Cyber ‘war’: a question of ‘reasonable expectations’

By Simon Jackson, Partner, Clyde & Co LLP, IUMI Professional Partner,

The concept and characterisation of war risks arises in a number of ways in marine insurance.  The separation of war perils from marine perils, and therefore the need to categorise them, has been an area in development for many hundreds of years, and modern more decentralised and asymmetric warfare throws up its own challenges. One aspect of that is ‘cyber war’.

In Merck v Ace the Superior Court of New Jersey was asked to consider coverage under Merck’s all risks property insurance following the infection of its systems with the ‘notpetya’ virus. Insurers refused coverage relying on the policy’s war risks exclusion, arguing that the ‘notpetya’ virus was an instrument of the Russian Federation as part of its ongoing hostilities against the Ukraine.

The court rejected that argument. It noted that “no court has applied a war (or hostile acts) exclusion to anything remotely close to the facts herein. The evidence suggests that the language used in these policies has been virtually the same for many years”. That said, the court acknowledged that “both parties to this contract are aware that cyber attacks of various forms, sometimes from private sources and sometimes from nation-states have become more common” but “despite this, insurers did nothing to change the language of the exemption to reasonably put this insured on notice that it intended to exclude cyber attacks”. That being so, the court concluded that “Merck had every right to anticipate that the exclusion applied only to traditional forms of warfare” and that this “reasonable expectation” meant that the exclusion would not apply.

Viewing construction from the perspective of the insured’s ‘reasonable expectation’ is an interesting concept. English law disregards the subjective views of the parties in favour of ascertaining what a notional ‘reasonable person’ would have understood the contracting parties to have meant by the language used. It will be interesting to see how the mapping of ‘cyber war’ on to war perils develops, both as a matter of insurance product development and judicial intervention. Merck will not be the last word on the subject!

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