War in Ukraine and Cyber Insurance

Since the start of the war in Ukraine, fears of cyber-attacks due to parallel hybrid war are increasing. In this article we explain how the insurance industry is reacting and how the war clause affects conditions.

Is there an increased cyber threat from the war in Ukraine?

Officials like the German BSI are currently assuming an “increased threat level”. However, there is currently no immediate threat to information security in connection with the situation. However, there are already suspicions of individual cyber-attacks in connection with the war. The German wind turbine manufacturer Enercon, for example, was no longer able to carry out remote maintenance on its own systems. The reason for this was a disruption in the satellite network.

How are cyber insurers reacting?

Immediately after the outbreak of the war, our cyber specialists contacted cyber insurers in order to know their reaction. The general feedback was that the situation was being assessed and, especially in the area of critical infrastructure, that decisions will be taken with even more restrictions.

Does the war exclusion clause apply?

Cyber insurances usually have so-called war exclusion clauses, according to which damage caused by war or war-like events are not insured. The classic exclusion of war means that there is generally no coverage in the case of a targeted action by an attacking state using physical force.

If the cyber-attack is originated by so-called state sponsored hacker groups, there is no direct-targeted action by an attacking state, and therefore no war in the sense of the definition. In addition, Russia is at war with Ukraine and not with other countries, a point to be considered when insurance wordings are interpreted. Even if a cyber-attack on a company is directed by a state, this is still no official war action. It is the insurer who must provide evidence that the cyber-attack is originating from a state if he thinks that the exclusion is applicable. It will be very difficult for the insurer, however, to prove such a fact, because hackers usually do not announce that they are acting for a government.

How about the ransom payment?

Ransomware cases are currently the No. 1 cyber threat. Access to data or services is blocked and a ransom is demanded for activation. The ransom payment is generally insurable. If the blackmailers are Russian hacker groups, policyholders must expect that the insurers will not make any payment without a positive sanctions and compliance check. Due to the extensive sanctions against Russia, ransom payments to Russian hacker groups are usually subject to sanctions and insurance payments are therefore contractually and legally prohibited.

Summary

We are currently not observing cyber-attacks in connection with the war in Ukraine that would occur in Austria and Central and Eastern Europe. Cyber insurers still take responsibility for protecting this number one corporate risk. In our opinion, the traditional war exclusion would not apply in the event of an untargeted attack. Ransom payments might be subject to the sanctions and therefore forbidden.

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War in Ukraine and Cyber Insurance

Since the start of the war in Ukraine, fears of cyber-attacks due to parallel hybrid war are increasing. In this article we explain how the insurance industry is reacting and how the war clause affects conditions.

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Stephan Eberlein

Group Practice Leader Financial Lines

T +43 664 962 40 60

War in Ukraine – impact on insurance

In the event of war, insurance contracts generally continue to run until their natural expiry date, but coverage must be considered to be very limited, as losses directly or indirectly related to war events are excluded in almost all lines of business.

The war in Ukraine, which has been raging since February 24th, and the response of the Western world in the form of economic sanctions against Russia have so far had a drastic impact on the insurance industry. Insurance brokers who deal with risks located in Ukraine and Russia and whose clients include Russian legal entities or natural persons are therefore obliged to deal with these effects.

Insurance of risks in Ukraine

According to the insurance definition, the entire territory of Ukraine is to be classified as a war zone, and strict sanctions also apply to the territories of Crimea, Luhansk and Donetsk.

In the event of war, insurance contracts generally continue to run until their natural expiry date, but coverage must be considered to be very limited, as losses directly or indirectly related to war events are excluded in almost all lines of business. A grey area also arises in the case of losses that remain still covered, as obligations as a prerequisite for payment by the insurer cannot possibly be met. This will have to be assessed on a case-by-case basis.

Insurance companies outside Ukraine are not prepared to renew insurance contracts or write new business in view of the war situation and the associated imponderables for contract performance. Insurance companies based in Ukraine are currently operating in emergency mode and can only provide a very limited service. It must therefore be assumed that there will be great difficulties in providing proper insurance cover in Ukraine.

Insurance of risks in Russia

Russia itself is not a war zone, existing coverages and contracts are therefore in principle fully valid. However, Russia is affected by sanctions imposed by the UN, the EU, the USA and Great Britain, which include a ban on insurance services for certain persons, companies and entities as well as certain goods and productions (sectoral sanctions). These sanctions must be complied with by all citizens of the respective issuing states or communities of states under personal threat of punishment.

While it cannot be the task of the insurance broker to advise his clients on the sanctions associated with the delivery of goods or financial transactions, it is part of his service commitment to provide information on possibilities for insuring risks, insofar as these are legally permissible in the light of the sanctions, and to take appropriate measures to obtain insurance cover.

