The recent foiling by British police of a plot to explode up to ten aircraft in mid-flight indicates that the battle against terrorism is far from over. A majority of Australians expect their country to be hit by an attack at some point in time. A news poll at the end of August even found that more than half of the respondents surveyed believe it is likely this could happen next year.
Apart from the enormous human tragedy such an attack would cause, the financial damage inflicted could be dazzling. The full extent of the financial losses caused by the September 11 attacks in the US will probably never be fully assessed, due to uncertainty over the sectors affected and the impact of long term effects.
Insurance Sector
The global insurance industry is one of the sectors worst hit by the September 11 attacks. Estimations by the Center for Contemporary Conflict put insurance losses in a range of US$30bn to US$60bn. The main uncertainty in this calculation concerns liability insurance.
Following the attacks, most primary insurers increased their premiums and adjusted or even dropped coverage for terrorism-related risks. Exclusions for terrorism have become standard in many insurance contracts.
Insurance premiums skyrocketed with the strongest impact on aviation, but sectors such as transportation, construction, tourism and energy generation have also been affected.
It is estimated that commercial property and liability insurance rates in the US rose by up to 30% on average. In the end, it required national governments to intervene and provide a new framework for the sector. "When the insurance market stepped out, the government stepped in," says Mark Doepel, Sydney based partner with UK law firm Kennedys.
"It had to happen," says David Kearney, managing partner at Wotton & Kearney, "because if it didn't happen, you had a situation where you had a significant pool of assets which were in effect uninsured against terrorism risks, and at the time, the financial markets were showing little appetite in general for terrorism risk. It seemed to me that something had to be done, and it seems to me that it's the sensible approach to look at negating the effects of terrorism exclusions."
Terrorism Insurance Act
Australia introduced the Terrorism Insurance Act in July 2003. It saw the creation of a reinsurance pool that enabled insurance companies to share terrorism risks with each other and with the Commonwealth government. For this purpose the government established the Australian Reinsurance Pool Corporation (ARPC).
If Australia were to come under attack from terrorists and the Treasurer declared it officially as such, the act would overrule any terrorism exclusion clauses in insurance contracts and cover must be provided for losses in accordance with the other terms and conditions of the policy.
"Insurance contracts may be silent on terrorism or even clearly state it is not included in the policy, but the act then incorporates the terms and conditions of that policy," says Doepel.
To make this affordable, insurers can fall back on the ARPC as a reinsurer. "In the case of a troubled event and the government declares it an act of terrorism, then the government becomes the insurer," explains general counsel Duncan Ramsay of QBE.
The pool is funded by reinsurance premiums paid by participating insurers, a bank facility and a government guarantee. The act has enabled companies to insure again and led to a rationalisation of insurance premiums.
Review of the Act
The Terrorism Insurance Act came into force in July 2003 and is to be reviewed every three years by the Department of Treasury. "The review of the act took place in 2005/2006 and has been completed in May this year," says ARPC spokesperson Michael Pennell.
The department approached stakeholders such as insurers, re-insurers, regulators, brokers and industry associations. They were asked whether it was necessary to uphold the act. "They decided that the act is still required; the next review is scheduled for July 2009," Pennell says.
The idea of adjusting the premiums paid to the ARPC has been raised, Duncan Ramsay says, because the pool is financially in good shape. "We understand that there is the idea to stop collecting premium from insurers, or to reduce the rates," he says.
But Pennell indicates that little has changed. "There have been no changes made to the act, the pool or the insurance premiums," he commented. The ARPC's annual report will come out later this year and will state the findings of the review.
The government "has not got a great track record" as an insurer, according to Kearney. "I don't think that's being unfair," he adds. "It's not the government's business to act as an insurer. At times, it steps in and acts as a form of quasi-insurer -it did that when HIH collapsed. I think the government would concede it's not its core business."
Kearney says that ultimately market forces will come into play, and with the passage of time "it may well be that commercial insurance markets are prepared to underwrite terrorism risks again. I think that's the way the government would prefer it."
Three years of ARPC
In the last three years the ARPC has made efforts to make the industry aware of the act and the re-insurance that is available from the ARPC. It has signed over 200 treaties with insurers in Australia and worldwide.
"We have about 220 active clients," says Pennell. "We've managed to collect about A$100m a year and so we expect to reach a pool of A$300m. Besides the pool, there is a commercial line of credit of A$1bn and a Commonwealth indemnity of A$9bn."
Participants in the scheme are not just Australian insurers. "Three quarters of our clients are from overseas," explains Pennell, "but 90% of the premiums come from Australian insurers." All of the primary Australian insurers have treaties with the ARPC.
