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Practically two weeks into the Russian invasion of Ukraine, quite a few firms are targeted on how the conflict may affect their enterprise, together with their insurance coverage protection. This advisory gives a high-level overview of two sorts of insurance coverage exclusions which may be implicated: conflict exclusions and OFAC exclusions.

Struggle exclusions
In quite a few insurance coverage insurance policies over the previous century, “conflict” exclusions have change into a regular protection time period that always goes unnoticed. With a hardened insurance coverage market and within the face of novel dangers within the trendy 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. Nevertheless, 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 legislation and interpretation for many years in each insurance coverage and non-insurance contexts. The seminal determination 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 appliance of a conflict exclusion to a terrorist group’s hijacking and destruction of a airplane. Referring to current precedent, in addition to worldwide legislation, the court docket held “that conflict is a course of hostility engaged in by entities which have no less than vital attributes of sovereignty.” Certainly, “circumstances coping with the insurance coverage that means of ‘conflict’ have outlined it in accordance with the traditional worldwide legislation definition” – that’s, “conflict refers to and consists of solely hostilities carried on by entities that represent governments no less than de facto in character.” Varied subsequent authorities depend on Pan American’sdefinition of “conflict,” together with just lately the Ninth Circuit’s determination 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 primarily 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 Companies Workplace, which drafts coverage varieties for the insurance coverage trade that present that the insurer will “not pay for loss or injury brought about instantly orindirectly” by “Struggle And Army Motion,” together with “undeclared” wars and “[w]arlike motion by a navy power” (ISO Kind CP 10 20 10 12, § B.1.f.). The difficulty for insureds is the danger that insurers invoke a “conflict” exclusion – a few of which can incorporate imprecise 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 Overseas Property Management exclusions. The US Division of the Treasury has issued strict tips for insurance coverage firms relating to protection, together with having insurers add “an express exclusion for dangers that will violate U.S. sanctions legislation. For instance, the next customary exclusion clause is usually utilized in open marine cargo insurance policies to keep away from OFAC compliance issues: ‘at any time when protection offered by this coverage could 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 stop the extension of a prohibited service (insurance coverage or danger assumption) to sanctioned nations, entities or people.”

Like conflict exclusions, not all OFAC exclusions are created equal. Though the pattern exclusion above is considerably slim, some OFAC exclusions are broader, arguably reaching past the scope of the sanctions issued. The difficulty 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 state of affairs.

So, what ought to firms do? Test your coverage language to higher perceive the place there may be gaps in protection. If the exclusions are overly broad, take into consideration what your exposures may be – and doubtlessly assess whether or not the exclusions could be narrowed or clarified at renewal. In some circumstances, firms we’ve spoken to are already making choices to change or restrict sure elements 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 vulnerable to insurers denying (probably unjustifiably) protection when a loss happens. And that danger is just too nice.

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