It has been almost 78 years since the U.S. last formally declared war against another nation, which it did when entering World War II. Since then, the U.S. has been involved in several undeclared but acknowledged wars, including Korea, Vietnam, Iraq, and Afghanistan. Any loss sustained as a result of these armed conflicts would be precluded from coverage under most war exclusions. But what about the conflicts where the presence of the U.S. military was not so prolonged, such as Desert Storm, or even where the military (as in the traditional sense of “boots on the ground”) has not yet been deployed? Traditional notions of what constitutes war may not reflect modern-day conflict between nations, and the circumstances surrounding recent attacks raise new questions regarding the application of war exclusions.
Recent events illustrate how nations (or quasi-sovereign entities) now engage in conflict. New forms of conflict threaten to impact private actors more directly, as unconventional attacks leak into an ever-more interconnected and digitized economy. We have entered an age in which the potential for political conflict places a greater risk of economic loss that results from unseen and often undetected threats.
For example, in 2015, a group of Russian computer hackers known as “Fancy Bear” prepared to attack a new target. Previous targets included governments and related agencies, such as NATO, the White House, and the World Anti-Doping Agency. Fancy Bear had also targeted NGOs, militaries, and civilian agencies throughout Europe and Asia. This latest target was seemingly minor, but would end up in the headlines: the U.S. Democratic National Committee’s servers.
In 2017, another Russian-linked group known as “Sandworm” was busy breaking into computers in the Ukraine, unleashing one of the most destructive pieces of malware thus far created: NotPetya. The NotPetya malware soon spread uncontrollably beyond its intended target, attacking global corporations, including TNT Express, Maersk, and Mondelēz. Total damages have been estimated at more than $10 billion.
Fast forward to the events that have captured the media's attention this past summer–the Strait of Hormuz–where tensions between Iran and several nations, including the U.S., have been high. On June 20, 2019, Iran’s Islamic Revolutionary Guard Corps shot down a U.S. drone in the Strait of Hormuz, escalating tensions in the region. This included mysterious attacks against private oil tankers that the U.S. government blamed on Iran, although Iran denied participation in the attacks.
Since then, stories have proliferated in the media of the seizure of oil tankers by Iran in the Strait of Hormuz, including the seizure of a British-flagged oil tanker on July 14, 2019. Iran claimed that it captured the tanker for violating international regulations, but the continuing conflict between Iran and the U.S. and its allies was blamed.
In response to these recent events, the U.S. acknowledged–via a Twitter post from President Trump–that while an initial conventional air strike was prepared in retaliation, the U.S. instead decided to launch a cyberattack against unknown targets in Iran. In fact, the U.S. has established a Cyber Command, seemingly acknowledging a shift in modern-day conflict from more conventional forces.
Now, the question for insurers is how the language in current war exclusions addresses the evolution of conflict and resulting losses faced by policyholders.
How Have Courts Applied War Exclusions?
The purpose of a war exclusion–at its core–is to protect insurers from covering losses resulting from unforeseen consequences of political conflict amongst sovereign nations, such as property losses incurred as a result of World War II and the Civil War. Historically, the term “war” has been defined by courts to mean hostility between two sovereign nations. However, as conflicts between nations evolve from formal declarations to undeclared wars that sometimes involve entities only loosely linked to a central governmental authority, war exclusions may be more closely scrutinized.
Just as society has had to adopt a broader understanding of what constitutes war, courts, too, have been asked to construe war exclusions to circumstances arising in these changing times. In the past, courts have defined war to mean “a course of hostility engaged in by entities that have at least significant attributes of sovereignty.” Holiday Inns Inc. v. Aetna Ins. Co.; e.g., Pan Am. World Airways Inc. v. Aetna Cas. & Sur. Co. (“[W]ar refers to and includes only hostilities carried on by entities that constitute governments at least de facto in character.”)
Because “war” was sometimes construed as an event limited to declared conflict between two sovereign nations, war exclusions also included terms “war-like actions” and/or “military action” to encompass conflicts that do not require a formal declaration of war. See Pan Am; Universal Cable Productions LLC v. Atlantic Specialty Ins. Co. (“Whatever meaning is ascribed to war, the term ‘war-like actions’ contemplates additional events not falling within that meaning.”)
For example, the Japanese attack on Pearl Harbor on Dec. 7, 1941, was considered an “act of war” because it had all of the indicia of war without a formal declaration, as noted in the New York Life Ins. Co. v. Bennion decision in 1946. As such, an attack that might not have all the indicia of war might be considered an “act of war” if it provokes a response of war or similar magnitude by a sovereign nation. In re September 11 Litigation Cedar & Washington Associates LLC v. The Port Authority of New York and New Jersey (ruling the Sept. 11, 2001, terrorist attacks on the World Trade Center and the Pentagon constituted “equivalent acts of war”).
