War! What Is It Good For? Helping Your Business Avoid Insurance Coverage Battles for Losses Flowing from the

War! What Is It Good For?

HELPING YOUR BUSINESS AVOID INSURANCE COVERAGE BATTLES FOR LOSSES FLOWING FROM THE RUSSO-UKRAINIAN CONFLICT

By: William Edward McMichael

As the conflict in Ukraine rages on, media outlets continue to report Western businesses pulling out of eastern Europe. Undoubtedly, many businesses will seek insurance coverage for losses flowing from the conflict. After all, is this not what insurance is designed to cover? Sudden, unexpected events that cause significant losses?

As risk managers and insurers alike review these claims, one may be tempted to dismiss attempts to obtain coverage for losses flowing from the conflict as “desperate.” Indeed, nearly all modern insurance policies include some version of a “War Exclusion,” a standard provision that excludes coverage for losses arising out of “war” or “warlike action.” However, the path to recovery may not be as bleak as one might anticipate. Businesses should treat claims arising out of the Russo-Ukrainian Conflict with extreme care, lest they lose policy benefits to which they may be entitled.

The insurance industry traditionally defined “war” to mean a formal conflict between entities that bore indicia of sovereign nations. However, modern understandings of “war” are not as restrictive. For example, the United States spent two decades “at war” in the Middle East, but never was in conflict with the nations where it waged its conflict (i.e., the “War on Terror.”)

Consider also that Russia’s official position in the early stages of the conflict was that it was not “at war,” but rather engaged in a targeted mission to liberate ethnic Russians

Businesses should treat claims arising out of the Russo-Ukrainian Conflict with extreme care, lest they lose policy benefits to which they may be entitled

from an illegitimate Western government. How should we regard losses flowing from economic sanctions imposed against Russia by nations who believe the conflict to be a “war,” but are not themselves involved in the physical fighting? What about when Ukrainian civilians fight back?

What happens when an event looks like a “war,” but may not fall within its special

definition (of which even the most experienced underwriters or insurance agents may not be aware)?

This was the exact scenario in Universal Cable Productions v. Atlantic Specialty Insurance Company. In that case, Universal made an insurance claim after relocating a television production from Israel when Hamas launched rockets into Israel, and then Israel launched a counter-attack into the Gaza Strip. The district court initially ruled for the insurer, because the “plain and

ordinary meaning” of the term “war” applied to the conflict. However, the Ninth Circuit reversed, citing authorities affirming that the insurance industry defines “war” to mean “a course of hostility…between states or state-like entities.” The Ninth Circuit then held that Hamas was not a de jure or de facto “state” or “state-like entity,” and, therefore, could not be involved in a “war” or “warlike action.” The Ninth Circuit further

What happens when an event looks like a “war,” but may not fall within its special definition (of which even the most experienced underwriters or insurance agents may not be aware)

held that Israel’s counter-attack did not affect its analysis because the insurer did not establish that Israel’s response caused Universal’s need to relocate. As such, the Court sent the case back to the district court for trial.

Similarly, in the Merck & Co., Inc. v. ACE American Insurance Company case earlier this year, the New Jersey Superior Court found coverage after Merck suffered over a $1 billion loss when a Russian state-sponsored cyber-attack on Ukraine then morphed and damaged Merck’s computer systems. In that case, the insurer denied coverage, citing the War Exclusion and arguing that a state-sponsored cyber-attack was a “hostile or warlike action...by any government or sovereign power.” However, the Court disagreed with the insurer’s coverage position because the plain meaning of the phrase “hostile or warlike action” did not apply to cyber-attacks, but instead only to “actual hostilities” or things that are actually “like war.” In other words, because the Russian cyber-attack did not look like a traditional war (i.e., computer virus vs. Kalashnikovs), Merck’s insurers could not rely on the War Exclusion to bar coverage.

In short, whether a loss flowing from the Russo-Ukrainian Conflict is barred from coverage requires a highly fact-intensive analysis. But until the insurance industry updates the War Exclusion to comport with modern realities of conflict among nations, there are steps your business can take to maximize recovery for potential losses flowing from the Conflict.

1. Do Your Homework. In modern times, we have the benefit of real-time reporting of facts and circumstances. We also have the benefit of electronic communication records, including records of communications among key decision-makers. One never knows what nugget of information will affect how a claim is evaluated. Policyholders should take precautions to document their claims carefully, as one tidbit may be the key to establishing coverage.

