Nearly two weeks after the Russian invasion of Ukraine, many businesses are focusing on the impact the war could have on their business, including their insurance coverage. This notice provides a high-level overview of two types of insurance exclusions that may be involved: wartime exclusions and OFAC exclusions.
In many insurance policies over the past century, “wartime” exclusions have become a standard coverage term that often goes unnoticed. With a hardened insurance market and in the face of new risks in the modern world, the industry has re-evaluated legacy language to add extensive “war” exclusions in insurance policies. For example, at the end of 2021, the Lloyd’s Market Association published four standard clauses to specifically exclude “cyber warfare” coverage from cyber insurance policies. However, thinking about the definition of “war” certainly does not stop at cyberinsurance.
What is meant by “war” has been the subject of case law and interpretation for decades in insurance and non-insurance contexts. The decisive decision in the context of insurance is Pan American World Airways, Inc. v Aetna Cas. & On. Co., 505 F.2d 989 (2d Cir. 1974), which rejected the application of a wartime exclusion to the hijacking and destruction of an aircraft by a terrorist group. Referring to existing precedent, as well as international law, the court held that “war is a course of hostility undertaken by entities which have at least significant attributes of sovereignty”. Indeed, “cases dealing with the insurance meaning of ‘war’ have defined it in accordance with the old definition of international law” – that is, “war refers to and includes only hostilities conducted by entities which constitute governments at least de facto in character”. .” Various later authorities rely on Pan American‘s definition of “war,” including recently the Ninth Circuit’s decision in Universal Cable Productions, LLC v. Atlantic Specialties Ins. Co.929 F.3d 1143, 1147, 1155 (9th Cir. 2019) (“war” has a “specialized meaning in the context of insurance”, requiring “hostilities between de jure or de facto sovereigns” and “the employment of force between governments or entities essentially like governments”, war being “the method by which a nation asserts its right by force”).
But some wartime exclusions reach into broader events than officially declared all-out “war,” including those issued by the Bureau of Insurance Services, which writes policy forms for the insurance industry that provide that the insurer ” will not pay for loss or damage caused directly or indirectly” by “war and military action”, including “undeclared” war and “[w]a similar action by a military force” (ISO form CP 10 20 10 12, § B.1.f.). The problem for policyholders is the risk that insurers will invoke a “war” exclusion – some of which may incorporate vague concepts such as “hostile or warlike action” or “warlike operations” – to reserve rights or deny cover for a otherwise meritorious claim.
In addition to wartime exclusions, many policies, including Directors and Officers (D&O) insurance policies, have Office of Foreign Assets Control exclusions. The U.S. Treasury Department released strict guidelines for insurance companies on coverage, including asking insurers to add “an explicit exclusion for risks that would violate U.S. sanctions law.” For example, the following standard exclusion clause is often used in open ocean freight policies to avoid OFAC compliance issues: “whenever coverage provided by this policy would be in violation of U.S. economic or trade sanctions , this coverage will be null and void”. The legal effect of this exclusion is to prevent the extension of a prohibited service (insurance or risk taking) to sanctioned countries, entities or individuals.
Like wartime exclusions, not all OFAC exclusions are created equal. While the exclusion example above is somewhat narrow, some OFAC exclusions are broader, arguably beyond the scope of the penalties imposed. The problem is that, in some cases, an insurer can invoke these exclusions to void coverage, despite a policyholder’s expectations of coverage in a given scenario.
So what should companies do? Check your policy wording to better understand where there might be gaps in coverage. If the exclusions are too broad, consider what your risks might be – and possibly assess whether the exclusions can be reduced or clarified at renewal. In some cases, the companies we spoke to are already making decisions to change or limit parts of their business, not because they will violate OFAC regulations, but because the exclusions they have are so broad. that they risk insurers refusing (perhaps unjustifiably) cover in the event of a claim. And this risk is too great.