A Hint of Adaptation to Modern Times
In 2017, the California federal court case Universal Cable Productions LLC v. Atlantic Specialty Ins. Co. included an analysis of the terms “war” and/or “war-like actions” to determine if an armed conflict that occurred between Israel and Hamas during the summer of 2014 constituted a war for purposes of precluding coverage under the war exclusion. There, the district court found that although Hamas was typically considered a terrorist group, during this particular conflict, it was “a distinct group that exercises control, directly or indirectly, over the Gaza Strip, and...engages in common governmental activities.” Based on that reasoning, the district court concluded that Hamas’ actions in seizing control of the Gaza strip were comparable to acts of war by a de facto government; therefore, the war exclusion precluded coverage for any damage sustained by the insured during this conflict.
In so finding, the district court focused on prior cases holding that “war” can apply to conflicts between “entities that constitute governments at least de facto in character.” This opinion signaled a willingness by at least one court to acknowledge that “war” and “war-like actions” do not always include a sovereign entity as a necessary party to the conflict. Under that analysis, the war exclusion would bar coverage for losses sustained as a result of groups purportedly acting on behalf of the state actions against another sovereign entity, such as the NotPetya cyberattack.
9th Circuit: “Not So Fast”
While the district court in Universal Cable Productions was willing to acknowledge that the war exclusion could bar coverage for losses caused by groups that may act–at least temporarily–like a sovereign or quasi-sovereign state, the 9th Circuit disagreed and found that Hamas’ actions did not have “sufficient characteristics of a sovereign entity to constitute war-like action by a military force.” Instead, the court adopted a narrow interpretation, holding that Hamas did not qualify as a de facto sovereignty, as it has never been recognized as such. The 9th Circuit placed significant emphasis on the fact that the executive branch of the U.S. government “has never recognized Gaza as a state or Hamas as a de jure or de facto sovereign,” and remanded the matter to the district court for a determination of whether the activity fell within the exclusion for “insurrection, rebellion, revolution, etc.”
While there is limited reported case law analyzing what constitutes “war” or “war-like actions” where losses result from less-traditional forms of conflict between nations, the Universal Cable Productions opinion suggests that courts may not be willing to deviate from more traditional notions of “war” and what constitutes a de facto sovereign.
Burden of Proof and Standard for Causation
As noted in Pan Am, in addition to proving that actions taken by an entity involve a “sovereign” when an insurer denies coverage based on certain war exclusions, it also must demonstrate that a “war-like” act is the proximate cause of the alleged loss. Under this test, “remote causes of action are not relevant to the characterization of an insurance loss.” Rather, courts consider the “efficient physical cause of the loss” and stop from tracing “events back to their metaphysical beginnings.” The 2nd Circuit concluded that although the proximate cause of the damage to the plane was the hijacking, the insurer failed to prove that the hijacking constituted an excluded peril within the policy’s war exclusion.
Since the ruling in Pan Am., some courts have implemented a less stringent application of causation and have favored a “common sense and reasonable judgment” approach in analyzing the source of the loss alleged, as seen in Younis Bros. & Co. v. CIGNA Worldwide Ins. Co. In that case, the court noted that the specific “cause” of the damage did not necessarily need to be the closest in time or place to the actual loss, but must be the cause that is “essentially connected with the loss at its efficient cause.”
Where the relevant policy language includes the phrase “arising out of,” or “arising from,” the majority of courts interpret these phrases as requiring some broad causal connection that is attributable to the loss, as opposed to a direct proximate cause, as noted in Salcedo v. Evanston Ins. Co.; Gluck v. Executive Risk Indem. Inc.; and Gen. Agents Ins. Co. v. Arredondo.
Why Is This Important?
The burden of proving that an excluded peril was the proximate cause of a loss and therefore barred by a war exclusion can present challenges for insurers. Insurers may need to present evidence, including witness testimony to show that the nature of the actions that gave rise to the loss are “war-like acts” that fall within the exclusion. The issue is significant in a closely watched case currently pending in the Circuit Court of Cook County, Illinois, captioned Mondelez International Inc. v. Zurich American Ins. Co.
The lawsuit arises out of the recent NotPetya cyberattack. Mondelez, a company that sustained losses resulting from NotPetya malware, seeks coverage for losses sustained as a result of the cyberattack, including business interruption costs, along with costs for new servers, laptops, and other affected equipment. At issue is whether the war exclusion applies and whether NotPetya was, in fact, caused by a Russian state-sponsored cyberattack and thus an “act of war” or “war-like act.” The factual scenario is one that has not been tested in Illinois or most other courts but which will likely arise again given the type of conflict that results in loss today.
The extent to which war exclusions apply to losses sustained as the result of modern-day conflict depends in part on how courts construe the terms “war” and “war-like conflict,” and whether they are willing to apply the exclusion to losses caused by groups that are not de facto sovereigns. Whether insurers can demonstrate that an excluded peril was the proximate cause of a loss will also be closely watched as courts start to consider the application of the war exclusion in the modern era of conflict. Traditional war exclusions may apply, or they may need to be modified to reflect contemporary notions of war and war-like conflict.