2002-03
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
Terrorism Insurance Bill 2002
SUPPLEMENTARY EXPLANATORY MEMORANDUM
Amendments to be moved on behalf of the Government
(Circulated by authority of the Treasurer,
the Hon Peter Costello, MP)

Table of Contents
General outline and financial impact	1
Explanation of Amendments	2
Amendments 1, 2, 3 and 5	2
Amendment 4	2
Amendment 6	2
Amendment 7	3
Amendment 8	5

1	
General outline and financial impact
1.1	The amendments to the Terrorism Insurance Bill 2002 redefine eligible insurance contracts, alter Clause 8 so that the recoverable loss or liability has to be of a type or character that is otherwise covered by the eligible insurance contract, and provide certainty to insurers reinsuring with the ARPC that they will not be left with liability to policyholders above their retention and the funds made available by the ARPC.
1.2	Date of effect:  The amendments will commence on Royal Assent, as do the original provisions.
1.3	Proposal announced:  The original measure was announced in the Treasurer’s Press Release No. 064 of 25 October 2002.  The amendments to the bill have not been previously announced.
1.4	Financial impact: Under the original measure, the Commonwealth guaranteed the due payment of money that may become payable by the Australian Reinsurance Pool Corporation (ARPC) to any person other than the Commonwealth.  The amount which the Commonwealth was liable to pay as a result of this guarantee was limited to $10 billion.  One effect of these amendments is that the Commonwealth’s liability is no longer expressly limited to $10 billion, but the Treasurer will use the ‘reduction percentage’ to attempt to limit the Commonwealth’s liability to $10 billion.
1.5	Regulation impact statement: The impact of the terrorism insurance scheme on businesses was set out in the Regulation Impact Statement included in the Explanatory Memorandum to the original measure.  The amendments to the bill do not alter the regulation impact statement.

