Insurers warned against a knee-jerk reaction to Martyn’s Law

UK insurance buyers should watch for terrorism liability coverage restrictions and potential capacity shortages following the introduction of Martyn’s Law, which could increase liability for companies and their directors, experts have told Commercial Risk Europe.

In May, the UK government published the draft Terrorism (Protection of Premises) Bill, previously known as the Protect Duty or Martyn’s Law in tribute to Martyn Hett, who was killed alongside 21 others in the Manchester Arena terrorist attack in 2017. The draft bill will be subject to pre-legislative scrutiny by the Home Affairs Select Committee, ahead of formal introduction.

The new legislation will require organisations to carry out terrorism risk assessments for large public events or public spaces in the UK, and implement measures to minimise the potential impact. The legislation also introduces stiff fines for companies and criminal liability for directors and officers in the event of non-compliance. However, it is not yet clear how the new legislation will be enforced and exactly what will be required once it comes into play.

Edel Ryan, strategy leader for Marsh’s sport entertainment and media industry practice, warned companies to watch for potential coverage restrictions from insurers in response to Martyn’s Law. Event cancellation, property public liability and D&O covers are all exposed to potential claims arising from the Act, and could be subject to coverage restrictions, she said.

She warned that the insurance market could introduce coverage restrictions in anticipation of the Act.

It is currently unclear how the insurance industry will respond, said Ryan. “One would hope they will not make their own interpretation or restrict the policy; however, there is already some evidence of a more tailored underwriting appetite. The policy should be there to support the client in the event a claim is bought against them, and if they have put the right measures in place and proactively behaved diligently,” Ryan said.

During the pandemic, the event market applied communicable disease exclusions and then began to apply other exclusions for perceived systemic risks, such as cyber. “By applying exclusions, insurers left clients with no route to insure themselves appropriately,” said Ryan.

“Clients will need to be mindful of any conditions or exclusions on their policies that insurers look to apply and should use their broker for advice. Clients need to be very close to what the terms, conditions and policy exclusions are, so that they do not by default have liability excluded by an insurer making interpretations of what is required for compliance with the Act,” said Ryan.

“It would be a terrible position if insurers got ahead of the game on their interpretation of the Act, and if this differed from clients,” she said.

Martyn’s Law is likely to increase liability for companies and their directors and officers, according to Tom Clementi, chief executive of UK terrorism reinsurer Pool Re. Under the draft Bill, there would need to be designated people responsible for, or senior officers responsible and accountable for, implementing the law, and ensuring proportionate protection is put in place, he explained.

“The Bill currently proposes individual criminal liability for senior individuals where there is a failure in the implementation of Martyn’s Law. Potential penalties under the enhanced tier are 5% of global revenue, or an £18m fine, alongside a two-year maximum custodial sentence, although such sanctions are likely to be applied only for the most serious breaches,” he said.

According to Rich Phillips, terrorism risk consultant at Marsh, it is not yet clear whether the proposed Act will increase liability for companies. But it will become easier to prove liability, he said.

“What has sadly been demonstrated by the Manchester Area terrorist attack is that [terrorism risk] has often fallen between the gaps and it has been hard to identify what went wrong and who was responsible. But the new legislation will make it easier to prove in a court of law if things were not in place that should have been in place,” said Phillips.

Clementi expects some businesses will seek to buy higher terrorism liability limits under their liability insurance. Employers’ liability typically includes terrorism cover up to £5m and most companies will also buy some terrorism cover under public liability. Event cancellation cover can also include extensions for terrorism.

“In the wake of Martyn’s Law, we are likely to see a number of businesses look to buy bigger limits, particularly for public liability and employers’ liability, and potentially D&O. For some larger venues, and if there were a terrorist attack that led to fatalities or injury of multiple people, I suspect current terrorism liability limits would not even cover the legal fees,” said Clementi.

“The question is whether the insurance market will have the appetite and willingness to supply those larger limits. We will have to see,” he said.

At present, property reinsurer Pool Re, which is ultimately backed by the UK government, does not offer terrorism liability cover. But Clementi sees a potential future role for Pool Re if the market does not step up. “We will have to see how things play out. I hope the market can respond and provide the cover that clients demand. If there were a clear or partial market failure, there could be a role for Pool Re. But it would require our members and HM Treasury to ask us to come in and make a difference,” he said.

It is currently too early to say whether companies will need to buy higher terrorism liability limits, according to Phillips. The size of limits purchased depend on the insured, while the extent of liability under the Act may become clearer as it is tested in the courts, he said.

Coverage and capacity issues aside, insurers will want policyholders to demonstrate compliance with the Act, he continued. “We see requirements from insurers to demonstrate compliance with regulations and best practice on a regular basis. It’s entirely reasonable to expect insurers will request to see the terrorism evaluation and audit trail of compliance with the requirements,” Phillips said.