What Is Modern Warfare? Ninth Circuit Rules War Exclusions Do Not Preclude Coverage for First Party Loss Caused by Hamas Rocket Attacks

On July 12, 2019, the Ninth Circuit Court of Appeals found two “war” exclusions inapplicable, under California law, to a loss caused by 2014 hostilities between Israel and Hamas. Universal Cable Productions, LLC v. Atlantic Specialty Insurance Co., No. 17-56672, 2019 WL 3049034 (July 12, 2019). In doing so, the court overturned the Central District of California’s award of summary judgment in favor of Atlantic Specialty Insurance Company.

The parties’ dispute arose out of Atlantic’s refusal to indemnify Universal for costs associated with Universal’s decision to move production of a television miniseries out of Israel in July 2014. Universal’s decision was in response to a flare-up of hostilities between Israel and Hamas, which included rockets fired by Hamas into civilian areas in Israel. Atlantic denied coverage for Universal’s claim based on two exclusions for “war” and “warlike action” by a “government, sovereign, or other authority using military personnel or other agents.”

In granting summary judgment in Atlantic’s favor, the district court applied the “war” and “warlike action” exclusions and held that their plain and ordinary meanings precluded coverage for Universal’s claim. Universal appealed the ruling, arguing the terms “war” and “warlike action” have specialized definitions in the insurance context preventing their application here.

The Ninth Circuit agreed with Universal, finding compelling that Universal’s negotiations for the policy terms and affirmative disclosure of its plans to shoot the series in Israel required utilization of the insurance-industry meanings for “war” and “warlike action.” The court then reasoned that the “war” exclusion was inapplicable because Hamas was neither the lawfully recognized nor effective government of Palestine. Universal submitted case law, leading treatises, and expert testimony to establish that “war” in the insurance context requires “hostilities carried on by entities that constitute governments at least de facto in character.” The court examined the evidence and found that Hamas deferred to the legally recognized government of Palestine, the Palestinian Authority, and did not exert control similar to a governmental body. The court also noted that the executive branch of the United States government – the branch tasked with conducting the country’s international affairs – did not and has never recognized Hamas as a legitimate governmental authority.

The Ninth Circuit surprisingly applied a virtually identical analysis to the exclusion of “warlike action” by an “authority using military personnel or other agents,” holding it still requires acts by a legally recognized or effective government body. The court relied on precedent taking an historical view of warfare and delineating between “warlike operations” and violence by political groups upon civilians “at places far removed” from the theatre of warfare.

The Ninth Circuit also surprisingly rejected the district court’s conclusion that the Israeli government’s actions could have been the proximate cause of the loss. The court instead concluded that Universal moved production out of Israel solely as a result of Hamas’ acts and not the Israeli military’s retaliation. The court disregarded the theory that a conflagration between Israel and Hamas, generally, and not simply the Hamas rocket attacks, was the cause of Universal’s decision to move filming.

Of note, the court remanded the case for further consideration on the application of a third exclusion, for “insurrection, rebellion, [or] revolution.” Hence, there is still the possibility Universal will not be afforded coverage for its loss.

This decision may not enjoy widespread significance in the P&C insurance world since its particular circumstances are not likely to regularly recur. However, for those involved in cyberinsurance, the significance of this decision may be much greater. Governments and sovereigns are finding ways to conduct warfare in subtle and nefarious ways – cyberattacks. Whether a War Exclusion applies to a cyberattack is being litigated now in the aftermath of NotPetya. That litigation is a hot topic in the cyberinsurance space and will continue to be discussed and analyzed as cyberattacks increasingly become governments’ preferred vector for instability and destruction.