As the conflict in Ukraine rages on, media outlets continue to report Western businesses pulling out of eastern Europe. Undoubtedly, many businesses will seek insurance coverage for losses flowing from the conflict. After all, is this not what insurance is designed to cover? Sudden, unexpected events that cause significant losses?
As risk managers and insurers alike review these claims, one may be tempted to dismiss attempts to obtain coverage for losses flowing from the conflict as “desperate.” Indeed, nearly all modern insurance policies include some version of a “War Exclusion,” a standard provision that excludes coverage for losses arising out of “war” or “warlike action.” However, the path to recovery may not be as bleak as one might anticipate. Businesses should treat claims arising out of the Russo-Ukrainian Conflict with extreme care, lest they lose policy benefits to which they may be entitled.
The insurance industry traditionally defined “war” to mean a formal conflict between entities that bore indicia of sovereign nations. However, modern understandings of “war” are not as restrictive. For example, the United States spent two decades “at war” in the Middle East, but never was in conflict with the nations where it waged its conflict (i.e., the “War on Terror.”)
Consider also that Russia’s official position in the early stages of the conflict was that it was not “at war,” but rather engaged in a targeted mission to liberate ethnic Russians from an illegitimate Western government. How should we regard losses flowing from economic sanctions imposed against Russia by nations who believe the conflict to be a “war,” but are not themselves involved in the physical fighting? What about when Ukrainian civilians fight back?
What happens when an event looks like a “war,” but may not fall within its special definition (of which even the most experienced underwriters or insurance agents may not be aware)?
This was the exact scenario in Universal Cable Productions v. Atlantic Specialty Insurance Company. In that case, Universal made an insurance claim after relocating a television production from Israel when Hamas launched rockets into Israel, and then Israel launched a counter-attack into the Gaza Strip. The district court initially ruled for the insurer, because the “plain and ordinary meaning” of the term “war” applied to the conflict. However, the Ninth Circuit reversed, citing authorities affirming that the insurance industry defines “war” to mean “a course of hostility…between states or state-like entities.” The Ninth Circuit then held that Hamas was not a de jure or de facto “state” or “state-like entity,” and, therefore, could not be involved in a “war” or “warlike action.” The Ninth Circuit further held that Israel’s counter-attack did not affect its analysis because the insurer did not establish that Israel’s response caused Universal’s need to relocate. As such, the Court sent the case back to the district court for trial.
Similarly, in the Merck & Co., Inc. v. ACE American Insurance Company case earlier this year, the New Jersey Superior Court found coverage after Merck suffered over a $1 billion loss when a Russian state-sponsored cyber-attack on Ukraine then morphed and damaged Merck’s computer systems. In that case, the insurer denied coverage, citing the War Exclusion and arguing that a state-sponsored cyber-attack was a “hostile or warlike action…by any government or sovereign power.” However, the Court disagreed with the insurer’s coverage position because the plain meaning of the phrase “hostile or warlike action” did not apply to cyber-attacks, but instead only to “actual hostilities” or things that are actually “like war.” In other words, because the Russian cyber-attack did not look like a traditional war (i.e., computer virus vs. Kalashnikovs), Merck’s insurers could not rely on the War Exclusion to bar coverage.
In short, whether a loss flowing from the Russo-Ukrainian Conflict is barred from coverage requires a highly fact-intensive analysis. But until the insurance industry updates the War Exclusion to comport with modern realities of conflict among nations, there are steps your business can take to maximize recovery for potential losses flowing from the Conflict.
1. Do Your Homework. In modern times, we have the benefit of real-time reporting of facts and circumstances. We also have the benefit of electronic communication records, including records of communications among key decision-makers. One never knows what nugget of information will affect how a claim is evaluated. Policyholders should take precautions to document their claims carefully, as one tidbit may be the key to establishing coverage.
2. Beware Bad Causation Arguments. There will be an ocean of claims that cite the Russo-Ukrainian conflict as the basis for the loss. While the plain language of many “War Exclusions” bars coverage for losses that “indirectly arise” out of a conflict, nearly all states’ laws interpret “arising out of” language to mean “proximate cause.” This is particularly relevant in the War Exclusion context, as there may be losses that are the ultimate result of the war, but which the war did not directly cause (e.g., an increase in fuel prices because of the embargo on Russian oil). Policyholders should be careful to articulate the cause for their loss in a clear manner, and to anticipate insurers’ arguments as to why a loss may not be covered.
3. Hire Qualified Counsel. Few attorneys understand the nuances of complex insurance coverage work. Even fewer have handled claims that implicate the War Exclusion. Still, fewer have litigated such claims. In short, there are only a handful of attorneys in the country who are prepared to handle these claims. If you believe your interests could be affected, be sure your coverage lawyers can articulate why they are qualified to handle the claim. Alternatively, be on guard if your opposing lawyers are not aware of the nuances of this area of the law, as they may make arguments that are persuasive under ordinary circumstances, but should not apply to your case.
William Edward McMichael is a trial lawyer who maintains a nationwide practice with an emphasis on complex insurance coverage and bad faith litigation. He has successfully represented both insurance carriers and policyholders in state and federal courts in more than a dozen states across the nation, including in insurance coverage disputes implicating the War Exclusion and other governmental risks. He currently works as an Associate Attorney at Chamberlain Hrdlicka in Houston, Texas. https://www.chamberlainlaw.com/people-william_mcmichael.html.