War Damage: Covered in Insurance or Not? What Are the Alternatives?

In recent weeks, escalating tensions between India and Pakistan have prompted Indian businesses and individuals to seek clarification on whether their insurance policies would cover damage caused by war. 

This surge in enquiries regarding “war cover” reflects growing concerns about the impact of geopolitical instability. However, insurance experts highlight that most policies typically exclude coverage for war damage, especially in commercial lines such as property, fire, and liability.

War Coverage: The Standard Exclusion

Historically, war has been a standard exclusion in most insurance policies. This exclusion stems from the unpredictable nature of war-related events, making it extremely challenging for insurers to model and assess risks accurately. In commercial insurance, including property and liability policies, war-related damage is generally not covered.

While war damage is excluded from many types of insurance, there are exceptions. For instance, marine and aviation policies may include war cover, primarily for marine hulls and cargo. These sectors have historically provided such coverage due to the nature of their operations and exposure to risks associated with international conflict.

Why Is War Damage Excluded from Most Policies?

The exclusion of war coverage in most commercial insurance policies can be attributed to several factors:

1. Unpredictability and High Risk: War is an inherently unpredictable event. Insurers face significant difficulty in forecasting the risks associated with wartime situations, which makes it harder to model the potential for claims. Consequently, it is more challenging for insurers to determine appropriate premiums or maintain solvency in the event of large-scale claims arising from war-related incidents.
   
    
2. Financial Exposure: Covering war-related damage on commercial policies could lead to potentially enormous claims, especially for high-value infrastructure and critical assets. Insuring such infrastructure could result in catastrophic financial exposure for insurers, potentially leading to large losses if war-related damage occurs.
   
    
3. Global Precedent: Globally, the exclusion of war from most insurance policies has become a standard practice. In fact, many policies across various insurance providers explicitly state that damage caused by war, invasion, or acts of foreign enemies is not covered.

Read More: Mental Health Insurance in India: Why Claims Remain Low Despite Rising Coverage

Alternatives to War Coverage

While war damage is typically excluded from most policies, insurance companies have been responding to the rise in enquiries by offering alternative forms of protection. One such solution is a political violence cover. 

This type of cover protects against damages that may arise from war-like situations, such as civil unrest, riots, and political instability, without the formal declaration of war. It also covers incidents like sabotage and terrorism, which may resemble war but are not officially classified as such.

For businesses looking for additional protection, standalone terrorism cover may be offered, which can cover a range of politically motivated damages. However, for those seeking more comprehensive protection beyond political violence and terrorism, insurers may direct clients to the international market, where war coverage may be available through specialised policies.

Insurers' Response to Changing Risk Landscape

Given the heightened geopolitical tensions, insurers are carefully monitoring the situation and considering how it might influence the insurance landscape. Some are preparing to adjust policy wordings to explicitly broaden exclusions in future policies or during renewals. This could include more stringent language that clarifies the scope of exclusions, particularly around war and conflict-related risks.

Moreover, the increased interest in war cover has prompted discussions within the insurance industry about offering innovative solutions. These could involve tailored packages for infrastructure that includes some level of protection against political violence or terrorism, ensuring that businesses have a level of coverage suited to the evolving risk environment.

Conclusion

The recent surge in inquiries about war coverage underlines the growing concerns over geopolitical tensions. However, the exclusion of war damage from most insurance policies remains a standard practice due to the inherent risks and unpredictability of war. 

While alternatives like political violence and terrorism coverage are available, companies seeking comprehensive war damage protection will need to explore the international insurance market. As the geopolitical landscape continues to evolve, it is likely that insurers will refine their offerings, but for now, war remains a standard exclusion for most commercial insurance policies.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.