International Law and Insurance Litigation: Interpreting War Exclusions

 

Image by Elchinator from Pixabay

Litigation over the scope of insurance coverage often follows major business losses. Disputes are generally governed by applicable contract law. In two noteworthy cases, the parties turned to international lawyers to help shed light on the terms of their agreement. Both cases arose from the denial of insurance claims for business losses incurred as a result of the NotPetya computer virus in 2017. In Mondelez v. Zurich American Ins. Co., Mondelez sued its insurer Zurich American in Illinois state court after Zurich invoked the insurance policy’s war and terrorism exclusions to deny over $100 million in claims. The parties reached a settlement in November 2022.

In the other case, Merck & Co., Inc. v. ACE American Insurance Co., a New Jersey trial court held in January 2022 that the “war” or “hostile acts” exclusion in the “all risks” insurance contracts at issue did not apply to losses caused by the NotPetya virus. Specifically, , the contract contained an exclusion for “loss or damage caused by hostile or warlike action in time of peace or war … by any government or sovereign power (de jure or de facto) or by any authority maintaining or using military, naval or air forces.”

At the summary judgment stage, the question for the court was whether a genuine dispute of material fact existed regarding the interpretation of this provision. As a matter of New Jersey insurance law, an insurance policy’s words should be “given their plain meaning.” If the “language used creates an ambiguity, the policy should be interpreted to conform to the reasonable expectations of the insured.” In addition, the burden of proof is on the insurer to show that a policy exclusion applies, and exclusions must be narrowly construed. The court agreed with Merck’s argument that its reasonable understanding of the exclusion “involved the use of armed forces.” In its view, given that “cyber attacks of various forms, sometimes from private sources and sometimes from nation-states have become more common,” and that the insurers did not change the language of the traditional exclusion, “Merck had every right to anticipate that the exclusion applied only to traditional forms of warfare.”

The insurers appealed the grant of summary judgment on this point. Amici Professors of International Law cautioned the appellate division against finding that malicious cyber activity such as NotPetya amounts to “hostilities” or “war.” (Disclosure: I was one of those amici.) The appellate division affirmed the decision of the trial court based on “the plain language of the exclusion, and the context and history of its application.”

The New Jersey Supreme Court granted the insurers leave to appeal. Amici Professors of International Law reprised their arguments, this time in response to another amicus brief that emphasized the applicability of the laws of war to cyber operations conducted during armed conflict. The parties reached a settlement before the New Jersey Supreme Court issued an opinion.

The particular question at issue in the Mondelez and Merck cases may not resurface, since many insurers have adjusted their policy language to provide greater specificity about what types of malicious cyber activity do and do not fall within the scope of coverage. That said, ambiguities persist. Moreover, traditional forms of armed conflict continue to inflict damage on individuals and businesses. Insurance law, rather than international law, provides the primary framework for determining the scope of coverage when disputes arise. Nevertheless, it will remain important to ensure that understandings reached in the insurance context do not “spill over” into other domains, with potentially unforeseen consequences.