Cunningham Lindsey and their specialist forensic accounting division, Forensic Advisory Services (FAS), responded to a number of claims following the Lindt Cafe terrorist event, referred to in the Australian media as “the Sydney Siege”. Ms Kimberley Daley (FAS) and Mr Barry Simpson (Cunningham Lindsey) reflect on some common policy responses to these claims.
Australia has had more than its fair share of natural disasters in recent years including bushfires, floods and cyclones. However in December 2014, the insurance industry was called upon to respond to a tragic man-made disaster; the ramifications of the actions of the terrorist, Man Haron Monis.
Monis took hostages in the Lindt Cafe in Sydney’s Martin Place on the morning of 15 December 2014. Tragically, two lives were lost in the early hours of 16 December following gunfire within the Lindt cafe.
Martin Place is normally a bustling pedestrian hub within Sydney’s Central Business District (CBD) and host to hundreds of businesses including banks, law firms, law chambers and retailers. It is located close to other prominent retail districts in the CBD including the Strand Arcade and the Queen Victoria Building. In the lead up to Christmas, Martin Place is also a focal point for large numbers of shoppers and tourists.
“Exclusion zone”
With the siege underway, police established an “exclusion zone” around a large section of Martin Place and its surrounding streets, preventing access to a substantial part of the CBD. Workers in buildings across the city were asked to stay indoors.
Our own team at Forensic Advisory Services, located near Martin Place, were shocked as events unfolded on the television and were asked to remain inside our building by Building Management. All visitors to our building were prevented entry by building management.
By the afternoon of 15 December, the normally bustling CBD was largely deserted. Tourists and visitors avoided the city.
Employees were sent home. Many retail businesses were advised to close or voluntarily closed for the remainder of the day due to the perceived threat. This included businesses in retail districts removed from Martin Place, such as shops in Westfield Shopping Centre and the Queen Victoria Building. Many workers were also instructed not to return to work the following day, particularly those whose offices were located in the “exclusion zone”.
Businesses were closed/disrupted or saw downturn in trade
Whilst the “exclusion zone” was lifted by the evening of 16 December, in the following week, the normally bustling business and retail hub of Martin Place became a place of public mourning as people gathered to lay flowers and pay respects to those who died.
These events impacted business within the CBD in a variety of ways. For a start, the Lindt Cafe in Martin Place was closed for some 13 weeks for repair of damage caused during the incident. Many businesses located within the exclusion zone were unable to operate on 15 and 16 December with staff evacuated and unable to return. Then there were businesses whose premises were occupied by authorities as a base for operations during the siege.
For other retail businesses near Martin Place, but outside the exclusion zone, many suffered a downturn in trade as customers avoided the area. The impact was also felt by retail stores well outside the exclusion zone, such as shops at nearby shopping precincts. These stores reported a downturn in trade, despite being open, with customers avoiding the area for several days after the incident.
The policy response
It is easy to see that there was a significant and widespread disruption to business as a result of the Sydney Siege with Insureds expecting their policies to respond. But how did business interruption policies respond to this incident? We are aware that around 60 claims were made as a result of the incident, with Cunningham Lindsey and FAS working a large number of these.
As a starting point, losses arising from terrorism are typically excluded by both material damage and business interruption policies, with most policies containing a terrorism exclusion. The following is a typical wording:
“Terrorism – we will not pay for any death, injury, illness, loss, damage, liability, cost or expense of any nature directly or indirectly caused by, resulting from, or in connection with, any action of Terrorism regardless of any other contributing cause or event.”
Terrorism Insurance Act 2003
However, the provisions of the Terrorism Insurance Act 2003 allow the exclusion to be nullified for eligible insurance contracts over eligible property (eg business interruption insurance for commercial properties in Australia) if the Australian Government Treasurer determines that it was a “Declared Terrorist Incident”.
This declaration was made in respect of the Sydney Siege on 15 January 2015. However, whilst the terrorism exclusion within the policy is nullified, any claim still needs to meet the remaining provisions/criteria of the policy for a loss to be insured.
Prevention of Access provision
Turning to the indemnification under the business interruption cover of a typical Industrial Special Risks Insurance (ISR) wording, the policy requires the property of the Insured or property used by the Insured at the premises to be damaged, with the basis of settlement referring to cover only for losses resulting from damage.
In the case of the Sydney Siege, any insureds making a claim would not have suffered any physical damage, with the exception of the Lindt Cafe. As such, we need to turn to the contingent business interruption extensions and endorsements which could potentially cover the loss, such as the “Premises in the Vicinity (Prevention of Access)” provision or the “Prevention of Access by a Public Authority” provision to see whether they respond to the loss, being the two most common provisions in Australian policies which could respond.
In the case of the Premises in the Vicinity provision, this extension is typically worded along the following lines:
“Loss as Insured by this Policy resulting from interruption of or interference with the Business in consequence of damage to property in the vicinity of the Premises caused by a peril, damage as a result of which is insured hereunder, which shall prevent or hinder the use thereof or access thereto, whether the Premises or property of the Insured therein shall be damaged or not, shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises.”
No damage involved
Again, the key word is damage. Taking the example of a business within the exclusion zone, the key question is whether or not the prevention of access was due to damage. In our view, the primary reason that the exclusion zone was established was not due to damage at the Lindt Cafe, but for public safety arising from the terrorist activity. As such, this extension may not assist the claims of businesses within the exclusion zone or other area prescribed within the policy.
The limitations of the Prevention of Access provision were also not overcome by the “Prevention of Access by a Public Authority” extension. This extension is typically worded along the following lines:
“We will pay for loss of income that results from an interruption of your business that is caused by any legal authority preventing or restricting access to your premises as a result of damage to or threat of damage to property within a 50 kilometre radius of your premises.”
Whilst it is clear that a public authority prevented access to many businesses within the exclusion zone, the primary reason was not damage or threat of damage but public safety.
Whilst there may be other extensions and endorsements which could potentially respond to losses of the nature described, we have not come across any such wordings in relation to the event under review.
The way forward
Notwithstanding the coverage issues highlighted above, we are aware that a number of insurers may have chosen to indemnify their Insureds for losses arising from the Sydney Siege given the limited number and size of claims. However, whether this approach would be adopted in the case of a more significant similar incident is uncertain.
The claims arising from the Sydney Siege certainly show that there can be a difference between the expectations of Insureds and the actual policy response to a catastrophe. As such we agree with Dr Chris Wallace, CEO of the Canberra-based Australian Reinsurance Pool Corporation (ARPC), who was quoted in a recent edition of the ANZIIF Journal in relation to terrorism that “People in business should talk to their insurers or advisers to determine whether they have adequate business interruption cover.”
The recent terrorist hostage events in various countries around the world have highlighted the real potential for very substantial consequential losses to be sustained in circumstances not involving damage, which is the trigger needed for business interruption policies to respond.
It may be, therefore, that there is a need for non-damage business interruption coverage to be available to cover this type of situation and we expect that this is an issue already under review by the insurance market, reinsurers and major brokers.
Ms Kimberley Daley is Partner and Head of FAS Australia and Mr Barry Simpson is National Executive Adjuster at Cunningham Lindsey.