On July 12, 2019, the Ninth Circuit reversed a district court’s rulings that a claim by Universal Cable Productions, LLC, (Universal) under a Television Production Insurance Policy (the Policy) was barred by the Policy’s war exclusions.
While Universal was filming the television series Dig in Jerusalem in 2014, Hamas fired rockets from Gaza into Israel. As a result, Universal moved its production out of Israel, thereby incurring significant expenses. Universal filed an insurance claim for those expenses under the Policy, which the insurer denied based on the Policy’s war exclusions.
The Policy, which was issued by Atlantic Specialty Insurance Company (Atlantic), covered losses that were “a direct result of an unexpected, sudden or accidental occurrence entirely beyond [the insured’s] control to include . . . [i]mminent peril, defined as certain, immediate and impending danger of such probability and severity to persons or property that it would be unreasonable or unconscionable to ignore.” The Policy covered loss caused by terrorism, unless otherwise excluded.
The Policy also contained the following war exclusions:
1. War, including undeclared or civil war; or
2. Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents; or
3. Insurrection, rebellion, revolution, usurped power, or action taken by the governmental authority in hindering or defending against any of these. Such loss or damage is excluded regardless of any other cause or event contributed [sic] concurrently or in any sequence to the loss.
4. Any weapon of war including atomic fission or radioactive force, whether in time of peace or war . . .
In denying Universal’s claim, Atlantic acknowledged that the claim fell within the Policy’s grant of coverage, but concluded that “the extra expense associated with the move is not covered under [the Policy] because of the exclusion for war and warlike action.”
District Court Ruling
Universal filed suit against Atlantic, asserting breach of contract and bad faith claims. Atlantic took the position that the four war exclusions barred coverage. The district court subsequently ruled that the first two war exclusions applied, and that Atlantic did not act in bad faith. The court stated that, under California law, the exclusions should be understood in their popular and ordinary sense, and that the Israeli/Hamas conflict at issue “easily would be considered a ‘war’ by a layperson.” The court rejected Universal’s argument that the term “war” has a special meaning through usage in the insurance industry that should have been applied in the case. The court did not address applicability of the third and fourth war exclusions.
Ninth Circuit Reversal
1. First War Exclusion
The Ninth Circuit noted that “Universal provided the district court with substantial unrebutted evidence that, in the insurance context, the term ‘war’ has a special meaning that requires the existence of hostilities between de jure or de facto governments.” Universal had relied on a number of insurance cases holding that the term war “refers to and includes onlyhostilities carried on by entities that constitute governments at least de facto in character.” Universal also had presented evidence from leading insurance treaties supporting that conclusion. In addition, Universal provided expert testimony that under insurance industry custom, an underwriter cannot merge the concepts of terrorism and war, because “if the policy does not contain a terrorism exclusion, there is a reasonable expectation that acts of terrorism by a known terrorist organization, regardless of however else they may be characterized, will be covered.”
The Ninth Circuit held that the district court’s decision in favor of Atlantic on this exclusion was incorrect in several respects. First, the Ninth Circuit concluded that Universal was not required by California law to introduce specific evidence of the parties’ intention during policy negotiations that they intended the special meaning of “war” to apply. And since Atlantic had not effectively disputed Universal’s evidence that the insurance industry does have a customary usage of that term, the special meaning should have been applied.
Second, based largely on the fact that the United States executive branch has not recognized Hamas as a sovereign, the Ninth Circuit concluded that Hamas is not a de jure or de facto sovereign. Consequently, the court ruled that the first war exclusion did not apply to Universal’s claim.
2. Second War Exclusion
With regard to the exclusion for “war like action by a military force” by a “government, sovereign, or other authority,” the Ninth Circuit stated that the lower court’s conclusion was “infected with many of the same legal errors” applicable to the first war exclusion. It concluded that the second exclusion also requires a de jure or de facto sovereign actor and that “warlike operations” does not include “intentional violence against civilians by political groups.” The court stated that Hamas’ conduct was more akin to acts of terrorism than warlike actions by a military force. It also held that retaliation by Israel, a sovereign state, against Hamas did not trigger the exclusion because Universal’s loss was proximately caused by Hamas’s rocket fire from Gaza into Israel. Accordingly, the Ninth Circuit reversed the district court’s grant of judgment in favor of Atlantic on this exclusion.
3. Third and Fourth War Exclusions and Bad Faith Claim
The Ninth Circuit remanded the case to the district court to decide the applicability of the third war exclusion (“insurrection, rebellion, [or] revolution) in light of potential factual disputes, and to decide whether Atlantic’s reliance on the fourth exclusion was a “live” issue that would need to be adjudicated. The court also vacated the district court’s judgment on Universal’s bad faith claim, and remanded the issue for further proceeding consistent with its decision.
War exclusions, which are relatively rarely invoked in coverage disputes, have been garnering headlines in the past several months. During policy negotiations with their insurers, insureds are encouraged to examine how any given policy’s war exclusion might be applied in light of the insured’s business operations and risk profile, and to consider negotiating for more favorable terms if warranted.