Escalating military conflict in the Middle East, supply-chain disruptions, and malicious cyber events are causing significant losses and raising the risk of more losses. Recent incidents have disrupted business, damaged data centers, struck shipping vessels, curtailed air travel, and compromised energy infrastructure. Now is a critical moment for policyholders to evaluate how their existing insurance programs may respond to these developments—and how they can strengthen those programs for the future.
Despite the prevalence of “war exclusions” in many, but not all, commercial insurance policies, policyholders still have multiple potential pathways to coverage. War exclusions come in various flavors, and experience shows that losses arising from the Middle East conflict may fall outside the scope of such exclusions, depending on the specific exclusionary wording and the circumstances of the loss. Further, political and war and allied perils insurance exists to protect expressly against conflict-related perils that might otherwise be subject to war exclusions. In addition, various other coverage lines may respond to discrete claims, such as trade default, kidnap and ransom, or crisis response.
This alert identifies key coverage considerations and outlines steps policyholders may take now to maximize recovery and mitigate against emerging risks.
War Exclusions: Scope and Modern Limits
Many commercial policies contain war exclusions barring coverage for defined war‑related perils. Whether a war exclusion applies is highly fact dependent, however, and may often depend heavily on the policy wording and on whether the loss is closely connected to armed operations or the military objectives of a government.
Covington successfully litigated the leading case on this issue, Merck & Co., Inc. v. ACE American Insurance Company, 293 A.3d 535 (N.J. App. 2023). In Merck, the court considered whether a war exclusion applied to claims for property and business interruption losses resulting from malware allegedly deployed by the Russian military against targets in Ukraine via commercial accounting software.
The court agreed with Covington that the war exclusion did not apply. The court held that the “plain language” of the exclusion did not apply to a cyber event that affected “accounting software for commercial purposes to non-military consumers,” whether the event was instigated by private actors or (as insurers claimed) by Russian agents. Id. at 546. The court highlighted caselaw distinguishing between “actual hostilities” involving or closely connected to the use of “armed force” and those activities “performed in a war period” but not specifically attributable to military action. Id. at 550-51. Further, the war exclusion in question did not directly address cyber-related events. Id. at 541-42.
The Merck decision highlights multiple considerations bearing on a modern war exclusion analysis, including: the wording of the exclusion, applicable interpretive rules, the existence of alternative wording more precisely addressing the loss, the definition of “war” and “hostilities,” the degree of connection between the claimed loss and war-like activities, and questions of attribution to a state versus private actor.
Beyond Merck, Covington has also recently assisted clients in securing substantial coverage (under policies with and without war exclusions) for aviation-related losses related to the war in Ukraine, and it has helped many others obtain coverage for other conflict-related losses.
Political Risk and War & Allied Perils Insurance
These insurance offerings directly provide coverage that might otherwise be barred by war exclusions and can be the first stop when conflicts escalate.
Political Risk Insurance typically protects against losses—including damage to or loss of assets, and loss of business revenue—caused by an insured “political” peril, such as government acts or politically motivated events.
Common grants of political risk cover include war; political violence and terrorism; expropriation and confiscation; inability to import/export; currency inconvertibility or transfer restrictions; forced abandonment of assets; and frustration of contractual performance due to political events.
War & Allied Perils Insurance is common in the maritime and aviation industries and may cover war-related delays or damage to, or loss of, vessels, aircrafts, and goods in transit or storage. It may also grant coverage for consequential losses or liabilities arising from such delay, damage, or loss.
War and allied perils coverage grants may include hull coverage for physical loss of or damage to insured property from war perils (e.g., missile strikes or bombs); contingent and possessed coverage for leased aircraft assets (including engines, parts, plans, and more); cargo war risk coverage for damage or delay to goods in transit, storage or holding; and war risk protection and indemnity coverage (P&I) for third-party liabilities including crew injuries or deaths. Last week, Chubb announced a public-private marine insurance facility with the U.S. government, reportedly to provide war risk insurance covering hull, P&I, and cargo exposures in the current conflict.
