Insurance coverage considerations
Political risk insurance and credit insurance
Political risk insurance policies provide coverage for property damage and other loss resulting from government actions, including war and political violence. Businesses with political risk insurance policies may seek coverage for property in Ukraine that has been damaged, destroyed, or otherwise lost due to the conflict. Businesses with assets in Russia may have already experienced those assets being frozen by the Russian government and being unable to extricate or earn revenue from those assets – including as a result of the imposition of international sanctions.
Trade credit insurance provides broad financial protection for businesses when their business partners do not pay for goods and services. In the Ukraine conflict, policyholders that have been engaged in trade deals in Ukraine, Russia, or Belarus, or have deals financed by assets in those countries, face the risk of not being able to receive payment. The restrictions on transactions with Russia could lead to uncertainty over whether exports to Russia would be paid for. Commodities companies with goods in transit and/or storage in Ukraine, Moldova, or neighboring countries may have had their goods seized, or may be unable to move or sell those goods due to sanctions.
Companies that have political risk or trade credit insurance policies and may be impacted by the conflict should carefully review those policies for coverage terms and potentially applicable exclusions. Of particular importance are notice of claim requirements because many policies require prompt reporting of claims.
Marine cargo insurance
A standard marine cargo all-risks insurance policy may exclude coverage for war-related risks, for cargo either in transit or in storage. Specific “war risks” coverage is typically then incorporated separately. War risks coverage includes damage due to acts of war, including invasion, insurrection, rebellion, and hijacking. Policyholders should give notice immediately upon becoming aware of any potential loss in a war situation, in case events develop. Policyholders will also need to be prepared to renegotiate the terms of war risks cover at short notice.
Companies may wish to consider abandoning – or may need to abandon – cargo in a war scenario such as Ukraine. The policy wording should be checked very carefully to see whether there is provision for abandonment and how loss may be calculated, including whether the abandoned cargo will be a deemed a total constructive loss. In the event that a vessel becomes trapped in port due to the conflict, policyholders should determine whether the policy includes a “blocking and trapping” clause, which generally requires that a period of time passes before blocked or trapped cargo may be deemed a total loss. It is, again, advantageous to start the clock running as soon as possible through prompt notice to insurers.
It should also be noted that some marine cargo policies provide storage coverage. If a vessel is unable to sail, under this type of coverage, the policyholder may seek to redesignate the vessel as a warehouse or “floating storage.” Designation as a warehouse may be contingent on the presence of qualified crew (for example, for firefighting purposes).
Aviation insurance
Sanctions against Russia have included a specific prohibition against providing aviation-related insurance and reinsurance to aircraft in Russia, meaning that existing coverage is being withdrawn.
In response to the international sanctions and the withdrawal of certificates of airworthiness for aircraft operating in Russia by the Irish and Bermuda aviation authorities, the Russian government has prohibited the export of aircraft and re registered aircraft with the Russian aviation authority.. This is in direct contravention of international law under the Chicago Convention, which does not allow aircraft to be registered in more than one jurisdiction at the same time.
All interested parties should review their aviation insurance policies (including lessees’ policies where lease arrangements are involved) and seek appropriate advice from their brokers and legal advisors regarding the preservation of their interests under such policies.
Property damage and business interruption insurance
Property insurance policies cover physical loss or damage to real and personal property, as well as business interruption resulting from the physical loss or damage. Business interruption coverage is particularly important in that it protects against loss of income if the company is unable to operate.
Furthermore, property insurance policies may cover extra expenses and contingent business interruption loss. Extra expense coverage reimburses the policyholder for expenses above the normal costs to operate that are incurred when responding to a covered loss and maintaining normal business operations to the extent practicable. Contingent business interruption coverage extends business interruption coverage to loss that is sustained due to interruptions to certain third parties, such as a vendors, suppliers, or service providers.
Companies with assets or business dealings in Ukraine and Russia should review and be ready to deploy business continuity plans to ensure that business operations will continue with as minimal interruption as possible. Companies should also review their property insurance policies in conjunction for coverage terms as well as notice requirements to assure they understand exactly what the policies cover, and they should be prepared to submit a proper and timely notice of claim and any required proof of loss.
Cyberliability insurance
Cyberliability insurance policies have particular significance in the Russia–Ukraine conflict as Russia-linked actors have targeted Ukraine in the past with malicious ransomware and malware attacks. In return, Ukraine-linked actors may also target Russia’s government and critical infrastructure, as well as companies with operations in Russia. Thus, in the wake of an increasingly difficult cyberliability insurance market, insurance companies are likely to further tighten underwriting practices, terms, and claims-handling practices.
Typical cyberliability insurance policies cover losses resulting from cyber events such as ransomware attacks. A company’s losses may include incident response costs, such as forensic fees, breach notification costs, specified legal fees, data recovery and restoration costs, and, in the case of ransomware, the cost of paying a ransom. Cyberliability insurance policies also cover third-party liability claims against the policyholder, including defense costs, settlements, and judgments, as well as the costs to defend against regulatory investigations and litigation and to pay certain fines and penalties. Additionally, similar to property insurance policies, cyberliability insurance policies may cover business interruption, extra expense, and contingent business interruption resulting from a covered cyber event. Thus, companies should prepare for the risk of a cyberliability event by reviewing their internal breach and incident response protocols and cyberliability insurance policies, paying close attention to notification and cooperation and consent clauses.
Some exclusions to watch out for in the current situation
War or hostile acts exclusions
Many insurance policies include an exclusion for loss caused by war or hostile actions. Insurance companies are undoubtedly examining these exclusions closely in connection with insurance claims that relate to assets or business activity in Ukraine, Russia, and the surrounding regions. There are, however, many variations of the war or hostile acts exclusions. For example, some versions of the exclusion may limit the scope of the exclusion to only loss arising out of kinetic warfare. Others contain exceptions (or “carve-backs”) for cyber terrorism or cyber warfare. Furthermore, policies issued to companies in specialized industries may have terms (and exclusions) tailored for the particular risks of their industry.
Due to the extraordinary nature of the unfolding crisis in Ukraine, policyholders should seek guidance from insurance coverage counsel on any war or hostile acts exclusions in their policies to determine the exact scope and potential applicability of the exclusion.
Sanctions limitations
In addition to policy exclusions, trade and economic sanctions issued by the Office of Foreign Assets Control of the U.S. Department of Treasury – and similar laws, regulations, and resolutions in the United States, the United Kingdom, and the European Union, as well as United Nations resolutions – may independently affect the availability of insurance coverage with respect to transactions with sanctioned entities or individuals. Nevertheless, even if payment on one portion of an insurance claim would violate a trade or economic sanction, it does not necessarily mean that the entire claim is not covered. For example, in the context of a cyberliability claim, a ransom payment to a sanctioned actor would be barred, but other insurance payments, such as payments for business interruption arising from the ransomware attack, should not run afoul of any sanction.
Best practices
Companies affected by the conflict in Ukraine or by sanctions against Belarus and Russia should engage experienced insurance counsel to evaluate their insurance programs and determine the scope of potentially applicable coverage and exclusions. We are able to assist our policyholder clients across our global network of offices to assess insurance coverage for businesses in all industries and geographic locations.
In-depth 2022-092
