Almost two weeks into the Russian invasion of Ukraine, quite a few corporations are targeted on how the conflict would possibly affect their enterprise, together with their insurance coverage protection. This advisory offers a high-level overview of two sorts of insurance coverage exclusions that could be implicated: conflict exclusions and OFAC exclusions.
Battle exclusions
In quite a few insurance coverage insurance policies over the previous century, “conflict” exclusions have change into an ordinary protection time period that usually 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. Nonetheless, consideration of the definition of “conflict” actually doesn’t cease with cyber insurance coverage.
What is supposed by “conflict” has been the topic of case regulation and interpretation for many years in each insurance coverage and non-insurance contexts. The seminal resolution within the insurance coverage context is Pan American World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.second 989 (second Cir. 1974), which rejected the applying of a conflict exclusion to a terrorist group’s hijacking and destruction of a aircraft. Referring to present precedent, in addition to worldwide regulation, the court docket held “that conflict is a course of hostility engaged in by entities which have a minimum of vital attributes of sovereignty.” Certainly, “circumstances coping with the insurance coverage that means of ‘conflict’ have outlined it in accordance with the traditional worldwide regulation definition” – that’s, “conflict refers to and consists of solely hostilities carried on by entities that represent governments a minimum of de facto in character.” Numerous subsequent authorities depend on Pan American’sdefinition of “conflict,” together with just lately the Ninth Circuit’s resolution 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 power between governments or entities basically like governments,” with conflict being “the tactic by which a nation prosecutes its proper by power”).
However sure conflict exclusions attain occasions broader than formally declared, all-out “conflict” per se, together with these issued by the Insurance coverage Providers Workplace, which drafts coverage types for the insurance coverage trade that present that the insurer will “not pay for loss or harm brought on straight orindirectly” by “Battle And Navy Motion,” together with “undeclared” wars and “[w]arlike motion by a army power” (ISO Type CP 10 20 10 12, § B.1.f.). The problem for insureds is the chance that insurers invoke a “conflict” exclusion – a few of which can incorporate obscure ideas comparable to “hostile or warlike motion” or “warlike operations” – to order rights on or deny protection for an in any other case meritorious declare.
OFAC exclusions
Along with conflict exclusions, many insurance policies, together with administrators and officers (D&O) insurance coverage insurance policies, have Workplace of International Property Management exclusions. The US Division of the Treasury has issued strict tips for insurance coverage corporations in the case of protection, together with having insurers add “an specific exclusion for dangers that might violate U.S. sanctions regulation. For instance, the next customary exclusion clause is usually utilized in open marine cargo insurance policies to keep away from OFAC compliance issues: ‘every time protection supplied by this coverage can 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 forestall the extension of a prohibited service (insurance coverage or threat 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 problem is that, in some circumstances, a provider could invoke these exclusions to negate protection, regardless of a policyholder’s expectations for protection in a given situation.
So, what ought to corporations do? Examine your coverage language to higher 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 will be narrowed or clarified at renewal. In some circumstances, corporations we now have spoken to are already making selections to change or restrict sure components 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 (probably unjustifiably) protection when a loss happens. And that threat is just too nice.
