With the circumstances in Ukraine intensifying and companies either shutting down or suspending operations in the region, the question arises about whether the sparingly used war exclusion will become more relevant as policyholders seek to recover losses. Economic effects of the conflict are spreading. Some companies may have to close operations entirely, some partially, and others may have their supply chains severely disrupted. The US government has warned companies to protect themselves against cyberattacks. The impact on policyholders, however, may take different forms, potentially implicating their business interruption, contingent business interruption, cyber, shipping and cargo, and political risk insurance coverages. Other coverages could be implicated as well.
Insurance policies typically contain some form of a war exclusion, which generally bar coverage only for damages caused by “war,” “warlike,” or “hostile” actions. However, insurers may try to invoke the exclusion if there is any potential link between the loss and events relating to Ukraine or the conflict. Thus, how courts interpret the exclusion will be critical to the ability of policyholders to recover insurance proceeds. Courts have traditionally interpreted war exclusions to apply to attacks that ordinary people would consider an act of war between nation states or state actors. For instance, in deciding whether the war exclusion applies, courts have considered factors such as (i) whether the attackers wore uniforms, (ii) whether they used physical weapons, (iii) whether there was a governmental declaration of war, and (iv) whether medals for heroic acts were awarded. Recent decisions have likewise narrowed the scope of the war exclusion to traditional forms of warfare between sovereign states. See, e.g., Merck & Co., Inc. et al. v. Ace Am. Ins. Co. et al., No. UNN-L-2682-18 (N.J. Sup. Ct.); Universal Cable Prods., LLC v. Atlantic Specialty Ins. Co., 2019 WL 3049034, at *10 (9th Cir. July 12, 2019).
Aside from the interpretive issues discussed above, some policies, particularly cyber insurance policies, may contain exceptions to the war exclusion. A key exception here likely could be an exception for cyber-terrorism. In many situations, even if the war exclusion may seem to apply to the specific facts relevant to the otherwise covered incident, the exception may be broad enough to preserve coverage. Policyholders should study both the exclusion and any relevant exceptions and work with experienced coverage counsel to help determine the scope of the exclusion asserted. Ultimately, the decision about whether coverage applies should be driven by the specific facts and circumstances that caused the loss. Thus, policyholders should be skeptical of blanket application of the war exclusion or any other exclusions in the policy.
Further, all war exclusions and exceptions are not created equal. Policyholders should take care to analyze these provisions at the policy procurement and renewal stage to determine the scope of the exclusion in the proposed policy and whether that specific insurer (or others) may be agreeable to endorsements that narrow the exclusion or introduce a critical exception to preserve coverage.
Given the rapidly developing circumstances, the full extent and impact of the conflict in Ukraine is unknown. Yet, we believe that the war exclusion, including the principles and issues briefly discussed above, will be leading topics in the insurance industry in the months and years ahead. For now, however, our thoughts are with everyone whose lives have been affected by these unfortunate and tragic events.