The state-backed scheme, known as Pool Re, only covers fire and damage at present.

The system was set up in the 1990s to cover the threat of attacks from the terrorist group, the IRA.

The decision to widen the insurance cover for firms comes as a result of the 11 September terrorist attacks on New York.

"These changes will provide more certainty for the insurance industry and its customers, and put Pool Re on a more modern footing," said Ruth Kelly, financial secretary to the Treasury.

Nuclear threats

The insurance scheme will now cover destruction by biological contamination, the use of aircrafts in attacks and damage by floods.

From the start of next year, it will also cover damage resulting from nuclear contamination.

The new arrangements were drawn up in consultation with an industry working group.

And the changes were praised by both the Association of British Insurers and the British Property Federation.