The current military conflict between Russia and Ukraine can easily be classified as war for the question of the interpretation of insurance conditions. It will be less easy to answer whether specific damage is covered by the war risk exclusion clause.
In view of Russia’s aggression against Ukraine, it is worthwhile to examine the question to what extent claims caused by or in connection with war (the so-called war risk) have to be indemnified by insurers. Insured companies ask themselves whether their insurance contract is still valid in a war, and which claims will be paid. Vice versa, insurers will have to check whether and how far war is excluded from insurance cover in order to be able to decide about the settlement of the claim. This article, which is based on the main reinsurers’ wordings and technical literature gives an overview of these two questions, which are essentially two sides of the same coin.
General treatment of war risk by the insurer
The basic obligations arising from an insurance contract relate to the payment of the premium by the policyholder and the confirmation of cover by the insurer. The extent to which insurance cover is granted results from the general description of the insured risk through the primary risk limitation (the declaration which interests are insured against which risks and in which situation). At the second level (known as secondary risk limitation), risk exclusion allows a portion of the scope of coverage covered by the primary risk limitation to be excluded and to remain uninsured. The purpose is that a major or global risk, the consequences of which cannot be calculated by the insurer, must not be part of an insurance portfolio to not endanger the existence of the insurance system through the risk of accumulation. Excluding a given risk, like war, the insurer limits the insurance cover from the start.
For this article, it is therefore relevant whether the risk of damage in the event of war is either expressly accepted in the course of the primary risk limitation or is mentioned as a risk exclusion in the secondary risk limitation in the insurance conditions. The first group includes those insurance products that enable the policyholder to be protected against losses due to “political risks” and “political violence”, which include war and civil war. The (special) insurers offering these products therefore assume this risk with the full intention to provide this cover, which does not need to be dealt with further because the obligation to pay claims caused by this risk is unlikely to become disputed.
On the other hand, those insurance policies where an insurer does not want to provide cover in the event of war (events) and has therefore stipulated an exclusion of this risk in his insurance wording should be examined more closely. It is crucial how the exclusion is defined in the wording in order to differentiate between insured and uninsured damage.
Definition of war risk exclusion
Originally being a part of Property, Machinery and Transport (on land) insurance, war risk exclusion clauses have become common in all lines of business in the aftermath of the 9/11 terrorist attacks. The various perils enumerated in the exclusion clause have also been standardized, their definitions have been strongly influenced by the London Market for global insurance and reinsurance business.
To give just an example, we quote the Swiss Re war exclusion clause:
This Policy does not cover any loss, damage or liability occasioned by or through or in
consequence, directly or indirectly, of any of the following events, namely:
(a) war, invasion, act of foreign enemy, hostilities or warlike operations (whether
war is declared or not), civil war;
(b) mutiny, military rising, insurrection, rebellion, revolution, military or usurped
power, martial law or state of siege, nationalization, confiscation, requisition,
seizure or loss of or damage to property by order of the government or by any
(c) strike, riot, civil commotion and popular rising.
What can be expected from claims handling?
The current military conflict between Russia and Ukraine can easily be classified as war for the question of the interpretation of insurance conditions.
It will be less easy to answer whether specific damage is covered by the war risk exclusion clause. Even if Russia has militarily attacked Ukraine on a geographically extensive basis and Ukraine is also defending itself with armed force, not all damage on Ukraine’s territory (or outside of a declared war zone – such as in March 2022 in Zagreb, where a Soviet Tupolev M-141 long-range reconnaissance drone crashed) result from or are related to it. Rather, policyholders could also be entitled to claims from so-called “non-combat losses”.
Therefore, insurers and policyholders will have to compare the war exclusion clause contained in their individual insurance wording with the nature of the damage that has occurred in each case. Then can be determined whether the claim is covered or excluded. Certain “grey areas” exist, such as claims resulting from ordinary malicious damage, from consequence of war action at a certain distance from the location insured – what is the exact meaning of “indirectly caused by war”?, of “in consequence with war”?
The interpretation of these stipulations remains to be seen, as there is only scarce experience in Europe with insurance in times of war. Generally speaking, guidance can be obtained from High Court rulings stating that risk exclusions must not be interpreted further than their meaning requires, considering their economic purpose and the exact wording used. The insurer has to prove that an exclusion applies. The Swiss Re war clause already quoted, which is the basis for many insurance wordings in European countries, stipulates that the burden of proving that such loss, damage or liability are covered shall be upon the Insured. We feel, however, that this stipulation is contrary to the burden of proof obligation on the insurer in every case where he alleges that a claim is not covered due to a given exclusion. As this is common jurisdiction in all lines of insurance, the Swiss Re wording should be easily overturned.
In any case we recommend that the insured make a comprehensive documentation of the extent to which “non-combat damage” has occurred in order to be able to comply with all obligations of information and documentation imposed by insurance law. It is to be expected that insurers will or must make use of their right for information in order to be able to make coverage decisions that meet the legal requirements and to be able to meet the burden of proof for the existence of an exclusion. A negative decision on coverage by the insurer must be made in writing and at least be justified by citing a fact and legal or contractual provision on which the rejection is based. The lack of material and secured evidence, in war regions normally provided by the insured, will delay, if not totally jeopardize, the further handling and settlement of a claim.
(This article is based on an editorial contribution for Austria by Dr. Ralph Hofmann-Credner M.B.L.-HSG, owner of law firm HOFMANN-CREDNER Rechtsanwälte GmbH, Vienna.)
Ante Banovac shares his thoughts about future risks facing the insurance industry and the state of the insurance market in Serbia, Slovenia and Croatia