Commercial property
Looking back, what has been the influence of the act on the way insurance contracts are structured? Insurance law specialist Dean Carrigan, partner with Allens Arthur Robinson, explains that the act focuses predominantly on commercial property.
"The act applies to certain types of direct insurance; mainly to commercial property and business interruption," says Carrigan. "Insurers after 9/11 refused to re-insure commercial property, because of the high risks involved. The motivation behind the act was to give insurers the ability to insure again."
The focus on commercial property is modeled after existing international laws. France and the UK, for example, have terrorism insurance regimes that pre-date the September 11 attacks.
"Insurers hold the view that in large commercial property the value is the greatest", says Carrigan.
"The act relates to commercial property because the loss of a building is expensive," confirms Ramsay. "If someone gets killed or a car gets blown up, in financial terms, that is a relative small cost."
Sydney Ferries
The almost exclusive focus of the terrorism act on commercial property raises the question how the insurance sector deals with other types of material or financial losses. In Sydney, one of the big fears is an attack on one of its many ferries. If a ferry gets bombed and the vessel is destroyed, who would pay for the damage?
"A ferry is not an eligible piece of property under the terrorism legislation," says Carrigan. "Eligible property is restricted to fixed structures on land. The ferry would fall under a marine policy, and the outcome would depend on the conditions of that policy," he explains.
The business interruption that the Sydney Ferries Corporation would experience in such a case is also unlikely to fall under the act. "The government wanted to protect major infrastructure projects with the act," explains Carrigan. "The Australian regime only provides for commercial property."
Terrorism cover
Damage caused by a terrorist attack that is not related to property can be covered by a variety of insurance contracts. The aviation and maritime industries are excluded from the act, but are potential targets for attacks.
QBE insures some small aircraft, but not the airlines. "Large airlines, such as Qantas, insure in London, for instance with Berkshire Hathaway," says Ramsay. The cover of these contracts depends on the individual policy.
In the marine cargo industry other policies are available. "Cargo companies have a war, strikes and civil commotion insurance," says Jeff Samson, commercial lines product manager at Allianz Australia. "Terrorism will be included in some of these polices, but it differs from insurer to insurer."
Another type of insurance contract which can cover damage caused by terrorism is Industrial Special Risk insurance, says QBE's Ramsay. But here too, it is all about the terms and conditions.
On a smaller scale, some insurers provide terrorism cover for home insurances. "Most home insurance policies would cover terrorism", says Samson. "But some of those policies contain exclusions for chemical, biological and nuclear events."
However, the market for this type of cover is very limited. "The man in the street doesn't take out a terrorism cover, they take out car or life insurance," says Carrigan.
The fine print
The Terrorism Insurance Act covers an important, but small portion of risks relating to an attack. And pay out of claims is still determined by the fine print of the individual contract.
Even when claims relate to commercial property, the terrorism act only cancels the exclusion clauses of terrorism. "The terrorism act is about exclusions in contracts", says Carrigan. Much is still dependent on the terms and conditions of the contract and that potentially means work for lawyers.
Today, most work relating to terrorism is about advice on exclusions in insurance contracts. "I have provided advice to insurers on exclusions and how they can structure their risk," says Mark Doepel. "What most people want to know is: what is an eligible insurance contract under the act and what is eligible property?" Those seeking advice are insurance companies and some of the top 100 ASX companies.
The act is designed to provide a safeguard for insurers and re-insurers, but how effective it is remains unsure. Luckily, there hasn't been a case yet. "The legislation hasn't been tested," says Carrigan. "We know how it is meant to apply, but we don't know how it will apply."
FIRM PROFILE: Wotton & Kearney: all about insurance
Many law firms have insurance practices. A small number of firms are dominated by their insurance practice. However, there are very few, if any, law firms that practise only insurance law.
Wotton & Kearney is a Sydney-based boutique insurance law firm - our lawyers only practise insurance law. Our client base consists essentially of insurers that write commercial lines of insurance business both locally and internationally. We also act for underwriting agencies, TPAs and insurance brokers relevant to insurance-related disputes.
Almost five years ago, the firm's founding partners, Phil Wotton and David Kearney, broke away from a large commercial firm to establish Wotton & Kearney. Phil and David perceived that a specialised, focussed boutique insurance law firm practising only insurance law could best provide their clients with the highest quality legal service at the right price. Since that time, Wotton & Kearney has experienced significant growth within a contracting market and there are now in excess of 20 insurance lawyers in the firm - up from the original six.