2. Beware Bad Causation Arguments.

There will be an ocean of claims that cite the Russo-Ukrainian conflict as the basis for the loss. While the plain language of many

“War Exclusions” bars coverage for losses that “indirectly arise” out of a conflict, nearly all states’ laws interpret “arising out of” language to mean “proximate cause.” This is particularly relevant in the War Exclusion context, as there may be losses that are the ultimate result of the war, but which the war did not directly cause (e.g., an increase in fuel prices because of the embargo on

Russian oil). Policyholders should be careful to articulate the cause for their loss in a clear manner, and to anticipate insurers’ arguments as to why a loss may not be covered.

3. Hire Qualified Counsel. Few attorneys understand the nuances of complex insurance coverage work. Even fewer have handled claims that implicate the War Exclusion.

Still, fewer have litigated such claims. In short, there are only a handful of attorneys in the country who are prepared to handle these claims. If you believe your interests could be affected, be sure your coverage lawyers can articulate why they are qualified to handle the claim. Alternatively, be on guard if your opposing lawyers are not aware of the nuances of this area of the law, as they may make arguments that are persuasive under ordinary circumstances, but should not apply to your case.

About the author: William Edward McMichael is a trial lawyer who maintains a nationwide practice with an emphasis on complex insurance coverage and bad faith litigation. He has successfully represented both insurance carriers and policyholders in state and federal courts in more than a dozen states across the nation, including in insurance coverage disputes implicating the War Exclusion and other governmental risks. He currently works as an Associate Attorney at Chamberlain Hrdlicka in Houston, Texas. chamberlainlaw.com/ people-william_mcmichael

TEXAS BUSINESS HALL OF FAME CELEBRATES 2022 BUSINESS LEGENDS

By: Meredith Walker

The Texas Business Hall of Fame Foundation honors the accomplishments and contributions of outstanding business leaders in our state by celebrating and telling their stories. These stories, and the business “Legends” behind them, perpetuate the notion and ideal of the transformational business leader through their unparalleled commitment to enterprise, excellence and community. In addition to recognizing six extraordinary business leaders each year, the Texas Business Hall of Fame awards more than forty $15,000 awards to scholars and veterans who have demonstrated an early inclination for entrepreneurship and innovation, through its Future Legends Scholar & Veteran Award Program. This program is active in 24 universities throughout Texas. Both established and emerging leaders in the community are recognized at the annual Texas Business Hall of Fame Induction Dinner.

John Arnold, Founder of Centaurus Capital LP, an energy-focused, family office investment fund, also founded Arnold Ventures, a philanthropy dedicated to investing in evidence-based solutions that maximize opportunity and minimize injustice. Arnold also serves on the boards of Breakthrough Energy Ventures, Civica, Inc. and The City Fund.

Fellow Houston inductee, Ric Campo has acted as Camden’s Chief Executive Officer since 1993. He has also sat on the Board of Directors of several organizations that focus on Houston’s economic development and quality of life, like Central Houston, Inc., Greater Houston Partnership, Baker Ripley, The Coalition for the Homeless, and more.

In addition to being the former owner of the Dallas Stars and Dallas Rangers, Dallas-based inductee Thomas O. Hicks is the Chairman, Founder and Partner of Hicks Holdings LLC, a family office that owns and manages real estate, corporate assets and investments, and a private equity firm. Hicks served on the Board of Regents at The University of Texas, and he was instrumental in forming and getting legislation

approval to establish UTIMCO, The University of Texas’ Investment Management Company, where he served as its first chairman.

Houstonian Jeffery D. Hildebrand is the Executive Chairman and Founder of Hilcorp Energy Company, Harvest Midstream Company and JDH Capital. Active in his community, Hildebrand serves on the boards of Central Houston, Inc., the Houston Livestock Show and Rodeo, Houston Police Foundation, Rice University’s Baker Institute for Public Policy, Chairman of The University of Texas Investment Management Company and the Texas Parks and Wildlife Commission.

Paul W. Hobby is a Founding Partner of Genesis Park and GP Capital. His executive roles include Columbine JDS Systems, Alpheus Communications and Texas Monthly. Hobby has served as the Chairman of the Texas Ethics Commission, the Greater Houston Partnership, the Houston Branch of the Federal Reserve Bank of Dallas and the Texas General Services Commission.

Finally, Whitney Wolfe Herd is the Founder and CEO of Bumble, Inc., the parent company that operates Badoo, Fruitz, and Bumble, which are three of the world’s fastest-growing dating apps worldwide. Herd led Bumble’s IPO in 2021 as the youngest woman CEO to ever take a company public, and has repeatedly been recognized for her achievements. For example, being named in TIME Magazine’s 100 Most Influential People and Forbes “30 Under 30” list.

Presented by Texas Capital Bank, the annual Induction Dinner will be hosted in Houston at Hilton Americas on November 3, 2022. The dinner is preceded by a private awards luncheon, sponsored by Deloitte, for the Hall of Fame’s 2022 Scholar & Veteran Award recipients.