War Risk Insurance: What it is, How it Works

What Is War Risk Insurance?

War risk insurance is a policy that provides financial protection against losses from events such as invasions, insurrections, riots, strikes, revolutions, military coups, and terrorism.

Auto, homeowners, renters, commercial property, fire, and life insurance policies often exclude war coverage. In some cases, it is possible to purchase a separate war risk insurance rider to cover these exclusions.

Key Takeaways

• War risk insurance covers losses resulting from war, invasions, insurrections, riots, strikes, and terrorism.
• It is offered as a separate policy due to the high risks involved.
• Businesses and individuals operating in high-risk countries are good candidates for war risk insurance.
• Standard policies exclude war risk insurance because of the difficulty in predicting damages and determining appropriate premiums.

Understanding War Risk Insurance

Entities exposed to the possibility of sudden and violent political upheavals are good candidates for war risk insurance. Companies operating in politically unstable regions, for example, face an elevated risk of loss from acts of war. War risk insurance may cover perils such as kidnappings, sabotage, emergency evacuation, worker injury, disability, and property and cargo loss or damage.

Some policies may also cover event cancellations due to war. However, some differentiate between terrorism and war as separate categories of peril. Additionally, certain countries may require airlines to have war risk insurance before operating in their airspace or using their airports.

The aviation and maritime industries have specific war insurance options tailored to their needs. For example, war risk insurance for ships may compensate the owner for the full cost of a vessel if the government seizes it. It may also cover losses of time if war activities result in temporary detention.

The Bumbershoot policy is a specialized form of excess liability insurance for the maritime industry.

Concerns With War Risk Insurance

The war exclusion clause gained attention in the insurance industry after the September 11, 2001, terrorist attacks. The attacks caused approximately $40 billion in insurance losses, leading insurers to cancel many policies and coverage related to war risk.

In response, Congress expanded the Federal Aviation Administration (FAA) Aviation War Risk Insurance Program to offer coverage to U.S.-based airlines and set premiums based on pre-9/11 costs. The program was in place until 2014, when the private industry increased capacity and lowered prices for war risk insurance.

The difficulty in war risk insurance lies in accurately assessing damages and calculating appropriate premiums. The extent and unpredictability of war-related damage can exceed even high premiums, potentially leading to insolvency for insurance companies. This makes war insurance a high-risk endeavor for insurers.