• Can The Costs Of Terror Insurance Be Allocated To The Tenants In The Auxiliary Costs Statement?
  • May 13, 2011 | Author: Thomas Richter
  • Law Firm: Sibeth - Munich Office
  • Until the terror attack on the New York World Trade Center on 11 September 2001, the risk of a terrorist attack was regarded as negligible, and it was usually included in the fire insurance without any extra premium. After that, the insurance companies changed their conditions for fire insurance - and damage resulting from acts of terror was usually no longer covered for buildings with an insured value of more than 25 million euros. Many building owners therefore wanted to take out separate terror insurance and to allocate the resulting costs to the tenants.

    The ruling by the Higher Regional Court (OLG) of Stuttgart of 15 February 2007 (13 U 145/06) was very kind to the landlords. The judges assumed that the costs of terror insurance can be allocated to the tenants if the rental contract defines the costs of property insurance as allocable operating costs - irrespective of whether the building is particularly at risk, because they considered that it cannot be predicted where a terrorist attack will take place, so any building in the world is therefore at risk. They stated that terror insurance is therefore necessary and reasonable for any building.

    On the basis of this clear ruling, it was then possible to advise landlords that the costs of terror insurance can be allocated to the tenants if the costs of property insurance are agreed as allocable auxiliary costs in the rental contract. This also applied to new insurance policies which arose during the term of the rental contract where the previous insurance no longer covered the risk of terror.

    A recent ruling of the Federal Court of Justice BGH of 13 October 2010 (XII. ZR 129/09) has now called this customary advice into question. The Federal Court of Justice (BGH) ruled that the costs of terror insurance can now only be allocated to the tenants under very specific circumstances.

    It stated that costs of terror insurance can fundamentally be allocated to the tenants as auxiliary costs because it is building insurance and therefore falls under the category of property insurance. However, landlords must always take the principle of economy into account when allocating auxiliary costs. This refers to the landlord's auxiliary contractual obligation to act in good faith and only to allocated auxiliary costs to the tenant which are necessary and reasonable. For rented residential premises this obligation is defined in Section 556 (3) sentence 1 of the German Civil Code, and for rented business premises it is stipulated in Section 242 of the Civil Code. The definitive criterion is the perspective of a sensible landlord who ensures a justifiable cost/benefit ratio in the course of proper management. However, the landlord is granted a certain scope for decision-making. For example, he is not always obliged to select the cheapest solution, he is also entitled to take into account other criteria  which are relevant to proper property management such as the reliability of the contracting party.

    On this basis, a landlord can only allocate the costs of terror insurance to the tenants if the costs are necessary and reasonable. The Federal Court of Justice therefore demands that for each insured building a check is made to ascertain whether insurance against acts of terrorism is necessary in individual cases and whether the selected insurance policy is reasonable if there are specific circumstances which justify the risk of damage to the building as a result of a terrorist attack.

    The Federal Court of Justice also explained for what buildings "a justified risk of terrorist attacks" is deemed to exist. According to the judges, acts of terrorism are "any acts of persons or groups of persons which are committed to achieve political, religious, ethnic, ideological or similar goals which are likely to create fear in the public or any section of the public and thus to influence any government or government institution". The attacks are therefore aimed to weaken major state structures by creating fear in the population. According to the Federal Court of Justice, the buildings which are at risk are therefore especially buildings with a symbolic character (e.g. the Eiffel Tower), buildings in which the power of the state is exercised (military facilities, government and parliamentary buildings), buildings in which a large number of people congregate, especially in big cities or conurbations (stations, airports, tourist attractions, sports arenas, office or shopping centres), and buildings in the immediate vicinity of such buildings.

    A building which meets these conditions can therefore fundamentally be insured against the risk of a terrorist attack, and the costs can be allocated to the tenants. But the landlord must also take the obligation of economy into account in the selection of the specific insurance policy and is not entitled to select an excessively expensive policy. However, as outlined above he has a certain scope for his decision.

    Conclusion: the costs of terror insurance can be allocated to the tenants if the rental contract includes the appropriate provisions for the auxiliary costs, if there is a justified risk of terrorist attack for the building and if the cost/benefit ration for the specific policy is reasonable.