In addition to the sanctions briefly mentioned here, all Western insurers and reinsurers have now decided not to offer any new capacity to Russian insurers. The Russian Federation reacted to this at the beginning of this week and, for its part, has banned Russian insurers from cooperating with foreign partners – i.e. insurers and insurance brokers – from “unfriendly countries”, including all EU members, until the end of this year. Thus, Russia is isolated from the international insurance market. The major international insurance brokers have subsequently withdrawn from Russia, and insurers with subsidiaries in Russia will most likely follow.

If the interests of EU-domiciled clients in Russia now require insurance cover, the only recommended course of action is for the respective company representatives to contact a Russian insurance broker on site, who can then obtain the required cover. This is because from an EU perspective, insurance brokers, as well as other companies, are not allowed to contact most Russian insurers because they are on the sanctions list as described above. On the other hand, the Russian insurance market consists of several professional insurers, which are now backed by the Russian state reinsurance company, so that common insurance coverage seems to be available. However, it should be borne in mind that insurance is only possible in rubles, lower sums insured than those needed could only be obtained and the financial strength of these insurers will also suffer in the future as a result of the sanctions.

It is currently still being examined whether capacities for Austrian interests in Ukraine and Russia are available from Austrian or Western insurers within the concept of balance sheet protection (so-called FINC clause); expectations must be classified, however, as rather limited for the time being.

Insurance of Russian interests within the European Union, the UK and the US

The sanction regime outlined above also requires the verification of Russian interests in Western states. The media have already reported confiscations of the property of oligarchs on the Mediterranean or in Great Britain. In this sense, the provision of insurance in the EU, the United Kingdom and the United States to sanctioned persons or entities is also prohibited. If sanctioned persons are found in an existing portfolio, the insurance broker must also withdraw from these persons or entities and terminate the business relationship, preferably in consultation with the insurance companies concerned. In case of doubt, institutions such as the Chambers of Commerce or the Ministry dealing with the sanction regime provide information on whether a person or company or entity is subject to sanctions. However, it is expected that a preliminary check will be made by the broker using the published sanctions lists.

Belarus

Although the scope of economic ties with Belarus may be significantly smaller than that of relations with Russia, it can be assumed that, on the one hand, the sanctions will increasingly be applied to this country as well and, on the other hand, the Western insurance industry will completely withdraw from cooperation with local insurers.

Please note that all information is based on the current state of developments in this military conflict and changes may occur at any time.

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Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

Business travel insurance in the event of war – “passive war risk” and evacuations

Even if the “passive war risk” is covered: the crucial question is whether insurance claims can be made locally in an area touched by war and which service can be provided by the insurer.

The main purpose of business travel insurance, just like private travel insurance, is to cover emergency medical care and return transport home as well as necessary assistance provided by the insurer, like medical evacuation in an emergency.
In this context, it must again be explicitly pointed out that a political evacuation from an area of conflict is not included.

Dedicated cover for “passive war risk” and additional modules

Some business travel insurers also provide for coverage of the “passive war risk” in their insurance wordings. However, this coverage is not common practice. “Passive war risk” means that a (business) traveler is unintentionally, suddenly and unforeseen confronted with military action and its consequences. As long as the traveler does not actively take part in a war (or in riots, etc.), he is also covered in the event of this “passive war risk”. In order to “mitigate damage” (often a separate provision in the conditions), he must endeavor to leave the region of conflict as fast as possible, if he is able to do so.

If the insurance tariffs include an additional module to cover interruption and/or rebooking of a journey in combination with an assistance module, this assistance can provide appropriate support, even if there is no medical emergency. When there is also a travel cancellation insurance module, the travel costs will be reimbursed, at least partially and up to a certain limit. The “passive war risk” may or may not be included for such additional modules, depending on the insurer.

Repatriation and medical care on site

Even if the “passive war risk” is covered: the crucial question is whether insurance claims can be made locally in an area touched by war and which service can be provided by the insurer. What are the actual conditions on site? A repatriation in a very serious medical emergency by an ambulance jet is in fact made impossible by the situation of war. This is the hard practice and reality. For instance, the Ukrainian airspace is currently closed to civil air traffic. This means that patient transport by plane is currently not allowed in this area.

Appropriate emergency medical care in a regular hospital is also in question, and local transport there may not be possible. Insurance service based on local support can therefore no longer be guaranteed in war zones.
The “passive war risk” is also an issue in pure accident insurance (payments for the consequences of an accident – permanent disability and accident costs): some insurers include this special clause, some not.

How can a service be offered for political evacuations from regions of conflict?

There are special service companies which, in addition to other advisory service, can also carry out political evacuations. Here, too, GrECo works together with a cooperation partner. Depending on the business travel insurer, our cooperation partner can also take over assistance services.

