Does Your Insurance Cover Losses Caused by the Ukraine Crisis?

Does Your Insurance Cover Losses Caused by the Ukraine Crisis?

May 25, 2022, Covington Alert

Businesses in numerous sectors have felt the impact of the crisis in Ukraine. Companies handling trade, energy, finance, agriculture, aviation, shipping, and beyond should consider whether their insurance assets are available to offset these impacts. At a minimum, companies should review their coverage portfolios carefully and, when in doubt, notify their insurers of losses, maintaining records of both the magnitude of the loss and their response to the loss. Relevant policies in the portfolio might include war risk, aviation, marine, property, trade credit, cyber and political risk insurance, discussed below. As you review your policies, you should consider not only insurer or broker statements about whether these policies apply to your particular situation but also the specific policy language and controlling case law, both of which often provide opportunities to secure coverage.

“War risk” policies, coverage sections or endorsements/riders specifically cover losses arising out of wars or other national emergencies (e.g., invasions, insurrections, riots, strikes, hijackings, terrorism), and they are most commonly (although not exclusively) used in the shipping and aviation industries. In these two industries, the insurance typically has two components: war risk liability (covering, for example, injuries to passengers and items inside the craft), and war risk hull (covering loss or damage to the craft itself). Some “war risk” policies even cover damage from weapons of mass destruction.

In comparison to other insurance policies that you might have in your portfolio, “war risk” insurance is broader than other insurance policies that might contain a war exclusion, but “war risk” insurance is typically narrower than “political risk” insurance, both in terms of the assets protected and the risks against which those assets are protected.

The United States government began offering “war risk” insurance in 1914 in order to make insurance available for its shipping vessels. The United States government is still authorized by statute to issue such insurance; but policyholders can also purchase it from private insurers.

Political risk, political violence, and trade insurance are triggered by foreign government actions that impose losses on the policyholder. Potentially covered government (or “political”) acts include:

• Expropriation, Seizure, Detention, Nationalization, or Confiscation. Insured property typically the target of such government action includes aircraft, goods, products, or equipment. Russia’s seizures of leased aircraft, for example, likely fall within the scope of political risk coverage, in addition to potentially applicable hull and hull war coverages.
• Abandoned Assets: Assets that a business left behind when it was forced to leave Russia or Ukraine might also be covered loss.
• Contract Frustration: Losses due to a government’s unilateral contract termination, refusal to make a contractually required payment, cancellation of import or export licenses that frustrate contracts, and foreign exchange or banking restrictions are all potentially covered losses.
• Arbitral Award and Denial of Justice: Losses resulting from a government’s (e.g., Russia’s) refusal to participate in arbitration or to pay an arbitral award may be covered, and these policies provide an important back stop for companies required by contract to arbitrate against Russia.

Cyber Coverage

In late February, new wiper malware apparently aimed at Ukraine’s government ministries and financial institutions was detected. This malware illustrates that a new wave of malicious code might target companies having no connection to Russia or Ukraine.

While cyber policies generally include some form of a war exclusion, the specific wording of a policy might leave open avenues to coverage, and thus, such policies must be read carefully. It is worth spending time parsing through the language, particularly where insurers contend that such war exclusions bar coverage, as cyber policies offer valuable coverage for first-party losses, third-party claims, business interruption, the costs of ransomware attacks, and breach response expenses.

Finally, traditional property policies are another source of coverage for cyber events, absent a clear cyber exclusion (so-called “silent cyber”). So, check those policies too.

Aviation Policies

Russia has impounded billions of dollars’ worth of aircraft leased to Russian airlines by companies not based in Russia. If applicable to your business, you should consider whether your hull policies, contingent-possessed policies, political risk, war risk policies, or war risk riders or coverage sections may apply. While some insurers may take the position that the aircraft remain subject to return, strong arguments often exist based on the policy language and events on the ground that detention of, interference with access to, or failure to return an aircraft when leasing is terminated is covered loss. Moreover, since the value of an aircraft resides in significant part in verifiable operation and maintenance records, damage to the aircraft or suspect records generated during the detention period also may result in coverage even if the aircraft is repossessed.

Marine and Cargo Policies

These policies protect insureds against loss of or damage to ships and goods in transit over waterways and in some cases via air transit. In addition to covering damage to or loss of the vessels and equipment on board, these policies typically also cover the cargo and goods, and may apply to general marine liability and advance loss of profit (ALOP) or delay start up (DSU). Potentially covered losses can also include loss due to late shipments, shipment re-routings or detentions (with associated demurrage), and cargo that is lost or damaged due to shipping problems.

Directors & Officers (“D&O”) Policies

Company boards and management may face scrutiny of their response to the Ukraine crisis or their alleged failures to anticipate the impact of the crisis on the company’s business. Potential claims implicating D&O liability insurance coverage could include claims for material loss of shareholder value resulting from a board’s or management’s failure to:

• abide by sanctions or disengage from markets notwithstanding consumer or customer opposition,
• scrutinize supply chains for vendors subject to sanctions,
• manage properly exposure to Russian or Ukrainian markets and risks,
• purchase sufficient insurance for exposures arising out of the crisis, or
• mitigate revenue loss caused by disengagement with restricted markets.

D&O policies typically do not contain war exclusions, but they might restrict overage for claims involving economic, trade or financial sanctions, or embargos. Importantly, these restrictions might not exclude coverage for the full loss but rather for only the portion of loss tied to a specific sanctions violation. Pay close attention to policy wording.

Reading your policies carefully is an important first step in assessing the coverage prospects of any claim, including any claim arising from the Ukraine crisis. Equally important is notifying your insurer of any claim, and keeping well-documented records of losses, steps to mitigate such losses, and costs incurred to respond to such losses. Finally, keep in mind that the crisis may change geographically and otherwise, thus making it possible that additional losses could be sustained. The enforceability of putative geographic or territorial limitation endorsements also should be analyzed.

As your risk managers turn to renewals, keep in mind that the crisis in Ukraine has prompted some insurers on renewal to (1) impose territorial limitations applicable not just to Russia and Ukraine but to specific seas and waterways and to other countries such as Belarus; (2) reclassify certain regions as high risk and reevaluate premiums and policy limits; (3) scrutinize supply chain risks, focusing not just on the risks to their insureds but to the insurers themselves whose activities might be subject to sanctions; and (4) refuse to insure certain businesses. Companies are necessarily re-evaluating their exposure to risk because of the Ukraine crisis, but also will need to evaluate their risk transfer (or lack thereof) in light of these risks.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Insurance Recovery practice.