Limitations of standard commercial insurance

Flaring conflict in the Middle East has shaken the global economy.

Major disruptions to industries such as oil, gas and shipping have affected the entire international supply chain, leaving businesses across a broad range of sectors facing significant financial hardship. Even if direct hostilities cease, the heightened risk level and political uncertainty in the region will continue to affect trade and commerce in the weeks and months to come. Dramatic examples across the world, such as closures of manufacturers and hospitality providers, demonstrate the seismic effects of these macroeconomic ruptures.

While Australia might be on the other side of the world, it is not insulated from these concerns. Modelling from the Australian Treasury has indicated that a prolonged conflict scenario could slash $16.5 billion from the national economy by 2027. This projected downturn coincides with growing inflation driven by significant energy supply shocks. For the vast number of Australian businesses affected by the ongoing global events, the scale of potential exposure is significant.

Instinctively, in times of economic downturn and volatility businesses will look to their insurance coverage to transfer risk. Unfortunately, many will be left disappointed. This is because most standard commercial insurance contracts contain broad exclusions for losses arising from war, declared or not. This is a longstanding feature of business interruption insurance policies, rooted in the fundamental principle that war risk is uninsurable through conventional products.

However, that is not to say businesses are left without coverage options. In fact, it is precisely because of the ubiquity of war exclusions that specialist markets have evolved. The current conflict demonstrates the significant impact that war can have on an interconnected global market. This reinforces the importance for businesses to consider the following specialised insurance products in a globalised and conflict-threatened economy.

Specialist insurance solutions for conflict‑related risk

1. Political risk insurance

Political risk insurance (PRI) covers businesses for losses arising from adverse political events in countries where they operate or trade. PRI is often offered as a bespoke product, tailored to the specific needs of the insured and the geopolitical context in which they operate. For businesses that have assets or investments in areas prone to loss resulting from political violence, including war and terrorism, these products can provide coverage where general business interruption insurance will not.

While PRI operates to protect businesses with direct exposure to hostile jurisdictions, it is not limited to this. PRI policies can extend to cover businesses without a direct presence in a conflict zone, but that nonetheless have commercial exposure to the conflict. This can operate through coverage for liability to third parties. Australian businesses with significant, albeit indirect, exposure to conflict regions should particularly consider the benefits of PRI products.

A specialised PRI policy may provide coverage for the following events:

• Contract frustration as a result of embargo, sanctions or political violence
• Import/export licence cancellation
• Confiscation or expropriation of assets
• Forced abandonment of assets
• Direct loss as a result of war or terrorism
• Credit risks, such as sovereign non-payment
• Currency inconvertibility

PRI policy wordings may vary significantly between underwriters and between products. Disputes often arise with respect to whether loss was caused by a "covered peril" under the specific policy. Businesses considering their existing cover, or exploring their options in light of current events, should seek specialised advice in relation to their specific coverage.

2. Specialist supply chain/contingent business interruption insurance

These products are designed to cover the loss of profits and increased costs that a business suffers when its operations are affected by disruption at a third-party location on which the business depends. This caters to the commercial realities of disruption in an interconnected global economy.

A standard supply chain insurance policy will generally contain war exclusions. However, there are several products that will respond to conflict-related disruptions. Specialist underwriters will write policies that include coverage for damage arising from political violence, either as a named peril or as part of a broader "all risks" structure.

Businesses seeking comprehensive protection should seek out policies that respond to supply chain disruption without requiring physical damage as a trigger. This is particularly important in the conflict context, where disruption may stem from events such as the closure of critical infrastructure and trade routes. Coverage under such policies might include:

• Shutdown or curtailment of a key supplier's operations due to energy rationing, fuel shortages or government-imposed emergency measures arising from conflict
• Port closures or severe congestion caused by warlike activity or government restriction, preventing the loading or discharge of cargo
• Cancellation or suspension of critical transport services as a direct consequence of conflict or airspace closure
• Forced closure or suspension of operations by a key customer or route-to-market partner in an affected region

3. Marine war risk insurance

Marine war risk insurance (MWRI) covers vessel owners, operators and cargo interests for loss or damage caused by war and warlike perils at sea. MWRI is a distinct product, separate from standard marine hull and cargo insurance. For businesses with exposure to global shipping routes, whether as vessel owners, exporters, importers or trade financiers, MWRI can provide coverage where standard marine insurance will not.

A MWRI policy may provide coverage for the following events:

• Physical loss or damage to a vessel or cargo caused by war, warlike operations, mines, torpedoes or hostile acts
• Capture, seizure or confiscation of a vessel or cargo by a hostile power or government authority
• Detainment or blocking of a vessel, preventing it from completing its voyage
• Loss of hire arising from war damage rendering a vessel temporarily inoperable
• Death, injury or kidnap of crew members arising from a war risk peril
• Piracy, which in most modern war risk policies is treated as a war risk peril

In light of recent disruptions in the Red Sea and heightened tensions in the Strait of Hormuz, the relevance of MWRI has become increasingly pronounced.

Engaging with specialists

For businesses concerned about losses arising from ongoing conflict, there are specialist insurers in the Australian market that issue insurance products catering to political and war risks. We recommend that when considering the appropriateness of these products to your business, you consult with a specialist broker.

Our team has extensive experience with a broad range of products available through these brokers and can assist corporate clients in making informed and commercially sensible risk transfer decisions.

We provide independent legal advice on policy interpretation, coverage adequacy, and claims strategy. We also conduct comprehensive coverage reviews to identify gaps or ambiguities in existing insurance programmes.

In the event of a coverage dispute, we advise on the enforceability of key terms and, where necessary, advocate on behalf of corporate clients to confirm cover.

As geopolitical uncertainty continues to shape global markets, engaging with brokers and legal experts to understand and secure appropriate coverage is an essential step in safeguarding against future loss.