Unfortunately, there are more and more areas of conflict worldwide. Since employers are generally fully liable for the well-being of their employees on business trips, in addition to business travel insurance to cover emergency medical evacuation measures, there will have to be considered political evacuation measures as well. As the events in Ukraine show, one cannot rely on the expectation that there will always be enough time to leave an area of conflict.

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Guido Teutsch

Specialist Employee Benefits

T +43 5 04 04 – 247

War in Ukraine: Cargo insurance and political risks

The dangers of war and strike are excluded in the “all risks” coverage, but they are usually included in the individual policies with additional clauses.

Trading companies and manufacturers of goods have their deliveries insured in a global transport insurance policy based on turnover. The scope of coverage is usually “all risks” according to the Institute Cargo Clauses or similar wordings.

The current situation in Ukraine is classified as war since Russia has occupied Ukrainian territory with a regular army.

Insurance in case of war and strike

Basically, the dangers of war and strike are excluded in the “all risks” coverage, but they are usually included in the individual policies with additional clauses. This extension of cover for these political risks follows the definitions from the insurance conditions of the English insurance market, like the general conditions.

The insured risks of “war” include for instance war, civil war, revolution, rebellion, insurrection, civil strife and confiscation resulting therefrom. The insured perils “strike” include damage to the transported goods caused by strikers, locked-out workers or persons taking part in industrial disturbances, riots or civil commotion, terrorists or persons acting with political motives. Material damage to the goods that occurs directly as a result of the above-mentioned risks is insured.

The additional clauses mentioned can be used to cover the risks of “war” in sea transport and international air freight (“airborne” and “seaborne”), but never in the case of land transport, due to the accumulation risk for the insurer.

The risks of strikes are insured by the relevant clause for carriage by any means of transport, including land.

Termination by insurer possible

However, insurers have a special right of termination in zthe policies for political risks. According to this, the insurer can terminate the contract with a notice period of 48 hours or 7 days depending on the applicable clause in the current contract. However, for deliveries that began prior to the effective date of termination, political risk coverage will remain in place for the entire shipment.

To date, cancellations of political risks have been declared as follows:

  • Transportation within Ukraine, Russia, Belarus as well as land and sea areas bordering Ukraine within a range of 200 km from the land/sea border with Ukraine or;
  • For all transports worldwide, but, after the notice period, with the re-inclusion of worldwide transports, excluding, however, the Ukraine region and the area less than 200 km from the country border with Ukraine and the whole of Russia.

Due to the current situation, insurers are canceling the additional clauses for war and strike both for international contracts and for policies existing in Ukraine and Russia itself.

If the insurer terminates the risks of war and strike, GrECo will, if required, negotiate with the insurer of the policy or try to find a solution for the re-inclusion of maritime and airborne transport (e.g. for sea journeys in the Black Sea and the Sea of Azov) on the international insurance market. Depending on the war situation in the respective transport relation, coverage will be possible, as things stand at present, with additional premiums determined by reinsurers.

If the political risks are terminated, does the coverage from the insurance contract remain in effect for the remaining insured risks?

Yes. If the goods are damaged e.g. in a normal traffic accident of the means of transport, there is cover. However, the policyholder must provide the insurer with proof that the damage was caused by the accident and not by a war event.

In the current situation, are rail transports from Asia to Europe – via the Silk Road – still insured?

Yes, they are insured; but without cover for “war risk on land”; if the insurer terminates the risk of strike, the protection for these losses also ceases.

We recommend that the policyholder immediately informs GrECo if his forwarding agent reports an out-of-hours stopover during transport. We bring this to the attention of the insurer and thus fulfill the contractual obligation.

Damage or additional costs that occur due to delays in the journey as consequence of war events (e.g. the truck is not allowed to cross the border and therefore cannot continue the journey) are not insured.

The sanction clauses of the insurers for deliveries apply unchanged, according to which there is no cover in the event of a violation of sanctions and embargoes; due to the tightening or expansion of sanctions (EU, USA, UK) as consequence of the Ukraine war, this circumstance must be given special consideration.

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Herbert Mayerhofer

Competence Center Manager Transport

T +43 5 04 04 – 276

Current status of sanctions against Russia and certain Ukrainian territories

EU sanctions prohibit any direct or indirect economic interactions (prohibition of payment and provision of services) with listed persons, as well as with all companies in which a listed legal entity or natural person has an ownership interest of 50% or more.

This is an overview of the current status of EU measures, with more focus on sanctions relevant to the financial sector/insurance (mediation) services. The summary includes the sanctions imposed in 2014 against Russia and Crimea, which are still in effect, and the sanctions most recently imposed in February of 2022 which are again in addition to the sanctions in place and targeted towards Russia and the occupied Donetsk and Luhansk regions.

For more detailed information on particular clients, corporate entities or private individuals you can contact Nathan Pinhasov from GrECo Group Legal, n.pinhasov@greco.services, or Andreas Krebs from GrECo Group Insurance Mediation Services, a.krebs@greco.services.

