Insurance as a means of risk transfer provides many benefits to a modern society. Benefits like peace of mind, support of lending credit for business growth, and the efficient use of capital resources, to name a few. However, insurance as a mechanism for risk transfer was never intended to cover fundamental risks. Examples of fundamental risks include nuclear detonation, unemployment, drought, earthquakes and floods. The losses from these types of exposures are so great the federal government often accepts the burden of loss through social insurance programs and subsidization.
The Acts of War exclusion in all insurance policies exists for this reason. War is not an insurable risk under the traditional role of insurance. As we have all witnessed, war and warlike acts are unpredictable, intentionally inflicted, and have the propensity to cause multiple widespread losses over a short period of time that, if insured, would jeopardize the viability of insurance as an effective means of risk transfer.
Insurance companies are not unlike other businesses that exist to make a profit and must of course make sound, strategic decisions in order to survive. It is their fundamental responsibility to underwrite risks at a fair price. The insurance industry, although regulated, operates in the free market. At moments in history when insurance premiums trend higher, market forces tend to be self-correcting. This is because new companies with additional capital will enter the marketplace to take advantage of increased premiums. That’s exactly what happened a couple years after 9/11. As the availability of insurance increased and insurance companies quantified the new reality of domestic terrorism, premiums began to stabilize.
Because of the catastrophic nature of war and related perils, most standard insurance policies explicitly exclude all war perils. In those instances where the war perils coverage is needed, the insurance company purchases a separate and distinct coverage form through a war underwriter to cover this risk. In the past, a war risk endorsement supported the financing and leasing areas of the economy. Through the availability of this coverage, lenders did not need to maintain costly loss reserves and were able to pass the savings along to the consumer. The loss frequency was low and coverage could be provided for a relatively modest additional premium.
American courts traditionally allow a standard insurance policy war exclusion to be applied only in situations involving damage arising from a genuine warlike act between sovereign entities. For instance, in the 1974 case Pan American World Airways, Inc. v. Aetna Casualty & Surety Company, the court ruled the hijacking and subsequent destruction of an aircraft by a political activist group did not constitute an act of war. The reasoning was a radical guerilla group not operating on behalf of any state does not constitute a sovereign entity and therefore does not constitute war.
With such a narrow practical application of the standard war exclusion, aviation insurers now rely on more definitive policy wording that typically excludes the following:
- War, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power.
- Any hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter (this coverage is simply not available at any premium).
- Strikes, riots, civil commotions or labor disturbances.
- Any act of one or more persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting there from is accidental or intentional.
- Any malicious act or act of sabotage.
- Confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any government (whether civil, military or de facto) or public or local authority.
- Hijacking or any unlawful seizure or wrongful exercise of control of the aircraft or crew (including any attempt at such seizure or control) made by any person or persons on board the aircraft acting without your consent.
Historically, aviation insurance companies were compelled to offer attractive policies bundled with broad coverage that included many of the above war perils in order to attract policyholders. Reinsurance companies – companies that agree to accept a large part of the aviation insurers’ claims in exchange for a portion of the premium – primarily cover this aviation war risk exposure. These companies work to spread risk over an even larger group, enabling the insurance company binding the policy to control their overall exposure. Since there had never been a significant warlike loss within the United States, underwriters felt little need to charge a premium for an exposure they perceived as minimal. Then came 9/11.
Until September 11, 2001 there had never been a significant, credible war-risk threat actually carried out on domestic aircraft within the United States. In the wake of the attacks on the World Trade Center and Pentagon, insurance carriers had to re-examine the coverage offered and reassess their potential exposure. On September 17, 2001, the London insurance market (where most of the reinsurers are represented) rescinded war risk coverage on virtually all aviation insurance contracts. Once the insurance companies had a chance to review the new exposure and threat scenarios, war coverage was again offered, albeit at adjusted rates.
Due to the volatility of war and warlike acts, the only way insurance companies can extend coverage without jeopardizing all of their assets is with a provision allowing them to stop their losses should events warrant. Seven days notice is standard. Automatic termination can occur upon the hostile detonation of a nuclear device or if permanent members of the United Nations Security Council go to war with one other.