Many factors may affect a company’s ability to access and fully recover under these policies. For instance:
- The country where the insured loss occurred (or can be linked) can potentially impact recovery, because the policy may include geographical restrictions or limits.
- Whether a company was the specific target of adverse war peril action, or instead was harmed more indirectly or collaterally, may affect applicable coverage grants.
- Whether these policies cover intangible assets, such as services or data, can also affect recovery prospects and amounts.
- Some cases may present issues as to which coverage line applies. For example, if no government entity has detained aircraft assets, but instead a lessee operating in a country involved in armed conflict simply has not returned them, questions may arise whether the loss is covered by war risk insurers, all-risk property insurers, or both.
Other Possible Coverages
Companies should also be attentive to the wide variety of other coverages that may respond to losses in the current geopolitical environment.
Property & Business Interruption: Commercial property policies insure physical loss or damage to property; they may also cover business losses resulting from damage to one’s own property as well as contingent business losses resulting from damage to one’s customers or suppliers. Coverage extensions, such as prevention of access or ingress/egress cover, may also protect against business losses where insured property is not physically damaged. War exclusions are common in such policies—but as explained above, their application may often depend on specific policy wording and the loss’s nexus to hostilities.
Cyber: Cyber policies typically provide coverage for data breaches, digital disruptions, and ensuing business loss. Again, war exclusions are commonplace, so coverage disputes often focus on contested cyber attribution issues, such as whether a cyber event involves a private actor, a state-backed operation, or both.
Marine and Cargo: With critical waterways such as the Strait of Hormuz under siege, vessel owners may look first to hull and machinery insurance to protect their ships and equipment, and P&I coverage for certain third-party claims. Companies also should consider cargo, transit and stock throughput policies to protect against physical loss of or damage to goods in transit or storage and potential associated delays. With war risks often excluded in certain standard forms, purchasing war endorsements or separate war & allied perils policies may provide added protection.
Trade Credit: This insurance protects against default by debtors that purchase from foreign suppliers or secure financing from foreign banks. Some of these policies do not contain war exclusions. Others do, but they may not apply where the default arises from economic sanctions.
D&O / Professional Indemnity: These policies protect directors, officers, and others (sometimes including the company) against allegations of breaches of duty in reacting to or managing volatile situations, such as the crises in the Middle East. These covers typically reimburse both defense costs and damages awards in third-party, regulatory, shareholder and other claims.
Kidnap & Ransom: K&R insurance protects individuals and organizations against crisis events such as kidnap for ransom, extortion, wrongful detention, security evacuation, and ransomware incidents. K&R may cover a range of financial losses, such as professional crisis management costs and paid ransom.
Takeaways and Next Steps
With the ongoing Middle East conflict and other crises across the globe, companies with affected or exposed assets or operations will benefit from proactive steps to mitigate and manage their risks. While war exclusions may sometimes present an obstacle to recovery, many policies do not have them, and for those that do, the policy may still respond to emerging losses during conflicts depending on policy wordings and factual circumstances. Finally, some policies, such as those including political risk or war & allied peril coverages, are specifically designed to cover geopolitical and war-related perils.
To utilize these insurance assets effectively, companies are well advised to take these steps:
- Identify all relevant coverages (whether from their own insurance programs, or from service, project, vendor, or joint-venture agreements that may grant additional-insured rights to the company or impose minimum insurance obligations);
- Carefully review all policy language;
- Promptly and accurately notify any possible claims;
- Document all losses and mitigation measures; and
- Proactively evaluate insurance programs to ensure they continue to address the rapidly evolving risks in this current geopolitical climate.
Covington’s global insurance recovery team—designated by Chambers as the “gold standard” for policyholder coverage work—has unsurpassed experience successfully recovering on these complex, high-value claims. All major insurers know Covington well, which often supports early resolution of claims. Where negotiation is not sufficient, we have a successful track record in courts and arbitral tribunals throughout the world. We stand ready to help policyholders identify potential coverage for existing losses and strengthen their coverage programs to address emerging risks.
If you have any questions concerning the material discussed in this client alert, please contact the following members of our Insurance Recovery practice.
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