Post
September 11, have the war cries of the United States thrown the insurance
industry into turmoil? War or terrorism: would terminology have made a
difference to the exclusion clauses in your insurance contract? What factors
play a part in the award of an insurance claim? Read on for more details.
On the morning of 11 September 2001, 19 hijackers commandeered four commercial jetliners and turned them into instruments of destruction. Two of the planes crashed into each of the World Trade Centre's ('WTC') twin towers in New York City, one after the other. Thousands of people were killed or injured. Property was damaged, burnt or destroyed. Businesses were put in disarray.
The reaction here in Singapore was one of deep concern, tempered by a sense that we were sheltered from the events by virtue of the fact that we are half a world away. Subsequent events have proven otherwise and terrorism is clearly a matter of direct concern in this part of the world.
War and Terrorism Exclusion Clauses
One of the first things that many businesses in Singapore asked was: 'if
anything like that happened here, would we be covered by insurance?' One would
need to consult the exclusion clauses to see if they incorporate wording that
would clearly exclude acts of terrorism.
Shortly after learning about the crash of the second aeroplane into the WTC, President George W Bush called the event an 'apparent act of terrorism'. However, over a day later, President Bush said that 'the deliberate and deadly attacks which were carried out yesterday against our country were more than acts of terror. They were acts of war'.
Were these casualties the result of an act (or acts) of war or terrorism? Despite the emotive public statements given by President Bush, the US was not at war on 11 September nor is it technically at war today. Only the US Congress has the sole authority to declare war and it has yet to do so. Nevertheless, President Bush's statement has muddied the waters in relation to insurance contracts. If it was an act of war, can it also be an act of terrorism? If the acts have indeed been sanctioned by the Taliban regime, would it not have been an act of war (since it was an act by the government of a foreign state) rather than an act of terrorism? Given that the Taliban regime was not widely recognised by members of the United Nations, was it in fact an act sanctioned by a foreign government?
The local position is usually quite clear. Based on the common form of wording found here, it usually does not matter whether war was indeed declared. Many local property damage and loss policies contain a terrorism exclusion clause, perhaps because the majority of the local policies were adapted from those issued in the United Kingdom. An example of a terrorism exclusion clause may read as follows:
This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or indirectly of any acts of terrorism committed by a person or persons acting on behalf of or in connection with any organisation. For the purpose of this condition, 'terrorism' means the use of violence for political ends and includes any use of violence for the purpose of putting the public or any section of the public in fear.
Such policy wording appears to have been adopted from policies issued in the UK, which became more and more popular since 1978 as a result of the Irish Republican Army attacks. As one can see, losses as a result of acts of terrorism are excluded, and the meaning of 'terrorism' is quite well defined.
In addition, there would often be a war risk clause, which may typically exclude 'war, invasion, act of foreign enemy, hostilities or warlike operations (whether war be declared or not), civil war'.
War or Terrorism?
What would be the position if the insurance contract did not have a terrorism
risk exclusion, but merely contained an exclusion for war risks?
Prior to the September 11 attacks, most of the insurance policies underwritten for domestic risks in the US did not contain exclusionary language for acts of terrorism. Therefore, unlike in the UK and Singapore, acts of terrorism may not have been as well defined or expressly excluded. There is, as such, a greater concern that insurers in the US would attempt to argue that acts of terrorism would fall within the war risk exclusion clauses.
According to the authors of McGillivray & Parkington on Insurance Law, where there is an exception for war risks, the word 'war' does not have a technical meaning. It is given a factual meaning. No formal definition of war is necessary.
For example, in the case of Curtis & Sons v Matthews [1919] 1 KB 425, the 1916 civil strife in Dublin, Ireland, was held to amount to war within the terms of an insurance policy. The revolutionaries at that time were held to be the 'King's enemies' since they fought for the independence of the Republic of Ireland. The plaintiffs had insured their business premises in Dublin under a policy that contained the following clause:
This policy is to cover the risk of loss and/or damage to the property hereby insured directly caused by war, bombardment, military or usurped power, or by aerial craft (hostile or otherwise) ... .
