Lloyds is considering a major shake-up of war risk wordings, with an independent panel potentially being given the power to rule on when military clashes constitute "war" for insurance policy payout purposes. The proposal comes at a moment when the war risk market is under extraordinary strain, and when the meaning of "war" really matters.

War risk

‘What is war?’ is the definitional question at the heart of war risk cover. What constitutes "war" is important to insurers as war risk underwriters typically reserve the right to cancel cover on seven days' notice under UK wordings, and 48 hours under US wordings, allowing them to react rapidly to escalating risk. The question of whether any given military clash constitutes a “war” for the purpose of a war risk insurance policy has historically been left to the courts, which can result in significant cost and delay.

The case for an independent panel

The Lloyds proposal to create an independent panel to determine whether a given conflict constitutes "war" for coverage purposes would, if adopted, offer a faster and more consistent resolution mechanism than litigation. An independent determination panel would give the market a forum to resolve definitional disputes without resorting to court proceedings.

Any panel determination would need to command the confidence of both insurers and insureds. Its legal status, whether binding, advisory, or persuasive, would need to be clearly established. If an independent panel is established, policy wordings may need to be reviewed and updated to include reference to independent panel determination.

What this means for insurers 

1. Review wordings

Assess whether your current policy language adequately defines "war" and "military clash", and consider whether existing policy wordings are fit for purpose in the current geopolitical environment. Policies should also clearly identify whether they are only referring to physical war or also cyber war. 

2. Five powers clauses

This is a widely used exclusion that automatically terminates insurance policies in the event of an outbreak of war between any of the five permanent members of the United Nations Security Council. With some of the five powers increasingly using proxies to advance their military goals, is there ambiguity as to whether your five powers clause applies?

3. Review reinsurance arrangements

If changes are made to the way in which ”war” is determined, insurers will need to review their reinsurance treaties to ensure they are protected on a back-to-back basis with no gaps.

For more articles on the conflict in the Middle East and meaning of “war” see the following:

Middle East conflict: Key insurance impacts explained

Russian aviation mega trial: War risks insurers appeal denied