Sanctions against private individuals

IEU sanctions prohibit any direct or indirect economic interactions (prohibition of payment and provision of services) with listed persons, as well as with all companies in which a listed legal entity or natural person has an ownership interest of 50% or more.

In addition, this applies to companies controlled directly or indirectly by sanctioned persons or to those where these persons may exercise a dominant influence.

The list of persons against whom financial actions apply was extended several times by Executive Order 2022/260 (listing 21 natural persons, two banks and one company) and Executive Order 2022/261 (listing 335 Duma deputies) of 23. February 2022, as well as on February 25 with Decree 2022/332, against 99 additional natural persons, including No. 670 Russian Foreign Minister Sergey Lavrov as well as No. 699 Russian President Vladimir Putin.

The following activities are examples of EU’s prohibition on payment and provision of services:

  • Transfers of funds
  • Sale of goods
  • Provision of services
  • Management of assets
  • Provision of other economic resources, e.g.: Cash, checks, monetary claims, Deposits with financial institutions, Publicly and privately traded securities and debt instruments including: Stocks and shares, Interest, dividends, or other income, Loans, guarantees, Bank guarantees, Documents containing indicia of participation in funds, etc.

Sanctions against Legal Entities

In addition to natural persons, selected legal entities have also been sanctioned by the EU. These sanctions – analogous to the sanctions for natural persons – prohibit direct or indirect economic interaction in the form of a prohibition on payment and provision of services (see non exhaustive list above). The assets of the listed legal entities in the EU will be frozen.

  • Several Russian banks are excluded from the international payment system SWIFT. All those already sanctioned in the past are affected by said SWIFT exclusion. Further financial institutions and banks could be excluded from SWIFT.
  • Ban on transactions with and freezing of the Russian Central Bank’s assets within the EU and G7 countries, no more transactions possible within the EU.
  • European airspace ban on Russian aircraft.
  • Media companies such as Sputnik, Russia Today and their subsidiaries are restricted in their activities in the EU.
  • Sanctions against Belarus: EU import ban on Belarusian products such as minerals fuels, tobacco, wood, cement, iron and steel, and personal sanctions.

Sectoral Sanctions

  • Military goods embargo: The direct/indirect export, supply, sale of military equipment and other defense material to Russia is prohibited. Also prohibited are technical assistance and brokering services, as well as financing the supply.
  • Export ban for dual use goods: Prohibited direct/indirect supply/export/sale of listed dual use items (Annex I of Dual Use Regulation 2022/328), irrespective of their civilian or military use, with or without origin in the Union. Dual use goods are designed or suitable for both civilian and military purposes.
  • Prohibition of payment, provision of services and direct/indirect supply/export/sale of goods and technology different from listed dual use items: General electronics, computers/electronic assemblies, telecommunications and information security, sensors and lasers, navigation and avionics, marine and aeronautical, and space and propulsion equipment therefor with technical performance capabilities different from listed dual use items.
  • Export ban on certain oil equipment goods: The indirect/direct supply/export/sale of goods and technology, whether originating in the Union or not, which can be used for oil refining, directly or indirectly to or for use in Russia shall be prohibited. The prohibition also applies to technical assistance, brokering services, and financing or financial assistance related thereto, whether directly or indirectly.
  • Export ban on aircraft and spacecraft, parts thereof, and technical and financial assistance and (re)insurance related thereto.
  • Extensive Restrictions of the EU capital market: For instance, the exclusion of certain Russian banks and military and oil industry companies from EU capital market.

In addition to the previous prohibitions on buying, selling, brokering, providing investment services or ancillary services, directly or indirectly, transferable securities and money market instruments with a maturity of more than 30 days from Russian banks listed in Annex III to Regulation 833/2014 (SBER Bank, VTB Bank, VEB Bank, GAZPROM Bank, ROSSELKHOZ Bank), on or after 12 April 2022, also applicable to Alfa Bank, Bank Otkritie, Bank Rossiya and Promsvyazbank), as well as for Russian companies in the military and oil industries (Almaz-Antey Kamaz Sea Trading Port, Novorossiysk Rostec, Russian Railways, JSC PO Sevmash Sovcomflot and United Shipbuilding Corporation).

Regional Sanctions in Ukraine

Sanctions in relation to Crimea and Sevastopol
Import ban on goods originating in Crimea or Sevastopol effective from June 2014: the EU prohibits the import of all goods originating in Crimea or Sevastopol and financing and insurance/reinsurance related to them.

As of December 20, 2014, further prohibition applies on export of certain goods and technology listed in Regulation 692/2014 Annex II to natural or legal persons, entities or bodies in Crimea or Sevastopol or for use therein. Similarly, the sale, supply, transfer of these goods and related direct or indirect technical assistance, brokering services, financing are prohibited.