The premises were set on fire during the Easter uprising of 1916. The cause of the fire was due to the series of bombardments by the forces of the Crown against the revolutionaries. The court held that the civil strife amounted to warfare.
In Kuwait Airways & Anor v Kuwait Insurance Co & Ors [1996] 1 Lloyd's Rep 664, Rix J of the Queen's Bench Commercial Courts, held that the invasion of Kuwait by Iraq in 1990 amounted to 'war'. The relevant clause in that case read as follows:
... this Policy covers loss of or damage to the Aircraft ... against claims excluded from the Assured's Hull 'All Risks' Policy was caused by (a) war, invasion, acts of foreign enemies hostilities ... revolution ... military or usurped power ... .
The position of 'war' in the US is similar to the UK. Moreover, a formal declaration of war is not necessary. An example is the case of Stankus v New York Life Insurance Co 44 N E 2d 687 in which a US destroyer was torpedoed and sunk by the Germans in October 1941 during the First World War before the US declared war on Germany. The beneficiary of a seaman, who had lost his life on the destroyer, sued the insurance company on the insurance policy that contained a war exclusion clause. The Supreme Judicial Court of Massachusetts held that a conflict between armed forces of two nations under authority of their respective governments was commonly regarded as 'war'. As such, the war exclusion clause applied.
Similarly, a claim by the beneficiary on the life insurance policy of an American solider who was killed in action in Korea in 1952, before formal declaration of war against North Korea, was disallowed in the case of Gagliormella v Metropolitan Life Insurance Co 122 F Supp 246, because the war exclusion clause in the policy applied.
An interesting case to consider for this issue is the American case of Pan Am World Airways Inc v Aetna Casualty and Surety Co 505 F 2d 989 (2nd Cir, 1974). A Pan Am plane was hijacked over London by members of a Palestinian terrorist group and destroyed in Egypt. American Airlines brought an action to recover against insurers of its aircraft in its 'All-risk' property policy, which excluded coverage for losses due to 'war' and 'warlike operations'.
The Lower Court declined to apply the war risk exclusion clause as the terrorist group was not a de facto government and had never acted on behalf of the recognised government. 'War' must be a course of hostility engaged in by entities that have at least significant attributes of sovereignty. Although the insurers argued on appeal that the acts were 'warlike' in nature and hence the exclusion clause was intended to cover such violent acts, the US Courts of Appeals rejected this argument and upheld the Lower Court's decision that terrorism was not excluded by a war risk exclusion clause.
It is unlikely that the courts in the US and UK will hold that the war risk exclusion clause will exclude coverage under insurance policies for the September 11 attacks since the acts were apparently orchestrated by Osama bin Laden's terrorist network. Hence, it is likely that they lacked the necessary sponsorship of a government or sovereignty to qualify as 'war', notwithstanding having repeatedly been called 'acts of war' by the highest ranking of US government officials, including the Commander-in-chief of the US armed forces. However, one must still necessarily examine the language of the individual insurance policy before a decision is made as to whether the September 11 attacks would constitute 'an act of war'.
In the UK, the problem may not be as acute as in the US. Terrorism exclusion clauses have currently been found in most policies covering fire and explosion. However, underwriters in the UK, and perhaps even Singapore, may want to expand their coverage to include damage from other potential terrorist acts, such as flooding, impact on property, aircraft damage and biological attacks in view of the potential monumental losses. Acts of war and terrorism may, therefore, be incorporated into uniform exclusionary language in new insurance policies.
Alternatively, insurers may choose to make payments of claims under policies that have war risk exclusions for acts of terrorism, with a caveat that the insurer's decision not to assert the exclusion in one particular case, for example in response to a national emergency, shall not be deemed as a waiver of their right to do so later. Naturally, this would result in an increase in insurance premiums.
