Ms Susan Dingwall, Partner, and Mr Robert Deeley, Trainee, in the Insurance Group of Norton Rose, the international law firm with offices in Bahrain and Dubai, discuss the extent of protection given by terrorism insurance policies in the Israeli-Hezbollah conflict in Lebanon.
The current hostilities between Israel and Hezbollah have highlighted fundamental questions regarding the practical operation and scope of terrorism insurance.
Since the events of 9/11, terrorism insurance has been high on the list of most risk managers’ priorities; as the insurance markets’ reaction to these events was to exclude acts of terrorism from most conventional property insurances, insureds have been forced to purchase standalone terrorism insurance to fill the gap.
However, because certain risks are excluded under these policies, insureds are finding that their terrorism cover is not providing the breadth of cover they were expecting. One particular issue arises from a common feature of terrorism insurance, namely the exclusion of war risks.
The insuring clause of a terrorism policy typically provides cover against “physical loss or physical damage by an Act of Terrorism...”.
It typically defines an Act of Terrorism as “an act, including the use of force or violence, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes”.
Consequently an insured might quite reasonably expect acts of terrorism to be insured.
However, such policies typically also exclude:
“Loss or damage occasioned directly or indirectly by war, invasion or warlike operations (whether war be declared or not), hostile acts of sovereign or government entities, civil war, rebellion, revolution, insurrection, civil commotion assuming the proportions of or amounting to an uprising, military or usurped power or marshal law or confiscation by order of any Government or public authority”.
This exclusion can, in certain circumstances, cause significant problems for an insured.
Application of these policy terms to the present conflict in Israel and in Lebanon raises some interesting questions about the operation and scope of terrorism insurance.
Case of Property in Israel Damaged by Hezbollah Rockets
An insured has property in Israel which is destroyed or damaged by rockets fired by Hezbollah from Lebanon. Would the loss and damage suffered by the insured be covered under a terrorism policy?
Hezbollah was formed in the early 1980s by followers of the Ayatollah Khomeini. It is a Shi’a Islamic organisation and political party in Lebanon, comprising a military and a civilian arm, whose primary stated goal is to defend southern Lebanon against present or future Israeli occupation. As a recognised political party in the Lebanon, it has participated in government.
It also has a quasi-governmental role (which includes assisting in the provision of public services such as schools and hospitals).
Notwithstanding its recognised political status in Lebanon, according to the governments of the US, Canada and Israel, it is a terrorist organisation.
However, others, including the European Union and the United Nations, decline to share this view. Within Lebanon and the Muslim world, Hezbollah’s armed operations are widely regarded as legitimate resistance against Israel.
Applying the insuring clause of a typical terrorism insurance policy to this example, there has been loss or damage, by a group of persons, on behalf of or in connection with an organisation, committed for political, religious or ideological purpose.
In principle, it would appear that the loss and damage suffered in Israel ought to be covered. However, can it be said that the war exclusion applies and, therefore, the claim is excluded from cover?
In layman’s terms, the Oxford English Dictionary defines “war” as “a state of armed conflict between different nations, states, or armed groups” or alternatively, “a sustained contest between rivals or campaign against something undesirable”.
By this definition, Hezbollah’s actions could be construed as war, or at the very least, “warlike”.
However, the typical war exclusion goes further than that in scope. It provides that it is not necessary for the war to be conducted by a sovereign or government entity (although there is some possibility that Hezbollah might even constitute a government entity or be deemed to be the proxy for another government, Iran).
The argument that this exclusion will apply in relation to the insured in our example is, therefore, a very strong one. As a result, what might be construed by an insured to be acts of a terrorist organisation and insured under his terrorism policy is regarded as war by his insurers and is specifically excluded.
Case Of Property in Lebanon Destroyed by Israeli Action
Taking a second example of an insured based in Lebanon whose property is destroyed or damaged by Israeli action, the position might at first glance appear to be even more clear-cut.
Israel’s military action would, in principle, fall within the definitions of “war”, “warlike operations”’ and a “hostile act of a sovereign or government entity”.
It seems more obvious perhaps that acts by a recognised government are unlikely to constitute terrorism, but could it not be argued that an asset destroyed in the course of a government’s response to terrorist action be covered by a terrorism policy? Is that counter-terrorism action or is it war?
What becomes clear is that the distinction between war risks and terrorism is, in today’s political climate, very unclear.
In many countries, in particular, emerging or newly emergent markets, the distinction between acts of terrorism and acts of war is very difficult to draw.
This underlines the importance for the insured of understanding the risk which he is trying to insure. Is it truly a terrorist threat? What is the make-up and objectives of that organisation?
Understanding its motives is key to defining the real risk.
Scope of Cover
These very real examples demonstrate both the common misconceptions which can arise in the minds of purchasers of such insurance as to the scope of cover and the reality of the significant gap in the coverage provided by most terrorism insurance policies. There are, of course, reasons why these wordings are currently drafted in this way.
Until 1997, Lloyd’s underwriters (who tend to lead the global market in terms of what policy wordings say) were prevented from underwriting war risks in relation to any fixed assets.
This restriction was subsequently lifted in relation to assets outside the insured’s country.
Only since 2002 have Lloyd’s underwriters been free to underwrite war risks in relation to assets held in an insured’s country.
Following the relaxation of these restrictions, war risks have generally been underwritten and accounted for separately from other areas of risk.
War risks cover is currently available in the London insurance market and elsewhere, and purchasing standalone war risks insurance to cover the gaps in a terrorism wording is one method by which this problem can be resolved.
However, there is also another solution to this problem, which is for terrorism insurers to include war risks within terrorism policies rather than exclude them.
There is no reason why a combined war and terrorism cover should not be offered by the insurance market thereby offering a product which insureds want and avoiding the all too common problem that inadequate cover was purchased.
There are signs in the London market that a combination wording will be more readily available. Certain specialist brokers have produced combined war and terrorism wordings which have been accepted by certain London market insurers.
It is to be hoped that, in due course, such policies will be the market norm.
In the meantime, project, trade and asset financiers, or any other party purchasing, financing or taking security or any other interest over assets should carefully consider whether terrorism insurance is adequate for their purposes.
In all likelihood, if the assets are located anywhere other than North America or Western Europe, and there is no separate war risks cover, it is not.