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INSURANCE | 02.03.2022

What does insurance cover during a war? A journey through history

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Coverage of war risks is narrowly limited to the sphere of international transport. Most insurance policies in all countries exclude, by default, damages caused by acts of war, as they are potentially too great to insure. In this article, we will look at how the insurance industry changed its coverage of war risks on the eve of World War II.

Insurance expanded and consolidated during the 20th century, becoming an essential element in countless sectors of the economy. But above all, it was a time of profound political changes that gave rise to the greatest wars that humanity had ever witnessed. Against the challenging backdrop of the first half of the century, insurance companies, which had experienced remarkable growth by protecting individuals and companies from risks, found themselves at a crossroads in terms of how to handle a risk so potentially destructive.

As early as the 19th century, one of the areas in which the insurance market gained the most momentum was trade, and freight transport coverage, especially maritime, had become widespread. At this point, insurance companies began to protect themselves from the risks of war, offering specific coverage for damage or the sinking of ships due to military attacks by an enemy country.

The risks of war are still present today in the marine insurance industry (international transport, which includes ships, goods, planes, etc.) In these lines of business, taking out coverage for wars is common, although sometimes with specialized entities like GAREX, a war risks consortium of which MAPFRE is a member. These are policies or coverage with their own terms and conditions, rules and customs. When a conflict breaks out, premiums for certain regions may skyrocket, professionals in this line of business point out.

An agreement to protect themselves from a great war 

Other lines in the industry, nevertheless, stopped working in war coverage decades ago. In the 1930s, major risks such as that of war were mainly covered in London, where large insurance companies were already operating in a market that was still only incipient in many other parts of the world. In 1938, the insurance companies in the London market, which had already been taking steps in this direction, agreed to a standard war exclusion clause for the non-marine business. The reasoning, which has continued to this day, was that the risks of armed conflict are simply too great to be covered. Clause NMA 464 excluded from coverage:

 “Loss or damage directly or indirectly occasioned by, happening through or in consequence of war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped power, or confiscation or nationalization or requisition or destruction of or damage to property by or under the order of any government or public or local authority.”

The turbulence of 1938: Hitler’s first annexations and the Spanish Civil War

The fact that this happened in 1938 was no coincidence. Europe was at a critical moment, with escalating militarism that would lead to World War II the following year.

  • 1938 was when Adolf Hitler, already at the height of his power, launched his annexation policy. In March, the first annexation took place when Nazi troops entered neighboring Austria, which became another province of the Third Reich after a false referendum. In October came the German occupation of the Sudetenland, in what is now the Czech Republic. This annexation had been settled in the Munich Agreement with the allies, who were still practicing a policy of appeasement in the hope of avoiding war. However, the possibility of war was already firmly established in European public opinion, and amid this scenario, the London insurance market introduced NMA 464. The Sudetenland would be followed by the invasion of the rest of Czech territory the following year and of Poland a few months later, the event that ignited the war.
  • The Spanish Civil War also played a decisive role in the widespread adoption of the war exclusion clause. By 1938, fatalities already numbered in the hundreds of thousands, and Europe watched as the country was ripped apart.It was the first conflict where the devastating effects of large-scale bombing on civilians were seen. Previously   to military targets, now they could reach the civilian population and properties hundreds of kilometers away from the front. In Spain, a new form of warfare was tested that would soon devastate Europe. Furthermore, political violence transcended traditional forms of warfare, generating a significant number of deaths and property damage. This phenomenon, which already had precedents in other countries, led to the expansion of insurance exclusions.
  • In fact, NMA 464 is not strictly limited to war; it introduces terms such as rebellion, revolution or insurrection, or confiscations ordered by governments. All of this speaks of the instability of the era when Europe saw uprisings and violent revolts throughout the interwar period.

The war exclusion around the world and the associated problems

The war exclusion clause became widespread around the world, and the premise that insurance companies could not be liable for the destruction caused by acts of war was established as a legal basis. For decades, the greatest challenges when insuring these risks have arisen when the responsibility of an enemy military power, or the fact that damage is a consequence of the conflict, cannot be clearly established. Over the years, the courts have had to settle several complex disputes in this regard, many of them involving multinational companies that sustained losses in countries at war.

There are some curious cases. One involved a collision between two merchant ships during World War I, insured by a policy that excluded “war risk,” since, as we have seen, marine insurance was a pioneer in this field. Both ships were circulating without their lights in the middle of the night, and one had changed course just hours before the crash when it was threatened by a submarine. Did the damage fall under war risks, excluding it from coverage? The United States Supreme Court ruled that it did not, making it clear that this was a thorny issue a century ago.

The 9-11 terrorist attacks and the birth of new threats

Clause NMA 464 remained the global standard until 2001, when the terrorist attacks of September 11 led these risks to become part of the exclusions included in most insurance contracts. The reasoning is similar: terrorist organizations have the potential to cause damage too great to be covered by a general policy, although specific coverage has been introduced in these cases with government support. For example, in Germany, an insurance firm is responsible for terrorism-related losses of up to 3 billion euros, and after that point, the German State would be responsible for a further 10 billion.

Amid the complex scenario created by technological advances and geopolitical tensions, new threats have appeared that will once again change the insurance sector. These are cyber attacks, a new kind of weapon that could cause devastating damage in the hands of states or terrorist organizations.

You can learn more about this topic in the following article:

Cyber terrorism and cyber war: facing down the invisible enemies.