Related Practices
Is Your War Exclusion Fit for Purpose?
The Zelle Lonestar LowdownDecember 18, 2024
As global threats evolve, so does the question of what constitutes a ‘war’ risk under a standard property insurance policy, and how this might impact coverage.
Historically, a war was a physical conflict between two or more states, with little doubt as to its status or participants. However, modern warfare has evolved and now goes beyond physical attacks on assets to include non-physical attacks, such as cyber warfare. Russia’s war against Ukraine has also revealed a new front in war risks that was not previously envisaged, e.g., carrying out attacks and acts of sabotage in Western countries offering support to Ukraine.
In July 2024, a series of parcel fires occurred at depots of courier companies in Poland, Germany, and the UK. The fires were said to have been caused by Russian agents sending parcels containing hidden explosives via courier companies, which then burst into flames. Security officials have confirmed that this was part of an orchestrated campaign by Russia’s intelligence agency to cause fear and disruption in Western nations.
In October 2024, a man pleaded guilty under the UK’s National Security Act 2023 to aggravated arson for burning down a warehouse in London, at the behest of Russian agents. The warehouse was targeted because it was apparently used by a Ukraine-linked company. There have also been reported acts of Russian-inspired sabotage on warehouses and railway networks in Sweden and the Czech Republic. Whilst these attacks have so far focused on European allies of Ukraine, intelligence sources have indicated that they expect similar attempts to be made in the US in due course. Polish officials allege that the targeting of courier companies was a test run for parcels to be sent by courier to the US and Canada.
These developments demonstrate that the dangers of war are no longer confined to the physical jurisdictions of the direct warring parties and require special underwriting considerations. To combat the exposure to war risks, property policies contain standard war exclusion clauses. The question however, is whether the wording of the relevant exclusion covers scenarios where property located in a non-warring country is targeted by arsonists due to the property’s (perceived) connection to Ukraine.
Most policies will cover damage caused by, for example, fire/arson, so it is likely that such claims will fall within the scope of cover of the property policy, unless the war exclusion applies. A typical war exclusion will exclude cover for any liability caused by or arising from war. The issue for determination therefore is whether property damaged in, for example, London, at the instigation of Russian agents and due to the property’s connection with Ukraine, can be said to have been ‘caused by’ or ‘arisen from’ the war in Ukraine.
In English law, causation in an insurance policy is to be determined by the ‘proximate cause’ test, unless the wording expresses a wider or narrower test. Furthermore, the Supreme Court has confirmed in FCA v Arch that terms such as ‘caused by’ or ‘arising from’ are all expressions of the proximate cause test.
A proximate cause is that which is proximate in efficiency. This means that it is the dominant, effective or efficient cause of the loss, and does not have to be the last in time. In Allianz Insurance v University of Exeter, it was decided that damage caused in 2021 by the controlled detonation of a WWII bomb during attempts to make it safe was proximately caused by WWII, notwithstanding the fact that the war ended almost 80 years prior to the occurrence of the damage. The court held that the dropping of the bomb by German forces over England was an act of war. Although the bomb did not actually cause any damage until decades later, this did not alter the fact that the dropping of the bomb was a war act which was sufficient to bring the damage within the scope of the policy’s war exclusion. The exclusion therefore applied in that case and the insurer did not have to cover the loss.
In a hypothetical scenario where a property insured under a policy with a ‘proximate cause’ war exclusion becomes damaged, for example by arsonists acting at the behest of Russian agents, can it be argued that the damage is excluded by the war exclusion (on the basis that the proximate cause of the damage is war because the property was targeted because of its connection to Ukraine)? In other words, the property would not have been targeted and no damage would have occurred but for the war.
Such a view is unlikely to find attraction with the courts. In English law, a policy of insurance is to be interpreted objectively, as it would reasonably be understood by an ordinary policyholder at the time the policy incepted. This means that the interpretation is premised on the presumed intention of the contracting parties, and the burden of proving the application of the exclusion will fall on the insurer.
Against this background, the question is whether it can be said that the intention of the parties at the time the policy incepted was that the war exclusion would apply in cases where there was no physical war taking place in the country where the insured property is located.
In Allianz Insurance v University of Exeter the Court of Appeal stressed that it was not being asked in that case to consider issues such as whether the “war” referred to in the policy could mean a war that had ended at the time the policy was incepted; or whether the damage caused by the bomb did not result from a war-like desire to damage, but from a controlled detonation which had been an attempt to eliminate or minimise damage. This was because the parties in that case were in agreement on the proper interpretation of the war exclusion clause, so the court only had to determine the proximate cause of the loss. Consequently, it is open to an insured to argue that the reference to ‘war’ in the exclusion must be interpreted to mean a ‘war’ taking place in the country or vicinity where the insured property is located, as opposed to a war occurring in a separate country. In other words, there must be a physical connection between the war and the insured property for the damage to be deemed to be proximately caused by war, as opposed to a looser and tangential connection.
If insurers wish to have the comfort of relying on a war exclusion in the hypothetical scenario described above, a court is likely going to require the wording of the war exclusion to be wider and broader than a proximate cause test. Such a wording needs to be clear in its intent that it is designed to apply to circumstances where the cause of the damage is not only proximately caused by war, but also where the cause is directly or indirectly connected with a war, irrespective of whether the war takes place physically within the territory where the insured property is located.
Consequently, rather than an exclusionary wording simply excluding cover for loss/damage “caused by” or “arising from” war, a more appropriate sample wording looking to exclude cover for loss/damage could read, “directly or indirectly caused by or connected to or as a consequence of war (whether or not such war occurs physically within the territory where the Insured Property is located)”.
Obviously, the consideration of any claim will turn on the wording of the relevant policy and the specific facts of each case, so it is not possible to assert that a particular wording would guarantee that an exclusion would apply in every case. Nonetheless, a broader exclusion along the above lines should at least afford the insurer better grounds for arguing that the war exclusion applies where the motivation for the loss/damage is linked or connected to a war event.
The reality is that the evolving nature of modern warfare will continue to create new and unexpected risks which standard property war exclusion wordings may not be suited to fully capture. It would therefore be wise for property insurers to ensure that their war exclusion wordings are regularly reviewed as new war threats emerge, to ensure their war exclusion wordings are fit for purpose.
