War clause language under closer inspection

Russia’s Ukraine invasion may further test the effectiveness of “war exclusion” and “hostile act” exclusion policy language, which has already come under greater scrutiny since a New Jersey court ruling earlier this year, said Fitch Ratings Inc. in a report issued Tuesday.

The New Jersey Superior Court in Elizabeth ruled Jan. 13 in Merck & Co.’s favor in litigation filed against a Chubb Ltd. unit in which the pharmaceutical company sought coverage for damages sustained in the 2017 NotPetya ransomware attack under its all-risks coverage, according to the decision in Merck & Co. v. ACE American Insurance Co.

Larger insurers “have taken significant pricing and underwriting actions in response to rising cyber claims in recent years, including tightened contract language, which should help mitigate underwriting losses in the current uncertain environment,” Fitch said in its report.

The report says the inability to properly identify an attack’s perpetrator as cybercriminals, who have expertise in concealing their identities, compounds the problem.

“Often early indications of attack origins are false flags. Digital forensics can take years to complete and still remain ambiguous,” says the report, which notes also that cyber insurers have already started to clarify their cyber coverage to address the issue of “silent cyber,” where cyber is not explicitly addressed in noncyber policies.

The report says, “Continued growth in cyber intrusions and ransomware events may pressure the long-term profitability of the cyber insurance market and insurers’ internal management of cyber threats,” although negative rating actions tied to cyber underwriting losses remain unlikely.

Industry observers are also awaiting an Illinois state court ruling in a similar NotPetya-related case, Mondelez International Inc. v. Zurich American Insurance Co., which was filed by the Chicago-based snack company against the Zurich Insurance Group unit.

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