Sanctions against the Donetsk and Luhansk regions and in response to the deployment of Russian forces to the regions

Further questions?
The CC Credit Team will be happy to answer any specific questions you may have about your trade credit insurance contract. Please contact us directly.

  • Ban on Import: The import of goods originating in the Donetsk and Luhansk regions not controlled by the Ukrainian government is prohibited as of February 24, 2022. It is also prohibited to provide, directly or indirectly, financing or financial assistance, as well as insurance and reinsurance, for the import of these goods. The prohibition does not apply to goods originating in these territories, if the goods are provided to and have been inspected by the Ukrainian authorities and a certificate of origin has been issued by the Ukrainian government.
  • Ban on new investments: Prohibited from acquiring real estate, facilities, securities of a participating nature, or shares in the foregoing, or expanding existing investments thereof. Prohibited from providing financing to entities, establishing joint ventures with entities, and providing investment services thereto in the non-Government-controlled Donetsk and Luhansk Oblasts.
  • Export ban on goods in the fields of transport, telecommunications, energy, prospecting, exploration and extraction of oil, gas and mineral resources
  • Prohibition on provision of technical assistance or intermediary services, construction or engineering services for infrastructure: The competent national authorities (in Austria: BMEIA) may, by way of derogation from the above prohibitions on new investment, export of goods and provision of technical and financial assistance, make exceptions for humanitarian reasons or to ensure the security of existing infrastructure.
  • Tourism activities: Prohibition on providing services directly related to tourism activities in the occupied Donetsk and Luhansk regions.

Please note that this information has been compiled based on the sanction regime valid from week 09, 2022, and that there may be amendments at any time when the crisis worsens. We will keep you updated on further developments.

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Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

Health insurance for Expats – consequences of Ukraine crisis

Since Ukraine has declared to be in war and air space has been closed in Russia and Ukraine, the risk exists that evacuations and return flights to the home country for medical reasons cannot take place.

A major German health insurer states that insurance cover for persons in Russia and Ukraine continues to exist without any limitation, as long as these persons do not actively participate in the war (Passive war cover for non-combatants).

The insurer underlines, however, that due to current sanctions all claim payments, direct settlements with medical institutions and cost guarantees will be examined closely. Therefore, claim settlement may take more time than usual.

Direct claim payments in US-Dollars to insured persons in Russia are not possible as consequence of the sanctions. Settlements to insured persons in Ukraine may be subject to transfer difficulties due to the situation of armed conflict.

Since Ukraine has declared to be in war and air space has been closed in Russia and Ukraine, the risk exists that evacuations and return flights to the home country for medical reasons cannot take place.

The co-insurance of new persons in existing contracts with the destination Russia or Ukraine must be agreed individually by the insurer, who is to be approached in any such case. It may be expected that other health and travel insurers will publish similar statements within the next days.

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Wolfgang Kotlan

Competence Center Manager
Employee Benefits

T +43 5 04 04 – 174

Cover aspects in aviation insurance in respect of war and terrorism

In addition to this general exclusion referring to damage occurred, there exists clause LSW617 that restricts the validity of cover itself: there is generally no cover for various named high-risk and existing crisis and war zones.

Like other insurance lines, aviation insurance also excludes damage caused in connection with war and terrorism.
The specific definition in the insurance policies says that there is no cover for claims caused by:

  • war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution insurrection, material law, military or usurped power or attempts at usurpation of power.
  • any hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter.
  • strikes, sabotage, confiscation, hi-jacking etc.

In addition, all insurance payments are subject to the various sanction regulations – please see our separate information on sanctions.

In addition to this general exclusion referring to damage occurred, there exists clause LSW617 that restricts the validity of cover itself: there is generally no cover for various named high-risk and existing crisis and war zones. This stipulation, however, allows overflights in international corridors as well as landings of aircraft in emergency situations.

In compulsory aviation liability insurance, however, consequential damage in the case of war and terrorism is covered according to Article 7 of Regulation (EC) No. 785/2004, but this is limited with the statutory minimum liability amount.
By way of the international clause AVN52 there is the possibility to buy cover or to increase the limit of indemnity for war and terror risk in aviation liability insurance; this applies to general aviation as well as airports, ATC or product liability.
War risk extension for aircraft hull insurance is, in principle, also available.

Coverage in both lines – liability and hull – includes the risk of war and terrorism with extension to strike, sabotage, as well as seizure or unlawful takeover (hijacking) of the aircraft, etc., but it excludes any hostile explosion of a weapon of war using atomic or nuclear fission and/or fusion or any other similar reaction or radioactive radiation.

