Almost two weeks into the Russian invasion of Ukraine, quite a few firms are centered on how the conflict would possibly affect their enterprise, together with their insurance coverage protection. This advisory supplies a high-level overview of two sorts of insurance coverage exclusions that could be implicated: conflict exclusions and OFAC exclusions.
In quite a few insurance coverage insurance policies over the previous century, “conflict” exclusions have change into an ordinary protection time period that always goes unnoticed. With a hardened insurance coverage market and within the face of novel dangers within the fashionable world, the trade has reassessed legacy language so as to add expanded “conflict” exclusions in insurance coverage insurance policies. For instance, on the finish of 2021, the Lloyd’s Market Affiliation launched 4 mannequin clauses to particularly exclude protection for “cyber conflict” from cyber insurance coverage insurance policies. Nevertheless, consideration of the definition of “conflict” definitely doesn’t cease with cyber insurance coverage.
What is supposed by “conflict” has been the topic of case legislation and interpretation for many years in each insurance coverage and non-insurance contexts. The seminal choice within the insurance coverage context is Pan American World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2nd 989 (2nd Cir. 1974), which rejected the applying of a conflict exclusion to a terrorist group’s hijacking and destruction of a aircraft. Referring to current precedent, in addition to worldwide legislation, the court docket held “that conflict is a course of hostility engaged in by entities which have not less than vital attributes of sovereignty.” Certainly, “instances coping with the insurance coverage that means of ‘conflict’ have outlined it in accordance with the traditional worldwide legislation definition” – that’s, “conflict refers to and consists of solely hostilities carried on by entities that represent governments not less than de facto in character.” Varied subsequent authorities depend on Pan American’sdefinition of “conflict,” together with lately the Ninth Circuit’s choice in Common Cable Productions, LLC v. Atlantic Specialty Ins. Co., 929 F.3d 1143, 1147, 1155 (ninth Cir. 2019) (“conflict” has a “specialised that means within the insurance coverage context,” requiring “hostilities between de jure or de facto sovereigns” and “employment of pressure between governments or entities basically like governments,” with conflict being “the strategy by which a nation prosecutes its proper by pressure”).
However sure conflict exclusions attain occasions broader than formally declared, all-out “conflict” per se, together with these issued by the Insurance coverage Companies Workplace, which drafts coverage types for the insurance coverage trade that present that the insurer will “not pay for loss or harm prompted instantly orindirectly” by “Battle And Navy Motion,” together with “undeclared” wars and “[w]arlike motion by a army pressure” (ISO Type CP 10 20 10 12, § B.1.f.). The difficulty for insureds is the chance that insurers invoke a “conflict” exclusion – a few of which can incorporate obscure ideas reminiscent of “hostile or warlike motion” or “warlike operations” – to order rights on or deny protection for an in any other case meritorious declare.
Along with conflict exclusions, many insurance policies, together with administrators and officers (D&O) insurance coverage insurance policies, have Workplace of Overseas Belongings Management exclusions. The US Division of the Treasury has issued strict pointers for insurance coverage firms in relation to protection, together with having insurers add “an specific exclusion for dangers that might violate U.S. sanctions legislation. For instance, the next customary exclusion clause is usually utilized in open marine cargo insurance policies to keep away from OFAC compliance issues: ‘at any time when protection offered by this coverage could be in violation of any U.S. financial or commerce sanctions, such protection shall be null and void.’ The authorized impact of this exclusion is to stop the extension of a prohibited service (insurance coverage or danger assumption) to sanctioned international locations, entities or people.”
Like conflict exclusions, not all OFAC exclusions are created equal. Though the pattern exclusion above is considerably slender, some OFAC exclusions are broader, arguably reaching past the scope of the sanctions issued. The difficulty is that, in some instances, a service might invoke these exclusions to negate protection, regardless of a policyholder’s expectations for protection in a given state of affairs.
So, what ought to firms do? Verify your coverage language to raised perceive the place there is likely to be gaps in protection. If the exclusions are overly broad, take into consideration what your exposures is likely to be – and probably assess whether or not the exclusions may be narrowed or clarified at renewal. In some instances, firms now we have spoken to are already making selections to change or restrict sure elements of their enterprise, not as a result of they are going to be in violation of OFAC laws, however as a result of the exclusions that they’ve are so broad, they’re liable to insurers denying (presumably unjustifiably) protection when a loss happens. And that danger is simply too nice.