Wotton & Kearney - commercially minded
As a law firm that only provides insurance-related services, it is imperative that all Wotton & Kearney lawyers are focussed on achieving the best possible commercial outcome for our insurer clients. Our lawyers understand the impact of claims costs on underwriting results for a particular class of business and the effect that such results have on returns to shareholders. Our lawyers work constantly at the challenge of assisting claims officers to manage claims costs sensibly whilst at the same time seeking to achieve the best possible litigation result.
Broad insurance expertise
Wotton & Kearney is able to present to the insurance marketplace a balanced insurance team with specialties in the vast majority of commercial lines of insurance business. All our insurance lawyers are skilled at defending liability claims which potentially give rise to an exposure to an insurer pursuant to a general liability or professional indemnity third party insurance policy. However, our senior insurance lawyers have a breadth of insurance experience that comes only from a total commitment to the practising of insurance law. Our insurance expertise extends to property (industrial special risks and business interruption), construction risks including contract works, directors' and officers', environment risks, bankers blanket bond, political risks, product recall, malicious product tamper, fire, householders and travel.
Focus on service
The breadth of our expertise and our sole focus on insurance is part of the reason for our significant growth against the general trend in the past five years. The other pillar that supports this growth is quality service. Quality service is deeply imbedded in the culture of Wotton & Kearney. We have adopted internally a set of extremely rigorous service standards that are generally more onerous than our client insurers' external service standards. We have also invested significant resources into IT to ensure that our senior lawyers can monitor electronically the standard of service.
Open communications
Wotton & Kearney lawyers are encouraged to develop relationships with insurance claims personnel to ensure full and frank dialogue on all claims. Our lawyers fully acknowledge the unique 'skill-set' that insurance claims personnel bring to the decision-making process and appreciate the importance of a true partnering relationship.
What lies ahead?
In an increasingly regulatory environment and against the background of a corporate landscape where the emphasis on decreasing claims costs will become more significant as the demands for quality returns to investors in insurance companies intensify, the call for truly specialist insurance lawyers will become louder. So will the need for innovative work practices. Wotton & Kearney is unencumbered with the bureaucracy and overheads of larger firms which can sometimes inhibit innovative work practices.
Wotton & Kearney offers the insurance market a unique alternative of a firm with its sole focus being the provision of specialised insurance-related legal services. The result is removal of conflicts to a significant extent, first class service and a real understanding of the commercial realities of the business of commercial insurance.
Level 13
28 O'Connell Street
Sydney, NSW 2000
Australia
Tel: 61 2 9236 9555
www.wottonkearney.com.au
FIRM PROFILE: Kennedys - Legal advice in black and white
When Kennedys' new Sydney office opened its doors at 2 Park Street in the city in late June, the three international partners - Patrick George, Tony O'Reilly and Mark Doepel -believed there was a strong demand for a leaner, nimbler style of law firm in Australia.
Just three months later, with 18 professional staff and a strong team of support staff, Kennedys is rapidly adding new clients and new staff to its team.
Managing partner Patrick George explains: "We'd come from a top heavy, old style hierarchical firm with high overheads, and we were all frustrated by the inability to be flexible to our clients' changing commercial needs. The insurance market has changed significantly over recent years and we believed, as lawyers, we needed a new way of doing business with our insurance and re-insurance clients.
"We were attracted to Kennedys' approach to doing business, particularly for its insurance clients. It's a leaner approach in terms of keeping the costs of doing business down while offering premium level service and advice.
"We believe our insurance clients want three things: they want certainty about legal costs; they want to stay out of court - so they want the right advice, presented openly and honestly; and they want clear legal recommendations, not just options. And it needs to be presented in clear, concise English, not Legalese.
"It's about finding the best and most economic solution for our clients and provide value by focusing on what is needed and delivering it in an uncomplicated way," he says.
Established in the UK in 1899, Kennedys is an international specialist legal firm with unrivalled expertise in dispute resolution for insurers, as well as major companies in construction, manufacturing, transport and banking with an exceptional reputation for providing common sense advice to its clients.
According to Ric Martin, chief executive, the Sydney office opening was driven by the needs of many of Kennedys' global clients, particularly in the insurance field, who wanted the same level of service and professional legal advice they enjoy with the firm in other markets around the world.
"We had wanted to open an office in Sydney for some time, but it was incredibly important to us to wait for the right team of people with whom to build our presence here," he says.
"We believe Kennedys Sydney is a team of truly world class lawyers in a boutique structure. Patrick George is one of the leading international dispute resolution lawyers in the world. He is a member of the International Chamber of Commerce Arbitration Commission and he is one of Australia's leading media lawyers, having recently published the book Defamation Law in Australia through LexisNexis.