Aggregation Issues
Another question that arose from the September 11 attacks is whether the
crashing of the two airplanes into the twin towers at the WTC approximately 18
minutes apart constituted one occurrence or two. This would affect the
aggregation of claims under insurance policies.
As a result of the September 11 terrorist attacks several months ago, Swiss Re (also known as SR International Business Insurance Co Ltd) had filed a civil suit on 22 October 2001 (Civil Action No 01 CV 9291 (DC)) in the United States District Court Southern District of New York against World Trade Centre Properties LLC. One of the causes of action sought by Swiss Re was a declaration that the WTC loss arose out of one occurrence and constituted one insurance loss.
In this instance, Swiss Re agreed to provide the WTC complex (including the twin towers) leaseholders, led by property magnate Larry Silverstein, a share of approximately US$3.6bn in property damage insurance coverage, which was the total limit underwritten for the risks per occurrence. Swiss Re alleged that under the terms of the contract, the definition of occurrence was as follows:
'Occurrence' shall mean all losses or damage that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.
On this basis, Swiss Re claimed that they would only be liable to pay up to a limit of US$3.6bn per occurrence. This was because the destruction of the towers was the result of a single coordinated terrorist plot.
On the other hand, World Trade Centre Properties LLC argued that the two separate aeroplane crashes, some 18 minutes apart, constituted two separate incidents. There were separate incidents of fire in each tower and separate collapses of each tower. This would, therefore, entitle them to a recovery of at least US$7.2bn. They, therefore, counterclaimed for a declaration that there was more than one occurrence under the coverage that Swiss Re agreed to provide to them.
At the time of writing this article, litigation was still pending for this lawsuit. What would be the likely outcome of the litigation based on present applicable case law?
One possible interpretation as to what constitutes a single 'occurrence' revolves around the principle enunciated in the Dawson's Field arbitration award of Michael Kerr QC on 29 March 1972. In that arbitration, four planes were hijacked by PFLP, a Palestinian terrorist group. One of the planes was blown up in Cairo and three other planes were blown up at Dawson's airfield in Jordan. Michael Kerr QC held that whether or not something that produces more than one, single loss or damage can properly be described as one occurrence or event depends on the following:
If unity is the basis of construction, then it is most likely that the crash of the two aeroplanes into the WTC twin towers will be considered as one occurrence instead of two. The time lapse between the crashing of the two aeroplanes was only about 18 minutes. The location was effectively at the same building complex except that they were different towers. The cause of the loss and the intent of the loss were also similar for both towers. On the other hand, the air crash at the Pentagon may be considered as a separate occurrence since it occurred approximately one hour later and at a different location.
However, one must also note that much will also depend on the words that were used in each individual policy as well as the construction of all the conditions in the insurance policy as a whole. For example, the relevant clause found in Swiss Re specifically states that the 'occurrence' is irrespective of the period of time or area over which such losses occur. In this case, one may then argue that the Dawson's Field Award principle may not be applicable as unity of time and location is irrelevant in determining 'one occurrence' for that particular policy. The outcome may also be different if other words, instead of 'occurrence', are used in the insurance policies.
Conclusion
The well-orchestrated terrorist attacks by the alleged terrorist network of
Osama bin Laden have certainly turned the insurance industry into a frenzy,
particularly in its role in responding to the monumental losses of all kinds.
Every single word used in the insurance contract has to be well thought out and
carefully defined or the financial toll on the industry will be massive. The
balance between being supportive of national patriotism in times of national
emergencies of such nature and legal, as well as commercial, reality is very
fine. Already, there is an ongoing discussion on whether the anthrax exposure
comes under the pollution and contamination exclusion clauses or the terrorism
exclusions in insurance contracts. The future appears to be fraught with
uncertainty and it may ultimately be a question of how far underwriters will go
to assert their legal rights.
Patrick Yeo & Lorraine Ho
Khattar Wong & Partners