The Financial Times reports that Russian submarines targeting subsea cables in UK waters or Chinese drones flying over US territory “might provoke a global emergency but would not necessarily be acts of war,” according to new policy language being debated by the Lloyd’s Market Association trade body.
According to the article, “Insurers at Lloyd’s of London are examining the wording of the so-called Five Powers exclusion, standard in marine contracts, which stipulates that coverage would be cancelled if war broke out between any of the US, UK, France, China or Russia.”
Understanding Exclusions
Growing geopolitical tensions between superpowers are driving discussion that aim to draw “clearer lines between hostile activities and acts of war.”
“We’re dangerously close to having an incident that involves two of the five powers,” marine insurance broker Marcus Baker told the FT, adding some in the market believed that “we just need a bit more clarity over what is something big and nasty and what isn’t something big and nasty.”
The LMA has set out several scenarios under which the exclusion would not be triggered. These include risks stemming from cyber-attacks, drones and undersea sabotage, according to a person familiar and draft wordings shared with the FT.
Undersea or Offshore Sabotage
Under the clause being considered, the FT reports that: “a Chinese drone flying into US airspace would not trigger automatic cancellation of coverage unless weapons were released. The same would go for a covert Russian submarine committing acts of undersea or offshore sabotage in UK waters, unless weapons were released or the incident resulted in “casualties equivalent to those sustained in an armed attack”.
LMA legal and regulatory director Arabella Ramage confirmed that the body was considering adding the new clause to provide “greater clarification” on the exclusion. “The need for the Five Powers clause is as valid now as when it was first introduced,” she said. Another possible change involves potentially setting up an independent panel charged with ruling on whether a given conflict could formally be defined as a war for the purpose of insurance payouts.
Clarity in Business Interruption Outcomes
Chris Don, Head of Communications and External Affairs at Russell said: “Some level of clarity as to what is or what is not an act of war is welcome, but the problem is that different legal jurisdictions will have their own interpretations. Russell formed its Connected Risk Group of risk managers some year ago to address the lack of clarity in the international (re)insurance market, for a range of systematic and systemic risks resulting in Business Interruption outcomes.
“Ever since the COVID-19 pandemic, corporates have been telling underwriters invited to our regular Connected Risk Group meetings that there is a balance sheet protection gap, which needs to be addressed. There are now credible and realistic discussions and attempts to progress the market to a point where it can join the dots and deliver the capacity needed to address corporates needs, starting with supply chain, BI and cyber types of cover.”
