War and terrorism exclusions are not present in all policies but their presence is inconsistent. Col Fullagar highlights the need for advisers to be diligent in spotting exclusion clauses for specific clients.
A core responsibility charged to those offering risk insurance financial advice is that of giving clients certainty of cover.
Said clients are unlikely to be impressed if a claim is lodged with a reasonable expectation of payment being made but subsequent investigations by the insurer reveal the particular event falls short of the requisite definition.
Worse still, it fits the popular perception of “the big print giveth and the small taketh away”, which is when the event is essentially covered but admittance of the claim is precluded by the presence of an unexpected exclusion clause.
Thus the importance, when providing financial advice, of not only knowing and informing about what is covered but also what is not covered, i.e. what clauses exist within the policy that enable insurers to avoid or limit their otherwise liability.
Exclusion clauses have been around since Adam was a pup.
Some are clear and clearly far-reaching such as a life policy indicative exclusion for “the skin and its contents”.
Others are less than clear and the extent of their reach plays with the mind such as the 1978 Temperance and General classic:
“No compensation shall be payable under more than one Event in respect of the same period of disablement except that after compensation has ceased to accrue under Event 4, it can accrue under Event 5 or vice versa, or that after it has accrued under either of the Events 4 or 5, it can accrue under Events 1, 2 or 3 or after it has accrued under Event 3, it can accrue under Events 1 or 2 but in any such case, compensation that accrued under Event 5 after Event 4 or vice versa shall be diminished by the amount already paid or payable under the Events 3, 4 or 5 or any of them.”
In between the two, lies an endless range of variances and while plain English has seen progress being made, progress does not always equate to arrival at a destination; even the most apparently straightforward exclusions may well harbour hidden problems.
For example, while an exclusion for dirt bike riding may seem simple enough, what position will an insurer take if the insured is injured while riding a registered dirt bike on a public road? And, of course, will all insurers act consistently to an identical situation?
When it comes to exclusions, however, there is one that particularly possesses the attention demanding trifecta:
- While the actuarial risk of the excluded event occurring may be slight, the perceived risk is considerable as that which is being excluded is receiving considerable media attention, and appropriately so;
- The detrimental financial impact if the excluded event occurs could be considerable; and
- The exclusion wording is arguably less than crystal clear in its intent.
The winning trifecta goes to the so-called War and Terrorism Exclusion Clauses that lurk somewhat camouflaged within many policies in the market today.
Where can they be found?
War and terrorism exclusions exist in policies available from all distribution sources – retail, employer-sponsored group, direct, superannuation platforms and industry funds.
They exist in current and legacy products.
They can exist in any policy type but they are more likely to be found within income protection, business expenses and TPD insurances.
The good news is they do not exist in all policies.
The bad news is they do not exist in all policies. Their presence is inconsistent and thus, the need, in all circumstances, for an adviser to actively seek clarity regarding the presence or otherwise of a war and terrorism exclusion clause, and the relevance of that clause to a particular client.
The other bad news is the wording of these exclusions is also inconsistent, which means even greater adviser diligence is required.
What is some typical wording?
The wording of clause may be short and to the point:
“An insurance benefit will not be paid if an illness or injury is directly or indirectly caused by ¬ war.”
An expansion on the theme may read:
“We will not pay a benefit if the person insured’s medical condition was caused by ¬ war (including war service), act of a foreign enemy, hostilities or warlike operations (whether war is declared or not), civil commotion, civil war or rebellion.”
Entities perpetrating the excluded activity may also include:
- One or more countries resisted on orders by any country;
- A combination of countries; or
- An international organisation.
It is not uncommon, however, to have references within the clause to various other “war” pseudonyms.
The potential for confusion and uncertainty becomes vividly obvious when common online definitions are considered for the various activities and parties that may be included within war and terrorism exclusions.
– Armed aggression – a military invasion of a country by another country or military formation;
– Civil commotion – a riot or similar disturbance;
– Civil unrest – a disruption of the typical social order that can involve a strike or protest; it can be peaceful or involve violence;
– Hostilities – hostile behaviour; unfriendliness or opposition, including war;
– Insurrection – a violent uprising against an authority or government;
– Invasion – an instance of invading a country or region with an armed force; an incursion by a large number of people or things into a place or sphere of activity;
– Mutiny – an open rebellion against the proper authorities, especially by soldiers or sailors against their officers;
– Rebellion – an act of armed resistance to an established government or leader;
– Revolution – a forcible overthrow of a government or social order, in favour of a new system;
– Riot – a violent disturbance of the peace by a crowd;
– Social unrest – an act or show of defiance towards an authority or established convention; open, armed and organised resistance to a constituted government;
– Terrorism – the unofficial or unauthorized use of violence and intimidation in the pursuit of political aims;
– War – a state of armed conflict between different countries or different groups within a country; and
– War-like activities – disposed towards or threatening war; hostile.
