War Risk Exclusion Legal History Outlined

Following the horror of Sept. 11ths terrorist attacks, thecountry now begins to shift its focus to returning to some degreeof normalcy. Part of that shift will include assessing the massivedamage incurred as a result of these hostile acts.

In that vein, House Financial Services Committee Chairman MikeOxley, R-Ohio, has drafted a letter to insurance regulators urginginsurers not to exercise the acts-of-war exclusion to deny coveragerelating to these attacks.

We believe the following article, taken from the FC&SBulletins, will help to clarify how the war exclusion shouldapply as we explain various court interpretations of theexclusion.

While no court decisions involving the exact language of the warexclusion clause in the current commercial property forms havearisen at this time, there are decisions involving other, past warexclusion clauses that do permit some reliable conclusions to bedrawn.

American courts, following British precedent, seem to adhere toa strict doctrine of what constitutes war, allowing the exclusionto be applied only in situations involving damage arising from agenuine warlike act between sovereign entities. The two followingcases best sum up this idea that for there to be a war, a sovereignor quasi-sovereign must engage in hostilities.

In Pan American World Airways, Inc. v. Aetna Casualty &Surety Company, 505 F.2d 989 (2d Circuit 1974), the SecondCircuit Court of Appeals held that where members of a politicalactivist group from Jordan hijacked an aircraft over London anddestroyed the aircraft on the ground while in Egypt, the resultingloss to the aircraft was not due to war within the meaning of theterm as used in the exclusionary clauses of the “all risks”policies covering the aircraft.

The court, citing legal history, stated that “cases haveestablished that war is a course of hostility engaged in byentities that have at least significant attributes of sovereignty;under international law, war is waged by states or state-likeentities and includes only hostilities carried on by entities thatconstitute governments at least de facto in character.”

The court reasoned that since the activist group had neverclaimed to be a state, it could not be acting on behalf of any ofthe states in which it existed when the plane was hijacked,especially since those states uniformly and publicly opposedhijacking. The hijackers were agents of a radical political groupand not a sovereign government. The court concluded that aguerrilla group or radical political group must have at least someincidence of sovereignty before its activities can properly bedefined as war.

In Holiday Inns, Inc. v. Aetna Insurance Company, 571F. Supp. 1460 (S.D.N.Y. 1983), the U.S. District Court in New York,quoting extensively and approvingly from the Pan American casecited above, declined to apply the war risks exclusion to a claimfor damage to a hotel that was shelled during the battles inBeirut, Lebanon.

The insurer argued that the conflict in Lebanon involved threeclearly defined independent entities, each having the attributes ofsovereignty or, at the least, quasi-sovereignty, and thattherefore, the war exclusion could be applied to deny coverage. Thecourt focused on the faction occupying the Holiday Inn at the timeof the fighting and concluded that it was not a sovereignentity.

The court further stated that even if the group could be arguedto possess the necessary sovereignty, it was not fighting withanother sovereign government at the time of the damage, andtherefore, the war exclusion clause could not be invoked by theinsurer.

On the other hand, one court ruled that the war exclusionapplied to property stolen during a period of hostilities betweenthe United States and Panama in TRT/FTC Communications, Inc. v.Insurance Company of the State of Pennsylvania, 847 F. Supp.28 (Del. Dist. 1993). Civil disorder erupted in the centralbusiness district of Panama City, where TRT operated a salesfacility. Armed men in civilian clothing, carrying military assaultrifles, broke into the facility and stole merchandise andequipment.

At the time of the theft, Panama had declared war on the UnitesStates and was in a war preparedness status. The court determinedthat the men who robbed TRT were part of some arm of the Panamaniangovernments forces involved in the war effort.

However, the court stated that “regardless of whether the menwere part of the Panamanian forces or a band of looters, there isample evidence to support the conclusion that their actions againstTRT were enabled by the military hostilities occurring betweenPanama and the United States.”

Although those perpetrating the theft may not have been part ofthe military or government of Panama, the loss that they causedwould not have occurred absent Panamas declaration of war and theU.S. invasion of Panama.

It is easy to understand and accept a court declaring that theterm “war” is limited to hostilities between sovereigns and thatthe war exclusion must be accordingly interpreted. However, thereis more to the war exclusion than that one word–”war.”