"He is supported by Tony O'Reilly, one of the leading sports and dispute resolution lawyers in Australia, and Mark Doepel who has a great depth of knowledge of the insurance industry. For example, he has successfully defended insurers in proceedings commenced against insurers following declinature of claim under a banker's blanket bond policy claim in excess of $750 million, and he regularly acts for private hospitals and health facilities in catastrophic injury claims.
"They have brought together a team of partners, senior associates and professional staff who have enormous expertise and proven experience in delivering successful outcomes for their clients."
FIRM PROFILE: Moray & Agnew: A growth area
For insurance specialist Moray & Agnew, it's all about growth at the moment. Having signed up two teams of lawyers from Newcastle and Canberra earlier in the year, the firm is now looking to nearly double the number of partners at its Melbourne office within the next 12 months. So what is it that draws lawyers and clients alike to Moray & Agnew's door?
Insurance law practices suffered an unprecedented battering once the tort reforms took effect. But Moray & Agnew's national chairman, Brian Agnew, speaks of his firm's response almost in terms of spirited defiance in the face of tough odds.
"When the tort reforms came in, the number of instructions to insurance firms in the first year dropped by 50%," Agnew recalls. "When that all started, a lot of firms were laying off people; but we put on six new partners that year and that was a significant statement to the market. It was saying that we've been here for a long time and we're going to be here for the long haul.
"In the last few years, we've come back up
to where we were before and in fact we've gone beyond that."
Appeal to partners and clients
That response laid the foundations for Moray & Agnew's current position, in which it is looking at growth, building on its existing client base and expanding into areas of insurance such as government work. According to Agnew, however, it is the firm's solid reputation above all else that underpins both its appeal to potential recruits and the confidence shown by its clients.
"We've got the brand name; we've been around for a long time; and we're committed to specialising in insurance," he says. In the course of growing the practice, he adds, the firm has taken on teams from other firms that weren't on some of the panels through which Moray & Agnew gets work. "As soon as they became a Moray firm, they got on the panel and picked up significant work," he notes. Such is the strength of the firm's reputation, it seems.
Moray & Agnew may have signed up more than a couple of Australia's top insurance lawyers, but Agnew cautions that the firm has been very selective and is quite happy not to hurry and to "cherry pick" from the market to ensure it gets the best. "When you deal with people regularly, you know who's good and who's not," he says, adding that cultural fit is also an important consideration for those looking to join the firm.
A superior IT system
But while reputation may get you a long way, today's insurance law market also demands solid technical skills, business acumen and, not least, IT systems to match. This is something in which both potential clients and potential employees are interested: "With insurance clients, they're very keen to learn about your IT and your precedents systems, your accounting and financials, and how you run all those things," he says.
"They're also very keen to know what facilities we have, and of course we've got one of the best IT systems that money can buy - we've put millions into our IT. It's crucial in insurance because you get a lot of matters at any one time from a client and, say, they might want monthly reports on every matter - when you're instructed; when you get your first report to them; when the hearings are; what the costs incurred to date are, and so on. All this information has to be regularly updated, so you have to have a system that will report that way. Our IT will also allow the client to come into our computer system and look at their files. You can see the correspondence back and forth, all the pleadings and so on. That's an attraction to a lot of clients and I think it's going to be a real asset to them in the future."
"I think it's fair to say that our focus and efforts in the IT area not only are appropriate to our needs but have also been well executed. After all, if you can't report on time, then you lose clients."
Going forward
So what of the future? "One area we're expanding into would be government," Agnew says. "We've really solidified ourselves in Canberra - and elsewhere, because we're looking at both state and federal work. Within the federal government, there is almost a declared policy that they want to use more of the mid-tier and specialist firms who can get the work done very effectively and at a lower price than the big firms. We fit into this category particularly well.
"The large companies are all cost conscious these days, and if you're a big company you are loath to give out work to a small practice for all sorts of reasons: it may, for example, backfire because the small firm is under resourced to handle all the work the client needs doing. Because of the specialised nature of the area in which we work, however, we're in a different bracket and as such we attract top quality work and are involved in big claims - $100m and more, some of them. That's a lot of money for a commercial entity to be involved in."
Despite the shake up in insurance law brought about by tort reform, Moray & Agnew has stayed the distance. "The fact that we did stay there has meant that top lawyers who were considering a move, knew we were seriously committed to insurance law and so they've joined, pleased in the knowledge that they were joining a strong team," Agnew says
"The marketplace has recognised it, and I think that what we have now is probably the best group of insurance lawyers that has been put together - certainly since I've been practising."