In the event of a crisis/war, there are thus several factors to consider:

  • Extension of LSW617:the above-mentioned clause limiting the insurance coverage in the geographical area can be extended to additional countries at any time.
  • Closure of the airspace: notified by governments or authorities – no insurance cover is provided for the respective area, neither for take-offs/landings nor overflights.
  • Cancellation of AVN52 (liability) and hull war coverage (e.g. LSW555): The agreed extension can be terminated at any time with 7 days’ notice. The termination option is also open to the policyholder.
  • Partial termination of AVN52 with 48 hours’ notice: The insurer may terminate one or more parts of the clause with 48 hours’ notice in the event of hostile detonation of nuclear or nuclear fission weapons of war.
  • Automatic termination of AVN52: In case of war between two or more explicitly named states (e.g. Russian Federation, USA, France, UK, etc.).

The following additional limitations that represent a significant impairment and impact of financial nature must be considered:

  • Suspended flights to Russian regions and to the Ukraine
  • Airspace closure in the crisis area for all aircraft
  • Closure of European airspace for Russian aircraft

This leads to the change of flight routes in all areas, especially from Western Europe to the Far East (China, Japan, etc.) and thus to longer flight times, higher fuel consumption, additional costs for overflight rights for areas and states otherwise not overflown.

Source: Radarbox.com /28.02.2022/ 12.30 CET

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Ilse Konheisner-Holub

Group Practice Leader Aviation

Hotline available 24/7: +43 5 04 04 200

Ukraine crisis – trade credit insurance and political risk

In view of the current developments in Ukraine and the unforeseeable consequences, the private credit insurers are not providing any new or additional cover on Russian and Ukrainian buyers for the time being.

In view of the dramatic developments in Ukraine, many companies are asking themselves how (and if at all) their trade receivables are secured in the event of a default in connection with an economic or political risk.

Frankly speaking, there is no simple yes or no to the different questions: the wording of the insurance contract and the corresponding General Conditions of Insurance must be examined in detail.

Risk-adjusted Credit Management

In view of the current developments in Ukraine and the unforeseeable consequences, the private credit insurers are not providing any new or additional cover on Russian and Ukrainian buyers for the time being. The private credit insurers are currently in talks with the credit-insured companies in order to understand and assess their risk situation and position in Russia and Ukraine.

The current development is extremely dynamic and restrictions must be expected on an ongoing basis. In near future, risk-adjusted measures can therefore be expected from the credit insurance market, such as starting with the reduction of the cover to the amounts currently outstanding.

Sanctions

In principle, the credit insurance contracts or their underlying General Conditions of Insurance contain so-called sanction clauses, which exclude any cover and other obligations on the part of the insurer if this violates applicable sanction provisions of the United Nations and/or the European Union and/or other national economic or trade sanctions or regulations to be observed get violated. Due to the complexity of sanctions clauses and their consequences as well as the currently tougher sanctions course (possible exclusion of Russian financial institutions from the international payment system SWIFT), we recommend monitoring the status of the sanctions measures particularly closely. For further information on sanctions, you may also contact your Chamber of Commerce.

At this point we would also like to mention the due diligence of a prudent businessman: You must manage all business which is covered under the trade credit contract with at least the same diligence and prudence as you would reasonably be expected to exercise were it not insured.

Scope of Cover – Trade Credit Insurance

In credit insurance contracts, the scope of coverage is usually individually designed. Hence, the wording of the respective insurance contract and the corresponding General Conditions of Insurance must be considered in detail.

Commercial Risk – Protracted Default

The commercial risk can be described as the deterioration of the creditworthiness of a private buyer, resulting in a payment default by or the insolvency of the buyer, not caused by political circumstances or occurrences.

The Protracted Default (=payment default) as an insured event usually occurs when a buyer cannot meet his obligation to pay the contractual debt within the agreed waiting period. However, under the given circumstances, the payment default is to be seen in the context of the wording of the contract and the General Conditions of Insurance.

For instance, if a foreign buyer (from the perspective of the Insured) wants to fulfill its contractual obligation and has deposited the equivalent value of the insured receivable at a bank but the deposited amount is not converted into the agreed currency or is not transferred due to authority or governmental orders, this event would not fall into the coverage of the commercial risk.

Political Risk

If the coverage of the political risk (basically only for defaults outside the policyholder`s country) is agreed in an insurance contract, the underlying wording must also be checked whether it is included in the coverage or has already been explicitly excluded by the insurer (= exclusion of political risk coverage for Russia, Ukraine…) and furthermore whether the political risk is not excluded by General Disclaimer.

Further questions?
The CC Credit Team will be happy to answer any specific questions you may have about your trade credit insurance contract. Please contact us directly.

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Lisbeth Lorenz

Group Practice Leader Credit & Political Risk

T +43 5 04 04 280

Property damage caused by war on land – aspects regarding insurance cover

It is a principle of insurance that due to the potential accumulation of claims there is a general exclusion of damage caused to a risk (buildings, factories, their technical equipment, installations, stocks and other contents) in connection with war and civil war.

