War risks exclusions and causation: the Nordstream loss

Summary

In Nord Stream AG v Lloyd's Insurance Company SA the court construed primary and excess layer insurance policies for Offshore Operating All Risks Insurance and held that they did not respond to losses arising from damage to an undersea pipeline. A war risks exclusion operated to exclude “loss or damage directly or indirectly occasioned by, happening through, or in consequence of” war (etc.). This wording required a weaker causal link than proximate cause. It simply required war (etc.) to be identified as a contributing factor. On the facts and the expert evidence there was sufficient causal connection between the relevant acts of sabotage and the war between Russia and Ukraine to trigger the exclusion, irrespective of which potential perpetrator was, in fact, responsible.

Background

The defendant insurers (representing the insurers of both primary and excess layers) provided cover to the operator of undersea pipelines that carried gas from Russia to Germany under the Baltic Sea. These pipelines were damaged and rendered inoperable by explosions in or around September 2022.

The defendant argued that the pipeline damage was directly or indirectly occasioned by or a consequence of the war between Russia and Ukraine. As such, they contended that it fell within the scope of a war risks exclusion in the Policies.

Construction of the policy terms

The terms of cover were in the primary policy (the Policy), with Section I being headed "Property Damage”.

The Policy did not contain a clear insuring clause. As a result, the parties disputed the extent of the cover provided under the Policy. Insurers argued that the Policy provided all-risks cover on two bases. The first, which was rejected by the court, was that it was unnecessary for there to be an express insuring clause where it was “in context clear” that the Policy provided all risks insurance. The second was that there was an implied insuring clause that cover was provided on an all-risks basis.

The claimant, on the other hand, argued that the insuring clause was to be found in the Institute Clauses for Builders Risks (ICBR) and the Institute War Clauses Builders' Risks (IWCBR). It was common ground that the Policies, by clause 3 of Section I, incorporated the ICBR and IWCBR. It was also common ground that the IWCBR covered loss or damage to the subject matter insured caused by "war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power".

However, the ICBR applied only to property under construction and the IWCBR cover was limited to floating assets, rather than fixed installations such as the pipelines. The court rejected both of the claimant’s arguments on construction. This view was supported by expert evidence as to market practice, indicating that there was a general market practice or understanding in the energy insurance market in 2019 that cover for war risks was confined to floating assets.

Exclusion 2.i in Section I of the Policy excluded cover for;

“loss or damage directly or indirectly occasioned by, happening through, or in consequence of war (whether war be declared or not), invasion, acts of foreign enemies, hostilities, civil war, rebellion, revolution, insurrection, military or usurped power or confiscation or nationalisation or requisition or destruction of or damage to property by or under the order of any government or public or local authority except as otherwise provided in Section I of the Policy."

The court accepted insurers’ submissions that Exclusion 2.i had two limbs; a war exclusion and a government act exclusion. This meant that a loss would be excluded under Exclusion 2.i if either (a) the war risks exclusion; or (b) the Government act/order exclusion applied.

The court also construed a General Condition extending the all-risks cover to deliberate damage (GC9) as providing only a very limited and specific carve-out to Exclusion 2.i , for damage caused by governmental measures in the context of pollution mitigation.

Causation

As above, the war risks exclusion applied to loss or damage "…directly or indirectly occasioned by, happening through, or in consequence of war [etc]".

The court noted that this represented a broad causal test. On the authorities, the words "directly or indirectly" effectively rule out the narrower test of proximate cause. The court also rejected arguments that the test required identifying an "effective cause" as being too close to proximate cause. After considering various authorities, including Spinney’s (1948) Ltd v Royal Insurance Co Ltd, and citing Crowden v QBE, the court concluded that these words mean a "more remote link in the chain of causation is contemplated than the proximate or immediate cause..." but nonetheless require that the cause "must be significant; it must stand out as a contributing factor…".

In this case, on the facts, the court considered that the war between Russia and Ukraine was a significant cause of the damage. It was not necessary to determine which of the potential perpetrators (Russia, Ukraine or others) carried out the sabotage. Whichever perpetrator was involved, the war was a "significant" cause of their actions and the damage was therefore "directly or indirectly occasioned by, happening through, or in consequence of war" within the meaning of Exclusion 2.i.

Commentary

This case is a high-profile one in the market for a number of reasons. It is a large loss, with the indemnity sought amounting to around €579m. It arises out of a very high-profile event which has given rise to various reserving challenges for the market. It is also a key test of the application of war risks exclusions, and in particular the causal link required between the war event and the loss.

Broad causal language is typically, and deliberately, included in all-risks policies (whether property, CAR, marine etc) to exclude war risks, with language such as “…directly or indirectly occasioned by, happening through, or in consequence of war” or equivalent being used (the same wording appears in the Welcar 2001 wording, for example). This is important, not least since there are specialist policies available that are designed to fill the gap in the all-risks cover created by the war risks exclusion. The insured may or may not decide to purchase the additional cover, but it usually exists.

This decision undoubtedly provides welcome clarity and reassurance to the market that the wording of the war risks exclusions will be followed. It is, however, important to note that the judgment does not address other areas where disputes can arise. For example, whether there is a “war” in the first place can be a complicated question, as shown by the New Jersey court’s interpretation of the war exclusion in the NotPetya case involving Merck (Merck & Co., Inc., et al. v. ACE Amer. Ins. Co., et al.). In Spinney’s (1948) Ltd v Royal Insurance Co Ltd, the following guidance was provided by the English court:

• “war” does not have a fixed meaning, with methods of war and motivations changing over time;
• the views of the Government as to whether there is a war are relevant but not determinative;
• a civil war is a specific type of war but is still a war;
• for there to be a “war” there needs to be a conflict between sides to whom the combatants owe allegiance;
• the objectives of the sides, together with their means of achieving those objectives, may provide an indicator of whether or not there is a “war”; and
• the character and scale of the conflict, along with the impact on public order and the life of the inhabitants of the impacted countries must be analysed.

The question remains a complicated one, and further disputes can be expected in future.