The war in Ukraine has caused shock, outrage and unimaginable human suffering. As governments and business continue to cut ties and suspend trade with Russia in response to its continued invasion of Ukraine, we consider the impact of recent hostilities on insurance contracts.

War exclusion

Most insurance policies include a war exclusion. This will exclude the insurer's liability to pay any claim or loss directly or indirectly due to war. 'War' can be an elusive term. Its interpretation in insurance contracts is paramount to understanding the implications of liability. While it is likely that a war exclusion would apply to, for example, property damage claims in Ukraine arising from the Russian invasion, instances of armed conflict and acts of war may not always be considered as 'war' themselves. For example, the 9/11 attacks on the US were not considered war. The precise policy wording will need to be considered carefully.

Insurance monies cannot be paid to the enemy

The Trading with the Enemy Act 1939 governs the relationship between an insurance provider and the insured in the event of a war. It defines an 'enemy' as any state, individual residing in enemy territory, any persons (including businesses) carrying on a business in any place so long as they are controlled by an 'enemy' and any person constituted or incorporated in or under the laws of a state at war with her majesty.

Insurance monies cannot be paid to an enemy in war time, however, this does not mean that insurance contracts with the enemy are automatically dissolved by a state of war. If the insured risk remains legal, the payments may be suspended until the conclusion of the war provided that the enemy insured continues to perform their obligations under the contract. On the other hand, should the risk become illegal, the enemy insured would not be able to make a claim. Furthermore, if performance becomes impossible the policy will lapse.

It is possible that, in the event that the UK does find itself at war with Russia, updated legislation governing trading relationships with the enemy will be put before parliament (as is presently the case in the US). This may draw on the provisions of the Trading with the Enemy Act 1939, although the global economy of 2022 is obviously very different from the international trading conditions which existed in 1939.

Imminent hostilities – the current situation?

Presently, the UK government is deploying an increasing number of financial sanctions in response to Russian aggression in lieu of boots on the ground. This 'intermediary' position between peace and war has a number of repercussions for insurance contracts. In the past, the industry has typically taken a 'black and white' approach to distinguishing between peace and war time and has not previously recognised the current hybrid state of play. Consequently, in the absence of a formal declaration of war, insurance contracts will continue to operate and be enforceable. This means that insurance contracts with Russian individuals and corporates are enforceable (subject to any financial sanctions imposed by the government). Should the UK find itself at war, the individual or body who may later become an 'enemy' can recover any loss which occurred before a declaration of war.

Impact of sanctions

Sanctions imposed by other jurisdictions or organisations such as the UN or the European Union will not impact UK insurance contracts unless UK legislation is passed to incorporate these into domestic law.

The UK's financial sanctions framework is, since Brexit, encompassed in the Sanctions and Anti Money Laundering Act 2018, and in the case of Russia, the various iterations of the Russia (Sanctions)(EU Exit) Regulations 2019. These, which are regularly updated and form the basis of the Office of Financial Sanctions Implementation (OFSI) Consolidated List, set out, among other things a list of persons subject to an asset freeze and to whom no UK person should provide, directly or indirectly, any funds or economic resources. To do so is a criminal offence. This is the cornerstone of UK sanctions restrictions, which apply to all UK persons, and are then embellished upon for key business areas, such as insurance.

On the 8 March 2022, the UK government introduced sanctions targeting the provision of insurance and reinsurance to Russian companies. The sanctions prohibit the provision of insurance and reinsurance services in relation to the aviation and space goods and aviation and space technology. Regulation 21 and 29A provide that UK persons are prohibited from directly or indirectly providing insurance or reinsurance services to a person connected to Russia or for Russian use. A run-off period is available under specific circumstances for contracts concluded before the 8 March until the 28 March 2022. The EU have introduced similar sanctions with the effect to further isolate Russian interests. In practice this means that insurers are not allowed to pay out on claims under existing policies with the Russian aviation and space companies as well as a ban on new policies. It is possible that these sanctions will be widened in the coming weeks/months to encompass risks in other sectors.

As this crisis continues to develop, it is important to consider undertaking a timely review of insurance contracts in light of the hostilities particularly where the insured risk is in Ukraine or Russia.

Click here to learn more about the impact of the Russia/Ukraine conflict on global business.