In this information and in oncoming postings we will focus on the question what actions of war as we see them currently in Ukraine mean for the existence of insurance coverage and for payments of damages by the insurer. We start with the most important part, considering the values involved, property insurance and property business interruption (BI).

Exclusion and termination of cover

It is a principle of insurance that due to the potential accumulation of claims there is a general exclusion of damage caused to a risk (buildings, factories, their technical equipment, installations, stocks and other contents) in connection with war and civil war. The standard definition of this exclusion is “exclusion of damage caused as direct or indirect consequence of any kind of military action, with or without declaration of war, and all violent actions by states; further caused by civil commotion, uproar, rebellion, revolution, civil war including all military or police or other state measures in connection therewith.”

Standard European insurance wordings do not automatically terminate insurance contracts if the situation described by the exclusion quoted occurs. Quite on the contrary, they state clearly that cover remains in existence, but the insured has to prove that a fire occurred during war time does not have its origin in war or any military action.
There are insurance contracts, however, that terminate cover at the outbreak of war, so it is important to have a look in the standard or written wordings applicable to each individual insurance contract.

Most reinsurance treaties still have the World War clause, saying that the treaty ends in the case of a war between the nations United States, Russia, United Kingdom, France and China. So, the extension of the current conflict into a war between Russia and NATO would most probably trigger this clause. But we are not there, and we can only hope that we never will.

Grey area sabotage, arson and terrorism

War and warlike action, the breakdown of public order may lead to loss events, like damage due to sabotage, arson committed by persons inside and outside a company, acts of terrorism. Here we enter a certain grey area, as far as insurance coverage is concerned. Each claim will obviously be analyzed very carefully whether it is a case of indirect consequence of the war, as defined above, or whether the property damage occurred independently from the conflict situation.

Another point to be considered is that the insured must in fact own the premises insured at the time when the loss occurs. Any change in this ownership, such as seizure or requisition – not insured in property insurance, as this is a political risk – but also abandonment of or being chased from premises will most probably suspend coverage. If the ownership is still existing as a title, but no employees are left on the premises, this means that the control of the risk has been given up and the usual obligations of the insured cannot be fulfilled any longer, which causes serious doubts regarding the validity of cover.

Non-Property Damage Business Interruption

These principles in respect of property insurance apply equally to business interruption. Even if a Non-Property Damage Business Interruption endorsement has been agreed, this follows the basic and general conditions of BI. So, in the case of an enterprise standstill due to the lack of energy supply, cut of ways of communication, disruption of the supply chain, lack of workforce etc. there will always be an evaluation whether these events are due to a situation of war or not.

Although the margin for negotiation is rather small for a broker in this context, GrECo will do the same as in every other loss event, that is to support the interests of our clients in order to reach a fair and just evaluation of the insured’s claim and to obtain wherever possible a correct loss payment from the insurers.

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Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

GrECo Group Task Force Ukraine conflict – statement on sanctions and insurance

The conflict between Russia and Ukraine and the threat of heavy sanctions to be imposed by the Western world as consequence of Russian military action, have brought the topic of financial sanctions and the position of insurance again into the focus of consideration.

In view of the rapid developments in the conflict between Russia and Ukraine and military action started on Ukraine territory, GrECo Holding has set up a Task Force responsible for gathering all information on the current crisis and for reactions in all fields of our activities. Starting with today, we will provide information on all topics and developments linked with the situation on our website for the information of clients and partners. In this we will be supported by our colleagues in the countries concerned and information will also be based on statements obtained from insurers and reinsurers.

We are starting this reporting with the sanction topics. The next news will refer to what war and civil war mean to insurance contracts and coverages.

For all further information on sanctions please contact GrECo Group Legal, Nathan Pinhasov, n.pinhasov@greco.services For any information and questions regarding insurance matters please approach GrECo Group Insurance Mediation Services, Andreas Krebs, a.krebs@greco.services

International sanctions and insurance – general principles

The conflict between Russia and Ukraine and the threat of heavy sanctions to be imposed by the Western world as consequence of Russian military action, have brought the topic of financial sanctions and the position of insurance again into the focus of consideration. After sanctions imposed e.g. on Iran in 2012 or Russia in 2014 after the Crimea invasion, a lot of experience with this political instrument has been obtained and clarifications have been made, not at least by the European Union. It is important, therefore, to take another look onto this matter.

Sanctions by the EU

The European Union sees sanctions as a tool to prevent conflicts and to respond to crises, the intention being “to bring about a change in policy or activity by targeting non-EU countries, as well as entities and individuals, responsible for the malign behavior at stake.” Most of the sanctions are in accordance with United Nations resolutions and are also agreed with the United States and the United Kingdom.

Some of the sanctions are published as Guidance notes to the governments of the Member States, but in some severe cases they are issued as Regulation, thus coming into force immediately in all Member States and prohibiting trade or financial transactions with states or persons against which the sanctions are directed. It is forbidden to each EU citizen, company or institution to violate this regulation by any way, and normally the decision is enforced by high penalties.