Protection under the Life Insurance Act
Insureds receive the following protection under the Life Insurance Act:
“Condition as to war risk void
- 229. (1) Subject to subsection (2), any term or condition of a life policy is void if it limits, to an amount less than the total of the sum insured and bonuses, the amount payable under the policy if the life insured by the policy dies on war service.
- (2) Subsection (1) does not apply if there is written on the policy document an acknowledgment signed by the person to whom the policy was issued that the policy is subject to the term or condition.”
Direct or indirect involvement?
It is not simply a matter of deliberate and direct involvement in a war or terrorist activity that can activate the exclusion of cover.
The use of the phrase “directly or indirectly” within the exclusion wording significantly increases the chance of an event being drawn into the vortex.
Normal activities that appear innocent in their own right can also lead to problems, for example:
- An insured on holidays or a business trip;
- An insured working overseas; or
- An insured simply being in the wrong place at the wrong time within Australia.
What similar exclusions exist?
In addition to war and terrorism exclusions, off-shoots also exist:
- Social instability exclusions, which focus on civil disturbance and violent personal crimes such as assault or kidnapping, riots, etc;
- Territorial exclusions which restrict cover to certain countries such as Australia and New Zealand; and
- Country specific, continent or regional exclusions which may target places such as the Middle East or Asia.
Off-shoot exclusions may trigger variances to the policy terms and conditions:
“We may vary any of the terms and conditions of the Policy with immediate effect and confirm the change in writing in the event of war involving Australia or if there is a change to the law and as a result:
- It becomes impossible or impractical for us to carry out our obligations under the policy;
- Government charges, taxes or levies are imposed or changed; or
- If the provisions of the Policy would otherwise become inconsistent with the law.”
Legal application of exclusions
The burden of proof shifts when an insurer wishes to rely on an exclusion clause to avoid or limit a claim.
The onus is on the insurer, to establish, on the balance of probabilities that the loss was caused by an excluded event and is thus not covered.
If a dispute escalates, the Courts will apply established rules in determining the meaning and effect of an exclusion clause:
(i) What is the ordinary and natural meaning of the words making up the exclusion?
(ii) If the meaning is ambiguous, the Court will look at the context in which the words are used. In this regard, the maxim “noscitur a sociis” will apply i.e. words of questionable meaning can be derived from their association with other words within the same clause.
(iii) Where more than one meaning may apply, the Court will adopt the meaning which gives the document commercial purpose.
(iv) If the meaning continues to be unclear, the Court might consider other evidence such as the parties’ intentions at the time the contract was entered into.
The Court will take an objective approach with the focus being on the meaning the document would convey to a reasonable person in the circumstances rather than on what one or the other party meant or understood by the words.
Real life examples
Several insurers were asked to provide an opinion about the application or otherwise of their war and terrorism exclusions to some recent events.
(i) The 2002 Bali Bombing;
(ii) The 2014 disappearance of MH 370;
(iii) The Lindt Café siege;
The general consensus of questioned insurers was that the war and terrorism exclusion would not preclude a claim being paid.
(iv) Direct or indirect involvement in conflicts within Syria and/or the Ukraine
In this example, the responses provided were more guarded:
“We would consider the facts and circumstances and engage stakeholders before arriving at a final decision.”
“This would be assessed more on a case by case basis.”
“This would depend on the nature of the claim and individual circumstances.”
Naturally, the above examples are indicative only with actual insurer decisions being reliant on the specific claim circumstances and exclusion wording.
Summary
Advisers may be tempted to point out to clients that the recommended insurances being put in place will bring them “peace of mind” by way of financial protection.
The irony is clear, a war and terrorism exclusion can leave that peace of mind in tatters, particularly if the presence of the clause is not identified, pointed out and explained.
An adviser wishing to explain the workings of the exclusion may prudently consider the position of the insurer. As can be seen from the above examples, it is hardly feasible or reasonable for an insurer to be prescriptive about when a clause may or may not apply, in advance of a claim being made.
Bearing this in mind, the best an adviser may be able to do is:
- Make known and document the existence of a war and terrorism exclusion within recommended policies;
- Within the advice document, inform the client of the practical difficulties surrounding the application of these exclusions at the time of a claim; but
- Reassure the client that, at the time of a claim, yet another value-add of the adviser will be to scrutinise the conduct of the insurer to ensure any attempt to invoke a war and terrorism exclusion is in line with the insurers’ duty to act in good faith.
Perhaps in this way the promised peace of mind will in fact be delivered.
Col Fullagar is the principal at Integrity Resolutions.
