Hunton Insurance Recovery Blog

The ongoing military action between the U.S., Israel, and Iran is affecting commerce both in the region and globally. There have already been reports of several oil tankers, cargo vessels, and a data center being damaged in attacks. Even businesses not directly impacted will be affected as shipping companies avoid the Strait of Hormuz, causing delays and higher prices for downstream customers. While many might assume insurance coverage is unavailable, that is not always the case and knowing where to look is key.

War Risk Insurance

The most promising source of coverage is under war risk policies, which specifically cover loss and damage caused by acts of war. These policies typically cover loss and damage caused by military action between two countries and should apply here. The United States has not officially declared war on Iran, but this should not matter because many policies include coverage for both declared and undeclared war. One representative policy covers damage that occurs “whether before or after declaration of war and whether by a belligerent or otherwise.”

Unfortunately, Insurers have begun issuing notices of cancellation of war risk policies, and are reselling policies with exclusions for waters near Iran and at higher premiums. Whether they can do so depends on the specific terms of the policy. Companies that receive a notice of cancellation of their war risk policies should review their policies to ensure that the insurer is not improperly trying to evade coverage. Policies place conditions on when and how an insurer can cancel the policy. Insurance inherently covers fortuitous events, and policies would be worthless if insurers could unilaterally avoid them once a risk materializes, just as a property owner cannot purchase fire insurance to insure its already burning building. In this way, in the case of shipping companies, cancellations should not affect ships already in transit. Rather, proper notice of cancellation is required before the risk materializes. Policies may also impose other limitations on an insurer’s ability to cancel a policy. This means that ships that are already in the area of the conflict prior to the cancellation notice should remain covered. However, companies should take reasonable measures to avoid endangering vessels that are not already in an area of risk. Attempts to cancel a policy without meeting the policy’s cancellation conditions are improper and the policy should remain in effect.

Commercial Property Insurance

Coverage for war risk is more limited under traditional commercial property insurance policies. While these policies often cover supply chain disruptions caused by property damage to a supplier (such as the damage to the data center), or even a supplier of a supplier, most property policies contain a war exclusion that may apply to limit or bar coverage. However, as with all exclusions, the burden is on the insurer to show that the exclusion forecloses all potential for coverage. Several non-state actors (such as Hezbollah) have joined the conflict on Iran’s side and damage caused by their attacks may be covered because war exclusions typically only apply to exclude damage caused by state actors. Holiday Inns Inc. v. Aetna Ins. Co., 571 F. Supp. 1460, 1503 (S.D.N.Y. 1983) (holding in the insurance context that “war” must be “between sovereign or quasi-sovereign states”). An attack by a non-state actor should therefore not be excluded by a war exclusion.

Property damage (and the resulting supply chain disruption) caused by an attack by a terrorist group may also be covered under a terrorism risk policy. On the other hand, most traditional property policies contain broad exclusions for “certified acts of terrorism” and many likewise contain exclusions for “non-certified acts of terrorism.” Thus, the availability of coverage for an attack depends both on the specific language and type of the policy (traditional property, war, or terrorism), the identity of the attacker, and whether the attack is certified by the government as an act of terrorism.

Some policies merely state that they cover (or exclude) “war” without definition or other explanation as to whether this means declared war only. Under those circumstances, loss resulting from military action with no formal declaration of war raises the question as to whether the loss was, in fact, due to “war.” Courts that have addressed the issue have found the term “war” to be ambiguous as to whether it includes an undeclared military action. For instance, in Harding v. Pennsylvania Mut. Life Ins. Co., 90 A.2d 589 (Pa. 1952), the beneficiary of a life insurance policy sought coverage after her husband died in military training in the United States during the Korean War, a conflict in which Congress never formally declared war. The policy included an exclusion for if the policyholder died while “engage[d] in military, air or naval service in time of war.” The beneficiary argued that the exclusion did not apply because there was no formal declaration of war. The Pennsylvania Supreme Court found that the term “war” was ambiguous as to whether it included undeclared war. The Court stated, “the cardinal rule of construction [is] that where a policy is susceptible of more than one construction it must be liberally construed in favor of the insured and against the insurer” and, therefore, the exclusion did not apply to bar coverage. 90 A.2d at 595. The decision aligns with the general rule that insurance policy ambiguities should be resolved in favor of coverage.

Insurers have at times attempted to expand war exclusions to attacks outside the context of military action. But courts have limited their ability to do so. This was the issue in Merck & Co., Inc. v. Ace Am. Ins. Co., 293 A.3d 535 (N.J. Super. Ct. App. Div. 2023), where Merck’s property insurers denied coverage following a cyberattack based on the policies’ “hostile or warlike action” exclusions. The exclusion purported to bar coverage for “Loss or damage caused by hostile or warlike action in time of peace or war, including action in hindering, combating, or defending against an actual, impending, or expected attack: (a) by any government or sovereign power (de jure or de facto) or by any authority maintaining or using military, naval, or air forces; (b) or by military, naval, or air forces; (c) or by an agent of such government, power, authority, or forces[.]” The insurers argued that the exclusions applied because the cyberattack was committed by an actor backed by the Russian government. The trial court rejected that argument and the New Jersey Superior Court Appellate Division affirmed, finding that the cyberattack did not fall within the scope of the exclusion. The court reasoned that “the exclusion of damages caused by hostile or warlike action by a government or sovereign power in times of war or peace requires the involvement of military action.” The court further noted that from a historical perspective, “similar exclusions have never been applied outside the context of a clear war or concerted military action” and, in that way, the court concluded that its decision aligns with the “long and common understanding that terms similar to ‘hostile or warlike action’ by a sovereign power are intended to relate to actions clearly connected to war or, at least, to a military action or objective.”

Political Risk Insurance

Another potential source of coverage is political risk insurance. These policies often include coverage for war and contract frustration due to government action. Political risk policies are typically bespoke with coverage being limited to enumerated risks. Unlike traditional property policies, political risk insurance is not limited to physical loss or damage to property and often extend to financial loss that is caused by the triggering political risk event. Iran has closed the Strait of Hormuz to shipping. The inability to safely traverse the Strait could lead to cancelled contracts or higher costs. Resulting losses may be covered. Additionally, the U.S. government recently announced that it will begin selling increased government-backed political risk insurance that could fill in gaps as private insurers restrict coverage.

In summary, while coverage for war and military action is limited, losses resulting from war and warlike action may still be covered. Policyholders who experience losses either from direct loss or damage or indirect business disruption should carefully review all potentially applicable policies to determine whether any may respond to their loss. Where questions arise or insurers refuse to consider the possibility of coverage, policyholders should quickly consult with experienced coverage counsel to ensure that critical deadlines are met.