Although this kind of sanction does not only prevent the conclusion of new contracts it also interferes with existing contracts and, especially important for insurance contracts, prevents for instance the payment of claims. This situation is reflected by exclusions in insurance contracts with the effect that coverage is terminated once the sanction becomes valid. As it is forbidden to insurers, reinsurers and brokers alike to neglect or circumvent this exclusion – for instance by trying to place a contract affected by the sanction in a market where the sanctions do not apply – it is really fundamental, to be compared only with the War or Nuclear exclusions.

Sanctions by Third countries

More difficult and complex is this issue, if the sanction is pronounced by a state outside the EU. There can be bilateral or multilateral sanctions between two or more states. Starting with Cuba, the United States have become very active in putting other states under sanctions. They do this with the same consequences as described for the EU: creation of a Federal Law with effect on all citizens and companies living or having their headquarters or having only assets as foreign owners (companies, capital, licenses and other titles) in the United States. They all risk penalties, seizing or freezing of capital etc., when acting contrary to the sanction act.

For this reason, all reinsurers and most internationally acting insurers have integrated the Sanction exclusion clause into their contracts with the same effect as described for EU sanctions above. This means that, even if an insurance contract has not anything to do with US legislation, cover will be excluded. It is true that the EU reacted on this with a so-called blocking statute, saying that “the extra-territorial application of laws adopted by third countries will not be recognized by the Union”. This has led to European insurers associations issuing own clauses, like in Austria, where it is stipulated that “exclusion from cover is valid if based on sanctions by the US or other third countries, if they are not against European or local law”.

Economic reality and fear of reprisals mean that globally acting reinsurers and insurers will obey US sanctions despite the political attitude of the EU or any Member State. But at least there is the possibility to look for insurance markets not intimidated by US law who may grant cover.

Scope of sanctions

Originally, sanctions were imposed on whole countries, since it was difficult or impossible to separate government interests from that of economic entities of the country concerned (e.g. Cuba, North Korea, Libya). Nowadays, (financial) sanctions have become more sophisticated and detailed. They are directed against persons with political, military or economic functions in that state, against certain industries, institutions and firms. This has led to establishing sanction lists to be checked in the moment when a business relationship is intended or when delivery of goods or financial transactions have to be prepared. For EU sanctions, a Sanction map (Sanctionsmap) has been installed, which is openly accessible, and most states have their own sanction lists to be consulted.

Embargoes


The embargo is the older parent of the financial sanction, having its roots in sea blockades of long times past. It means the prohibition of trade and transport of certain goods to given destinations. Most common are arms embargoes, but they can be extended to all kinds of goods, in most cases still to those that might be used for weapon production or directly for military use. Goods falling under an embargo ruling cannot be insured. Any circumvention by false declaration of the nature of goods or by sending them to third countries that forward the goods to the sanctioned destination will be prosecuted and providing of insurance may be considered as a criminal act. Therefore, insurers will have a close look on shipments, export declarations and the like.

Exemption to sanctions for humanitarian reasons

As we have seen, sanctions disrupt the insurance cover since no further financial transaction is possible. This affects, for instance, construction or erection projects in the country concerned or the operation of a local factory, especially in the case that the sanction is extended to the whole country. If a loss happens where it is necessary and even urgent to send money or relief goods to persons affected by the loss event (accidents of employees, fire, natural catastrophes), the humanitarian aspect may come into consideration. The EU has made clear that it is prepared to make exemptions to sanctions for humanitarian reasons, since the population of a country shall not be punished when its government is under sanction for the afore-mentioned malign behavior. In such cases, applications can be made to the relevant authorities with the aim to allow financial transactions for specific situations.

The role of GrECo as insurance broker and consultant

As this whole sanction topic is a very complex one, GrECo sees its role as insurance broker in the information of all clients with respect to insurance implications, under which circumstances cover can be obtained for countries or industrial sectors where sanctions have been imposed, what consequences there are for running contracts where the cover is stopped due to sanctions, which margin there exists discussing the cover with insurers. By no way, the broker may be ordered to assist in the circumvention of sanctions or embargoes.

In the insurance industry, sanctions have become part of compliance regulations and codes of business conduct. Insurers will, therefore, have a close look on the business offered to them with respect to sanctions, and – in international insurance – on the question where the business comes from, out of which country, who is the insurance buyer, who the insured. Major insurers are aware of the many individual aspects that sanctions may have, and they are prepared to make their decisions according to the situation in each single case.

GrECo will closely monitor all sanctions now imposed by the European Union, the United Nations, the United States and the United Kingdom on Russia in order to be prepared to give thorough advice on the consequences on insurance and insurance payment transactions in this new situation.
We will post further news on sanctions on Russia, once the full scope of them and their implications will be known.

Related Insights

Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229