Universal Cable Productions, LLC v. Atlantic Specialty Insurance Co.: Applicability of War Exclusions to Evolving Warfare/Untraditional War/Hamas Conflict
In a widely-publicized recent decision, the Ninth Circuit held that two differently-worded war exclusions did not bar insurance coverage for a television production company forced to relocate filming due to violence between Hamas and Israel security forces.
Factual Background and Procedural History
In the first half of 2014, Universal began filming a television show entitled Dig in Jerusalem, Israel. In late June 2014, Hamas began firing rockets from Gaza into Israel, which sparked an Israeli campaign against Hamas in response. The Universal security team became concerned about “acts of terrorism” near Jerusalem. Universal moved the production out of Israel and notified its insurance company, Atlantic, that it sought coverage for costs of delay and relocation.
Two days later, Atlantic denied coverage. The policy contained three relevant war exclusions, covering “war,” “warlike action,” and “insurrection, rebellion, revolution, [or] usurped power.” Atlantic denied coverage under the first two exclusions for “war” and “warlike action.”
Universal filed suit against Atlantic for breach of contract based on Atlantic’s denial of coverage. The district court granted summary judgment in favor of Atlantic, holding that the first two exclusions, for “war” and “warlike action,” barred coverage because the conflict between Israel and Hamas “would be considered ‘war’ by a layperson.” Universal appealed.
The Ninth Circuit’s Decision
Universal’s appeal was premised on the argument that in the insurance context, “war” has a specialized meaning, applying only to conflicts between “de jure or de facto” governments.
Agreeing with Universal, the Ninth Circuit reversed the district court’s decision. The Ninth Circuit held that the district court had erred in holding that the war exclusions should be understood based on the ordinary and plain meaning of their terms instead of applying the specialized meaning given to them in the insurance context.
Under California law, terms in an insurance policy are understood in their ordinary and popular sense “unless a special meaning is given to them by usage, in which case the latter must be followed.” Cal. Civ. Code § 1644. While courts generally apply customary usage only when both parties are engaged in the relevant business (here, insurance), the Ninth Circuit found that Universal is a sophisticated party that regularly engages in insurance-related business, and both parties were on notice of the customary usage such that applying the customary usage of the terms was appropriate.
Having determined that special meaning of the relevant terms in the insurance context would apply, the court moved on to the application of that meaning to the conflict in Israel.
The first war exclusion excluded from coverage costs incurred due to “[w]ar, including undeclared or civil war.” Because customary usage includes only wars between de jure or de facto governments, the key question before the Ninth Circuit was whether Hamas was acting as a de jure or de facto government at the time of the 2014 conflict.
In finding that Hamas was neither a de jure nor a de facto government, the Ninth Circuit focused on the historical background and political position of Hamas in the region. At the time of the 2014 conflict, the Palestinian Authority was the de jure government, and Hamas had recognized this controlling government and agreed not to disturb it. The Ninth Circuit supported its conclusion by pointing out that the executive branch—which has the exclusive authority to recognize foreign regimes—has refused to recognize Hamas as either a de facto or de jure sovereign.
In holding that the claim was not covered by the second exclusion for “warlike action by a military force,” the Court applied similar reasoning. The Court also relied on expert testimony, treatises, and case law indicating that “warlike” acts generally do not include violent acts by political groups not associated with governments. See Pan Am. World Airways v. Aetna Cas. & Surety Co., 505 F.2d 989, 1012 (2d Cir. 1974). Acknowledging that this approach seemingly conflates “war” and “warlike action,” the Ninth Circuit stated that it did not need to parse the difference between the two exceptions to determine that the Israeli-Hamas conflict did not fall under either.
Moving forward, with terrorist attacks becoming more common, insureds should make sure their policies do not have terrorist attack exclusions and that they take advantage of the right to purchase coverage for terrorist acts under the Terrorism Risk Insurance Act. Additionally, insureds should aim to keep any war exclusions worded narrowly. Insurers negotiating policies related to activities set to take place in at-risk areas may choose to add broader exclusions to their policies encompassing violence involving political groups or terrorist groups.
The Ninth Circuit’s holding is limited to policies interpreted under California law where customary usage is afforded to terms in insurance policies if both parties are on notice of that usage. See, e.g., DIRECTV v. Factory Mut. Ins. Co., 692 F. App’x 494, 495 (9th Cir. 2017) (rejecting insurer’s efforts to apply plain and ordinary meaning of the phrase “direct supplier” as to contingent business interruption). In a majority of jurisdictions, terms in insurance policies are construed according to their plain, ordinary meaning. If one of these jurisdictions faces a similar issue, a Circuit split may result. In fact, the Tenth Circuit has already held (in an admittedly somewhat dated opinion) that the inclusion of the phrase “undeclared war” in an insurance policy indicated that the parties “chose not to use the word ‘war’ in its technical or formal sense,” a holding seemingly at odds with the Ninth Circuit’s opinion. See N.Y. Life Ins. Co. v. Durham, 166 F.2d 874, 876 (10th Cir. 1948).
Further, the inapplicability of the first two war exclusions at issue in Universal may not be determinative if the district court determines on remand that the third exclusion, covering “insurrection, rebellion, [or] revolution,” covers the Israeli-Hamas conflict.