The Commercial Court in Nord Stream AG v Lloyd’s Insurance Company SA holds that damage to Nord Stream AG’s gas pipelines is excluded from cover, with careful examination of principles of indirect causation.

Background

Nord Stream AG operates two natural gas pipelines in the Baltic Sea, known as NS1 Line 1 and NS1 Line 2 (together, the 'pipelines'). The defendant insurers provided primary and excess layer offshore cover to Nord Stream AG.

On around 26 September 2022, both pipelines were damaged by explosions at locations approximately 6.5km apart, rendering them inoperable, and NS1 Line 2 also suffered a separate indentation (referred to as 'the dent'), though the date and cause of the dent were disputed. Seismic signals were detected on 26 September 2022, and expert evidence established that a directional, shaped RDX-based explosive charge had pierced the pipelines.

The pipelines were insured under 'Offshore Operating All Risks' cover placed on terms set out in the Munich Re Primary Policy. The insurers’ core case was that both the rupture damage and the dent were excluded under Exclusion 2.i of the policy, which excluded loss or damage “directly or indirectly occasioned by, happening through, or in consequence of…” war and related perils. The trial ran for six weeks in the Commercial Court, with expert evidence called across geopolitics, energy insurance market practice, explosives science, subsea operations, and quantum.

The war risks ‘buy-back’ argument was rejected

Nord Stream argued that the Institute War Clauses (Builders’ Risks) ('IWCBR') condition positively covered war-type perils for the pipelines, effectively displacing Exclusion 2.i. The Court held that the IWCBR on its face applied only to floating assets, and that the Institute Clauses for Builders’ Risks ('ICBR') concerned property under construction or repair. That did not apply in these circumstances and the IWCBR did not extend to fixed installations such as these pipelines. The Court rejected Nord Stream’s approach as an attempt to rewrite the contract, and the test for correcting obvious drafting errors was not met.

Construction of Exclusion 2.i: A broad causal test

The Court held that Exclusion 2.i contains two separate heads: the 'War Exclusion' and the 'Government Act/Order Exclusion', with the proviso (“except as otherwise provided in Section I”) qualifying only the second limb. It was common ground that the Russia–Ukraine conflict commencing around 24 February 2022 met the definition of 'war' and the Court held that the causal language required a broad, non-proximate causal link. The Court rejected Nord Stream’s argument that an 'effective cause' or near-proximate standard applied, holding instead that it was sufficient for war to be a 'significant' contributing factor (meaning noticeable or specifically accountable) without requiring it to be the predominant cause.

The war exclusion applied regardless of perpetrator

The Court accepted that only three perpetrators were realistically in play: Russia, the United States, or Ukraine (including possible Ukrainian sub-state actors). It held it was unnecessary to determine which was the more likely perpetrator. The Court instead assessed each candidate in turn:

• If Ukraine carried out the attacks, the war was a significant cause, as the sabotage would have formed part of Ukraine’s war effort and been motivated at least in part by striking Russia in response to the invasion.
• If Russia perpetrated the attacks, the war was equally a significant cause, given Russia had no motive to act before the invasion and its post-invasion motivations centred on coercing Germany and the EU regarding their support for Ukraine.
• If the United States was responsible, the war was again a significant cause, as the invasion made sabotage conceivable and US motivations included influencing Russia’s conduct of the war.

The Court concluded that, whichever plausible perpetrator carried out the sabotage, the war was a significant cause, and the damage accordingly fell within Exclusion 2.i.

The dent: Caused by the same sabotage

Anchor drag was eliminated as a credible cause of the dent, and anchor drop was assessed by the claimant’s own expert as 'extremely unlikely.' The Court accepted expert evidence that the dent could have been caused by a shaped explosive charge that fell from its intended position and detonated within approximately 0.5–1 metre of the pipeline. Metal fragments and highly pulverised concrete near the dent were consistent with explosive damage. Applying the Popi M principles, the Court found it more likely than not that the Dent was caused by an explosion as part of the same sabotage operation.

The Court held that both the rupture damage and the dent were “directly or indirectly occasioned by, happening through, or in consequence of war” and were therefore excluded from cover under Exclusion 2.i.

Conclusion

Nord Stream AG v Lloyd's delivers three clear lessons for the insurance market. War risk exclusions with indirect causation language operate at a deliberately broad threshold - 'significant' contributing factor, not proximate cause. Institute Clauses will not be stretched to cover fixed installations where their scope does not naturally extend. And perpetrator uncertainty will not defeat a war exclusion where conflict is a significant cause under every plausible attribution scenario.

Underwriters pricing offshore and infrastructure risks in conflict-adjacent environments, and policyholders relying on all-risks cover in those contexts, should take note.