Warlike action by a military force, insurrection, rebellion,revolution and usurped power are all terms that are found in thewar exclusion, and it is proper for a court to apply these terms toany claim that may arise and that could be subject to the warexclusion.

The court in the Pan American case did just that and effectivelydiscussed why none of those terms applied to the claim. But theimportant point is that insurers and insureds know that the warexclusion applicability need not be limited to a “war;” that thereare other parts to the war exclusion; and that courts need toanalyze all parts of the exclusion if a dispute over coverage is tobe settled justly.

Another conclusion that has arisen from past interpretations ofthe war exclusion is that, to be excluded by that clause, a claimmust involve a hazard distinct from that of peacetime. In otherwords, neither aggravation of a hazard existing in peacetime norremoval of a peacetime safeguard constitutes a war risk or awarlike operation.

The following cases discuss this point and emphasize that courtswill relegate the war exclusion to a nonperforming role if it canbe shown that damage to covered property can otherwise beattributed to some specified cause of loss.

In Queen Insurance Company v. Globe & Rutgers InsuranceCompany, 263 U.S. 487 (1924), the U.S. Supreme Court held thatdamage from collision of two merchant ships sailing in separateconvoys during World War I, with no hostile warships apparentlypresent, was not a war risk, although the convoys were traveling atnight without lights and one convoy had changed its course becauseof a submarine attack a few hours earlier. The damage was due tocollision, was such that it could have occurred at any time, and sowas not the result of war.

This case is old but still valid since courts in the UnitedStates have not departed from the fundamental principle laid downin the decision. And, on its authority, most insuranceprofessionals assumed even during World War II that such things asthe aircraft damage section of the extended coverage endorsementwould cover damage from the crash of a military or naval aircraftduring training maneuvers, and that damage from an otherwiseinsured peril would not be excluded merely because it occurredduring a blackout.

In Aircraft International, Inc. v. United States, 460F.2d 1065 (5th Circuit 1972), the federal court was presented witha claim wherein an insured aircraft was lost over Vietnam duringthe war in a collision with a military aircraft. The insurer haddenied coverage based on the war exclusion, but the court held thatthe loss was due to an aviation peril, notwithstanding the factthat the two aircraft were flying over Vietnam only because therewas a war raging.

The court decided that the collision was not a hazard existingonly in wartime and so, the exclusion was not applicable in thisinstance.

In American Fire and Casualty Company v. Sunny SouthAircraft Service, Inc., 151 So. 2d 276 (Fla. 1973), a Floridacourt heard arguments that the war exclusion should apply against aclaim for loss to an aircraft that was hijacked to Cuba and thendamaged by a Cuban military plane. The court found that the losswas proximately caused by theft rather than warlike activity andso, the war exclusion does not preclude coverage.

Theft was deemed not to be a hazard distinct from that ofpeacetime, so even though the insured plane was damaged by awarplane, the war exclusion would not be stretched to apply to thistype of loss.

Finally, a number of cases arising early in World War IIestablished the conclusion that war need not be officially declaredin order for an insurer to invoke the war exclusion. Casesinvolving life and accident insurance (but with war exclusionsworded similarly to that found on a standard property insuranceform) held that the 1941 attack on Pearl Harbor was war within themeaning of the exclusion clauses even though there had been noformal declaration of war at the time of the attack.

Typical of these cases is New York Life Insurance Company v.Bennion, 158 F.2d 260 (10th Circuit 1946). In contrast,another life insurance case, Stinson v. New York Life InsuranceCompany, 167 F.2d 233 (D.C. Circuit 1948), held the war to beover, as far as an insurance exclusion was concerned, after thecessation of actual fighting in 1945, even though there had been noofficial and formal declaration of peace.

Of course, the war exclusion on property forms of todayspecifically refers to undeclared war, so any hostilities carriedon by a sovereign state against another sovereign state, such as aPearl Harbor type of attack, will be considered subject to the warexclusion regardless of whether or not war has been officiallydeclared.

Susan Massmann is a staff writer for the FC&S Bulletins,published by the National Underwriter Company in Erlanger,Ky.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 21,2001. Copyright 2001 by The National Underwriter Company in theserial publication. All rights reserved.Copyright in this articleas an independent work may be held by the author.

Contact Webmaster