Does war affect the payment of insurance claims?
The war in Ukraine is affecting the insurance sector. If a judicial or arbitration dispute arises, the parties will need to interpret the insurer’s exclusion of liability “in the event of war.”
Cause excluding the insurer’s liability
Regardless of where they are based, insurers and reinsurers can expect numerous claims and are analysing their liability in terms of policy exclusions “in the event of war.” A major player in the reinsurance market, Swiss Re, predicts quarterly losses in connection with the war in Ukraine of USD 283 million. Losses arise in various areas, including destroyed infrastructure and buildings, problems with sea and air transportation, unfulfilled contracts, and shortages of workers. All of these losses will lead to claims for compensation under insurance policies.
Most insurers protect against such claims with exclusions from coverage in their policies “in the event of war.” Such clauses are typically contained in the general conditions of insurance. As a rule, the clause is broad and refers not only to “war” but also to all acts of aggression and hostile acts.
The definition of “war”
Although Russia insists that it is conducting only a “special military operation” in Ukraine and avoids the term “war,” it should be assumed that any court or arbitral tribunal applying Polish law would interpret these actions as “war.”
As the English High Court and subsequently the Court of Appeal held in Kawasaki Kisen Kabushiki Kaisha of Kobe v Bantham Steamship Co Ltd (No. 2), [1939] 2 K.B. 544 (2 March 1939), a “war” can break out without a formal declaration of war, without the severance of diplomatic relations between the warring parties, and regardless of the view of the governments concerned.
Exclusion of liability under Polish law
According to the Polish regulations and case law, the grounds for excluding an insurer’s liability should be unambiguous and clearly defined. The policyholder must know what events are not covered by the insurance. If an exclusion “in the event of war” is vague, ambiguous or confusing, the court will resolve the doubts to the detriment of the insurer. As the drafter of a form contract, the insurer bears the associated risk (Supreme Court judgment of 29 May 2019, Lex no. 2680292). The effect of the court’s decision may be either to narrow the application of the exclusion or to declare that the exclusion does not apply.
Interpretation of the phrase “war and its consequences” is key in determining the scope of the insurer’s liability. Generally, the exclusion covers not only damage directly caused by the war, but also “arising directly or indirectly from war” or “arising in connection with war.” Such an exclusion is broad, giving room for interpretation to both counsel and the court, in particular as to the causal connection between the injurious event and the damage.
What are “war-related” circumstances?
Although rulings related to the current war in Ukraine are still lacking, the Supreme Administrative Court of Poland has interpreted “war-related” circumstances in relation to the Second World War (judgment of 3 November 2015, Lex no. 1989947).
In that case, the court found that to successfully claim compensation for abandoning real estate outside the current Polish borders, the circumstances forcing the owner to leave the former Polish territory must be only “related to the war started in 1939,” and not circumstances “arising directly from the war started in 1939.” In the court’s view, circumstances “related to the war started in 1939” (and thus merely connected to it) present a broader concept than circumstances “arising directly from the war started in 1939.” The latter phrase refers only to situations where there is a direct cause-and-effect relationship between the war and (in that case) the need to leave the country.
In proceedings applying these principles to the insurer’s exclusion of liability “in the event of war,” the parties will demonstrate either the existence of a direct cause-and-effect relationship between the war and the damage, or only an indirect connection between the war and the damage, depending on how the exclusion is formulated with respect to the consequences of war.
Summary
An important issue in considering whether an insurance exclusion “in the event of war” will apply is the interpretation adopted by the court. Some issues will be unambiguous, but we expect that circumstances such as the direct or indirect consequences of the war will be relevant in considering the reasonableness of the policy exclusion. Additionally, in our view, there will be procedural issues relating to the assessment of damage, at the site of the incident as well as using new technologies such as drones. When and how the insurer introduced this exclusion into the policy will also be relevant.
Monika Hartung, attorney-at-law, Dr Marta Kozłowska, adwokat, Dispute Resolution & Arbitration practice, Insurance practice, Wardyński & Partners