Take cover! Why property programmes are all about the exclusions

In the face of ever-more complex geopolitical events, multinationals are increasingly realising the limitations of the political violence coverage offered by their property insurance. Indeed, while policies may appear to offer cover for risks such as riots, civil commotion or terrorism, in reality, coverage only extends to a certain point.

To put it plainly, general property insurers cover political violence up to a predetermined level of severity. Once it gets too 'serious', the risk is handed back to the policyholder.

If this approach were applied to other areas, however, it would simply not be tolerated. Imagine a property policy, for example, that covers windstorm but only for wind speeds of up to 100 mph. If it exceeds that then the cover ceases. This approach would be viewed as unacceptable in this context, yet such exclusions are routinely present when it comes to political violence.

Exclusions can have real bite

The mechanism for handing back the risk to the policyholder is the standard War Risks Exclusion. While risk managers may know they have a 'war' exclusion in their property policies, few are encouraged to read beyond this term. After all, it appears very early on in the exclusion and brings to mind a conventional war between two sovereign states. 

However, the wording in the remainder of the exclusion often has the most relevance in the current climate. Those words confirm that the exclusion comes into play much lower down the political violence spectrum than people realise. In fact, calling the exclusion a 'war' exclusion is somewhat misleading. It would be more accurate to call it a 'serious political violence' exclusion.

The War Risks Exclusion in the property insurance market became a permanent fixture following the War Risks Agreement of 1936. Back then, its motivation was the threat of aerial bombardment that first manifested during the Spanish Civil War. Its purpose was clear: to protect the property insurance market against land-based risks from serious political violence. By and large, it has achieved just that.

One area did, however, slip through the net over the decades and was quickly 'corrected' after 9/11. Following these terror attacks, the property insurance market immediately introduced a terrorism exclusion demonstrating that, while the nature of political violence had changed markedly over the preceding decades, the intent of the insurance world remained to keep serious political violence out of its general portfolio.

The 'failure of imagination' trap

Contrary to popular assertion, not all types of political violence are classed as acts of terrorism. There are many forms of political violence that are not covered by a stand-alone terrorism insurance policy. Conversely, there are also plenty of forms of terrorism that are not covered by a stand-alone terrorism insurance policy.

The Arab Spring is a clear example of where the buying habits of risk managers had to change following what I term a 'failure of imagination' by insurance purchasers. As events on the ground unfolded, it soon became apparent that the decision to buy terrorism coverage – whether purchased as part of a property programme or on a stand-alone basis – was simply too narrow a choice. The War Risks Exclusion kicked in very quickly and some harsh lessons were learnt about the blurred relationship between terrorism and war, which left many policyholders without adequate coverage under their property or standalone terrorism policies.

In theory, the wording around the War Risks Exclusion is clear, but applying these definitions to real-world scenarios can be difficult. A good litmus test is what we could call the 'CNN Conundrum'. Essentially, if political violence in a country has been in the headlines for three nights running, it is probably serious enough for the War Risks Exclusion to apply. This also tends to coincide with the dreaded phone call from senior management to the risk department asking: are we covered?

The stand-alone political violence market

We have talked about the issues surrounding cover for 'serious political violence' in property coverage. So, what about the solution? Plugging as many of the gaps that inevitably exist for a form of risk that is unpredictable, unmanageable, and, these days, readily insurable should be the top priority. Therefore, the first port of call for any client should always be a detailed review of the exclusions in their property programme along with any write-backs or sub-limits.

The true depth of the War Risks Exclusion should never be underestimated, and any stand-alone coverage should always be crafted with the property programme’s gaps in mind. Don’t forget, political violence property programmes are all about the exclusions!