EXPLANATORY STATEMENT
Issued by the authority of the Treasurer
Declaration of Terrorist Incident
Terrorism Insurance Act 2003
The Terrorism Insurance Act 2003 (the Act) establishes the framework for the Australian Government’s terrorism reinsurance scheme. Where the Minister makes a declaration that an incident is a terrorist incident, for the purposes of the Act, that declaration renders terrorism exclusion clauses in all eligible insurance contracts of no effect.
Subsection 6(1) of the Act provides that if, after consulting the Attorney General, the Minister is satisfied that a terrorist act has occurred in Australia or two or more related terrorist acts have occurred in Australia, the Minister must, by notice in the Gazette, declare that the act constitutes, or the acts together constitute, a terrorist incident for the purposes of the Act. The term ‘terrorist act’ is defined by reference to section 100.1 of the Criminal Code Act 1995. After consulting the Attorney-General, the Minister is satisfied that the incident that occurred on 15 and 16 December 2014 at the Lindt Café, Martin Place, Sydney, consisting of the threats and actions of Man Haron Monis, is a terrorist act or acts. Accordingly, this instrument declares a terrorist incident for the purposes of the Act.
This declaration renders terrorism exclusions in eligible insurance contracts of no effect. Insurers can reinsure their terrorism risk with the Australian Reinsurance Pool Corporation (ARPC). The ARPC charges insurers a premium for reinsurance and requires that they retain some terrorism risk.
Information supplied by the ARPC indicates that the total insured losses from this incident are not expected to exceed the portion attributable to individual insurers and so are not likely to involve claims on ARPC reserves. Because the Commonwealth is not expected to be liable for payments under section 35 of the Act exceeding $10,000 million, no reduction percentage applies to this declaration.
Note: Subsection 6(7) of the Act requires the Minister to declare a reduction percentage if the total amount payable by the Commonwealth under section 35 of the Act is expected to exceed $10,000 million. Subsection 6(6) of the Act authorises the Minister to declare a reduction percentage in any other case. A reduction percentage proportionately reduces the amount insurers pay in response to claims if those insurers are reinsured with the ARPC.
Prior to making this declaration, consultation was undertaken with the Attorney-General and the Insurance Council of Australia.
Declaration of the terrorist incident is a legislative instrument for the purposes of the Legislative Instruments Act 2003, but is not subject to disallowance (see paragraph 9A of Schedule 2 of the Legislative Instruments Regulations 2004).
Overview
The Terrorism Insurance Act 2003 was enacted to establish the framework for the Australian Government's terrorism reinsurance scheme, addressing the problem of insurers being reluctant to cover terrorist acts due to the potentially enormous financial risks involved. The Act provides a mechanism to nullify terrorism exclusion clauses in insurance contracts in the event of a terrorist incident. The Australian Parliament enacted this legislation to ensure that businesses and individuals are not left financially vulnerable in the aftermath of a terrorist attack, thus providing a safety net that encourages the continuation of insurance coverage for such risks. This legislative instrument declares a terrorist incident for the purposes of the Act, which in turn nullifies terrorism exclusions in eligible insurance contracts, enabling insurers to reinsure their terrorism risk with the Australian Reinsurance Pool Corporation (ARPC).
Scope and Application
The Terrorism Insurance Act 2003 governs the Australian Government’s terrorism reinsurance scheme and applies to all eligible insurance contracts within its scope. The Act comes into effect when the Minister, after consulting with the Attorney-General, declares an incident to be a terrorist incident. This declaration nullifies terrorism exclusion clauses in relevant insurance contracts, allowing insurers to reinsure their terrorism risks with the Australian Reinsurance Pool Corporation (ARPC). The geographic reach of the Act is national, applying to incidents occurring anywhere within Australia. The Act does not specify exclusions but operates on the basis that it applies to all eligible insurance contracts unless otherwise stated through subordinate instruments. Notably, the Act does not apply to disallowance as per the Legislative Instruments Act 2003. In the specific case of the incident at the Lindt Café in Sydney on 15 and 16 December 2014, the Minister declared it a terrorist incident, thereby rendering the terrorism exclusions in the related insurance contracts ineffective. The Commonwealth is not expected to incur payments exceeding $10,000 million, hence no reduction percentage has been applied to this declaration.
Key Provisions
The Terrorism Insurance Act 2003 establishes a framework for the Australian Government’s terrorism reinsurance scheme, which is triggered when a Minister declares an incident to be a terrorist incident under the Act. Specifically, section 6(1) allows the Minister to declare a terrorist incident if they are satisfied, after consulting the Attorney-General, that a terrorist act has occurred in Australia or multiple related terrorist acts have taken place. In this case, the Minister declared the incident at the Lindt Café in Sydney on 15 and 16 December 2014 a terrorist incident, based on the actions of Man Haron Monis. This declaration nullifies terrorism exclusion clauses in all eligible insurance contracts, ensuring that insurers cannot deny claims due to terrorism exclusions.
The Act imposes specific obligations on insurers and the Australian Reinsurance Pool Corporation (ARPC). Insurers must comply with the Act by reinsuring their terrorism risks with the ARPC, which charges a premium for this service and requires insurers to retain a portion of the risk. The ARPC plays a crucial role in managing the financial impact of terrorist incidents by redistributing risk among insurers. This arrangement ensures that no single insurer faces disproportionate losses from a terrorist event.
The Act also delineates consequences for non-compliance or breach. While the Act itself does not specify detailed penalties for non-compliance, the broader legislative framework within which it operates includes potential civil and criminal penalties for non-compliance with insurance regulations. Insurers who fail to adhere to the requirements of the Act may face regulatory action, fines, or other sanctions imposed by the Australian government. The Act's focus is on ensuring that the reinsurance scheme operates smoothly and that insurers can manage their risks effectively in the event of a terrorist incident.