Many insurance policies contain a “war exclusion,” which states that there is no coverage for loss resulting from “war,” “warlike action by a military force,” or “insurrection, rebellion, [or] revolution.” Does the exclusion apply when a militant faction—specifically Hamas—shoots rockets into an area where the insured is conducting activities?
That’s exactly what happened in this case. Universal, producer of the show Dig, moved its production out of Jerusalem after Hamas fired rockets into Israel in June and July 2014. Universal incurred substantial expense as a result of its move and filed a claim with Atlantic to recover those costs. Atlantic viewed rocket attacks by Hamas as falling within the war exclusion in its policy and denied coverage. Universal sued.
The case has some interesting and different twists to it. First, the parties engaged in negotiations over the terms of the war exclusion to be included in Universal’s policy. Second, Universal disclosed specifically its intent to film Dig in Israel prior to issuance of the policy. There was discussion between policyholder and insurer about Dig. As the Ninth Circuit noted, “Atlantic did not change the policy’s terms, add any exclusions—such as a terrorism exclusion—or charge any additional premium.” Third, under California law, which applied to the policy, section 1644 of the Insurance Code mandated application of a special meaning developed in the insurance industry for the terms in the exclusion if such a meaning existed.
The Ninth Circuit held that the doctrine of contra proferentum did not apply to construction of the war exclusion because of the negotiations between the parties. Both parties, said the Court, were sophisticated and had negotiated over the particular terms in question. The Court saw no reason to protect either side “from any ambiguous drafting in this instance.”
Turning to the Insurance Code issue, the Court held in favor of Universal. Atlantic quoted the Appleman treatise in its denial letter: “‘War is a ‘course of hostility’ between ‘states or state-like entities.’” It is viewed differently from “terrorism.” As a result, where a policy does not have a terrorism exclusion, an insured can expect acts like those of Hamas to be covered. What case law and commentary there is supports the idea that war is carried on by states or state-like entities. (See also the discussion in G. Marx, H. Marx, C. Marx and Z. Marx, Duck Soup, (1933), available here.) The Court found that Hamas was not a sovereign or state-like entity. Therefore the war exclusion did not apply and Universal was entitled to coverage.
Classic comedy movies aside, this case contains a number of important lessons. The Court’s discussion concerning non-application of contra proferentum is notable. Several of Atlantic’s underwriting decisions—not seeking an increased premium or including a terrorism exclusion for activities in a conflict zone—appear in retrospect to have been a factor in the court’s decision. They provided a strong foundation for the expert testimony offered by Universal and are a reminder to underwriters of how important it is to think about what kinds claims might arise (and what the insurer wants to cover) during the underwriting process. Finally, at a time when the phrase “domestic terrorism” has (sadly and ominously) come back into current discussion, insurers need to look carefully at what exclusions are included in their policies and whether they address the realities of the risks to be managed.
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