2	
Explanation of Amendments
Amendments 1, 2, 3 and 5
2.1	The amendment to Clause 3 defines ‘eligible property’, deletes the definitions of ‘insurance’ and ‘underlying property’, and defines ‘own’.  The definitions of ‘eligible property’ and ‘own’ are relevant to the interpretation of Clause 7.  The extended definition of ‘own’ is intended to cover situations (for example, in the ACT) where ‘owners’ of buildings are, in a legal sense, only lessees from the Crown.
Amendment 4
2.2	Alters the startup time from 30 June 2003 to 1 July 2003.
Amendment 6
2.3	This amendment makes it clear that the reduction percentage will be utilised by the Treasurer to try to limit the liability of the Commonwealth under Clause 35 to $10 billion.
2.4	The bill currently provides for a $10 billion Commonwealth guarantee of the ARPC.  To give some certainty to policy holders and to meet insurance industry concerns that insurers not be exposed to any liabilities above their agreed retentions, Clause 6(6) allows the Treasurer to declare a pro-rata (percentage) reduction in claim payments by insurers if, otherwise, it was likely the Corporation would be unable to meet all its liabilities to them.  Clause 6(8) allows for more than one declaration to be made, but to give financial certainty, subsequent declarations can only be made to increase payments to insureds.
2.5	While acknowledging the comfort Clause 6(6) provides, insurers, led by the Insurance Council of Australia (ICA), remained concerned that should the Government underestimate the likely level of claims flowing from an event or series of events, such that the funds available to the ARPC were exhausted, they could still be left with exposures to policy holders in excess of their retentions.  The ICA insisted that the Government provide an absolute indemnity for insurers for any such exposures.
2.6	The amendment to Clause 35 clarifies that, in the event that there is a miscalculation of likely claims, the Commonwealth will bear the consequences, not the insurers. While Clause 35 provides an open-ended guarantee by the Commonwealth to the ARPC, Clause 6(7) still provides the means by which the Government can manage its exposure under the Scheme.  The replacement of Clause 6(7) obliges the Treasurer to declare a reduction percentage if he considers that, in the absence of a reduction percentage, the amounts payable as a result of subclause 35(1) would exceed $10 billion.
Amendment 7
2.7	Clauses 7 and 8 define eligible insurance contracts and the effect of terrorism exclusions in such contracts.
Clause 8
2.8	The original drafting of Clause 8 meant that cover for losses arising from declared terrorist incidents was provided without regard to the underlying coverage in the insurance contract.  For example, if a terrorist act caused a flood, then a policyholder would be able to claim for subsequent loss, even if their insurance policy did not normally cover flood.  This goes beyond the policy intent of restoring the terrorism risk insurance cover that was available in the market prior to 11 September 2001.
2.9	As now proposed, where a business decides not to insure for a particular risk or head of damage (that is, the flood example above), and pays a lower premium as a result, then it would not be covered for the risk or damage where it arose from a terrorist act.  This is a much more equitable outcome and effectively mirrors the situation in respect of terrorism risk that existed prior to 11 September 2001.
2.10	The effect of the revised Clause 8 is to render ineffective terrorism exclusions in eligible insurance contracts in so far as they relate to a loss or liability arising from declared terrorist incidents.  As a result of this change of approach in Clause 8, it is no longer necessary to refer to different monetary upper limits, excesses or the operation of other exclusions and exceptions in the contract.  In addition, it is not necessary to refer to a start up date in that clause.  A terrorist act can only be a ‘declared terrorist incident’ (Clause 6) if it occurs after the start up date, so Clause 8 will not affect the operation of eligible insurance contracts until after the start up date.
2.11	Under Clause 8(7) of the original bill, the ARPC is obliged to compensate an insurer for amounts payable for eligible terrorism losses under eligible insurance contracts that are in force at startup time.  Without such a provision, the Bill would impose a liability on the insurance company, for which the insurance company would not have had the opportunity to purchase reinsurance or to collect appropriate premium from the insured party.
2.12	Due to the lead time needed by insurers to effect systems changes, it is now proposed that the Scheme commence on 1 July 2003, but the Australian Reinsurance Pool Corporation will only collect reinsurance premiums for those eligible insurance contracts entered into on or after 1 October 2003.  The revised Clause 8(4) will extend the obligation to compensate to contracts entered into between startup (1 July 2003) and 1 October 2003.  The amendments will also make the ARPC liable to compensate insurance companies for incidental claims expenditure that relates to the type of liability described in the original clause 8(7) of the Bill.
Clause 7
2.13	The original draft of the bill defines eligible insurance contracts as those that provide insurance cover for loss or damage to tangible property.  The reference to tangible property is considered to be too broad.  This would cover property that does not have any link to real property, and goes beyond the rationale for the Government’s involvement in terrorism risk insurance; namely, to give sufficient surety to banks and project financiers that the commercial buildings and projects they are funding are appropriately protected.
2.14	The Government proposes to amend Clause 7 such that contracts are only eligible in so far as they relate to real property (i.e. buildings or other structures or works on, in or under land).  Clause 7, together with the definition of ‘eligible property’ which will be included in Clause 3, effectively limits the type of property that is covered by the Scheme to real property and tangible property contained within the real property.  
2.15	The revised definition will capture contracts taken out by owners, construction project consortia or tenants for buildings (including fixtures and fittings) and infrastructure (e.g. toll roads, dams, power plants, sewerage works), as well as insurance contracts taken out for equipment, office furniture etc. that are housed in or on the real property.  A key result is that insurance contracts taken out by tenants of, for example, a high rise office building for contents would be captured by the Scheme, but insurance contracts for personal property that has no link to real property would not be captured.
2.16	Another effect of the original drafting of Clause 7 is that business interruption and public liability insurance are only considered to be ‘eligible insurance contracts’ if the coverage is provided within a contract of insurance for loss or damage to property.  Industry representatives advised that in practice many public liability and business interruption policies that relate to property are not necessarily included within a single property damage insurance contract.  
2.17	One implication of the proposed change to Clause 7 is that business interruption and liability insurance contracts that are written separately to the property damage insurance contract will be ‘eligible’.  For example, if an occupier of a building does not insure the building against loss / damage, but insures against any liability arising from the occupation of the building, the liability policy would nevertheless be an ‘eligible insurance contract’.
Amendment 8
2.18	Deletion of subclause 35(2) means that the Commonwealth’s potential liability as a result of its guarantee to the ARPC under subclause 35(1) is not limited.  As discussed above, in relation to Amendment 6, the Treasurer must use the reduction percentage under subclause 6(7) if he considers that, in the absence of a reduction percentage, the amounts payable as a result of subclause 35(1) would exceed $10 billion.