Insurance can struggle with gray zone conflict
While the eyes of the world have been on conflicts in Europe and the Middle East, there is no shortage of tension elsewhere as countries vie with each other for territory and status without their actions tipping them into direct military conflict. This liminal space between war and peace is often described as gray zone conflict.
The aviation sector is both an attractive target for gray zone activities, and it can also be a useful vector for gray zone attacks. There have been several incidents recently that are difficult to clearly and directly attribute to a specific state actor, such as the spate of explosions at courier depots which intelligence operatives have attributed to sabotage.[1]
For the supporting insurance sector, these gray zone activities can put insurance policies into areas which can be challenging for both insurers and insureds to understand. Insurance relies on precise language. This is deliberate because as far as possible, there needs to be a clear understanding about who is liable for a claim and in what circumstances so there can be effective transfer of risk from the insured to the insurer. In the case of space insurance for example, liability can be worked out to the nearest millisecond, depending on the phase of flight when an incident took place. While insurance for airlines, airports and other parts of the aviation ecosystem don’t usually require quite this level of precision, policies have been developed over the century of commercial flight to be very clear about how they will pay out and in what circumstance. These policies which have been built on the foundation of international aviation carriage conventions that many nations have signed up to, are as transparent as possible and are generally clearly understood.[2]
There are three areas of recent concern for the aviation industry and its insurance partners: spoofing and jamming of GPS signals, the imposition of aviation related sanctions, and the implications of a nuclear detonation, whether it is the result of state action, terrorism or something in between. This article will discuss the possible insurance implications of each event.
The challenge with gray zone activity is that it does not necessarily fit into the neat definitions that the insurance sector relies on. It isn’t direct war, where international law states that there should be a formal declaration. At the same time though, it isn’t necessarily terrorism in the traditional sense because there can be evidence of state sponsorship (or at least string-pulling).
Part of the challenge is that sometimes the gray zone activity is not directly intended to interfere with commercial activities such as aviation. Interfering with the signal from a global navigation satellite system, known widely as GPS spoofing or jamming, is an increasingly important tool in modern warfare. Spoofing occurs where an area is blanketed with a fake positional signal that fools an aircraft into thinking it is somewhere that it isn’t, while jamming is simply flooding an area with a signal that stops other location systems working. This is useful in a conflict because if you can interfere with the navigational system of an enemy missile or military aircraft, you’ll significantly degrade its ability to reach its target or destination. The problem is that spoofing and jamming systems change the signals of all traffic within a system’s range, and that can include commercial aircraft.
Pilots and aircrew are highly trained and have various back-up systems and manual techniques to verify information as they fly. As such, while there has been a significant increase in GPS spoofing and jamming,[3] it has not led to a loss event or insurance claim at this point. If an incident does occur however, proving culpability could be challenging and time consuming, and could well lead to insurance clause AVS103A[4] being utilized in the event that it is not clear whether a GPS spoofing or jamming incident constitutes a war peril. Updated in 2021, this clause creates a mechanism by which hull “all risks” insurers and hull “war risks” insurers will pay 50% of a physical damage claim pending resolution by arbitration as to whether or not the loss falls within the scope of paragraphs (a) and (c) to (g) of AVN48B. It is intended to reduce long, drawn out legal processes when the cause of a claim is unclear.
Economic sanctions can also be a complex issue. At the start of the crisis between Russia and Ukraine, many countries announced sanctions against Russia and its representatives, a move that in most cases included an export ban on all technology, goods and services related to aviation. This includes a prohibition on insurance and reinsurance activity for those technologies, goods and services moving within or through Russia.
The wording of article 3c of the European Union’s sanctions was as follows:
“It shall be prohibited to provide insurance and reinsurance, directly or indirectly, in relation to goods and technology listed in Annex XI to any person, entity or body in Russia or for use in Russia."[5]
The sanctions were built around the phrase “for use in Russia”, which caused several challenges and some uncomfortable discussions between insurers and their various insureds.
The first problem with the phrase was that it wasn’t clear whether it meant a prohibition on insurance relating to just domestic flights within the country or ALL flights into Russia.
Given the global nature of the aviation insurance market, what was the status of airlines domiciled in or operating between third countries that had not put Russia under sanction but insure with companies based in countries where sanctions are in force? Airlines not subject to sanctions were, in theory, free to continue to operate them but there was uncertainty whether these flights would be covered by insurers owing to the uncertainty of whether the sanctions language prohibited cover, and insurers were unable to provide a definitive answer. Some issued statements outlining their understanding of the sanctions, while others referenced parts of the sanctions clause AVN111 within the insurance policy.
Equally, if it was all flights into Russia, what would happen if a commercial aircraft suffered a fault and was forced to divert to an airport within Russian airspace. Under the force majeure exception, the aircraft would theoretically be allowed to land in Russia, but would replacement parts be permitted to reach a stricken aircraft under the sanctions regime, how would those parts be transported, and would mechanics based in Russia be allowed to work on the aircraft?
The phrase “for use in Russia” highlighted the gulf in interpretation between high level speech and government policy making, which it could be argued has a certain level of ambiguity by default, and the legally precise language that the insurance sector relies on to remove ambiguity and offer certainty of coverage and payments in the event of a claim. The European Union ultimately issued a document that clarified the position,[6] but the process took time and caused challenges for aircraft operators.
One of the most concerning aspects of the recent ratcheting of global geopolitical tensions is that in many cases, at least one of the world’s nuclear powers (declared or undeclared) are involved.
From an aviation perspective, hull and liability insurance policies have exclusion clauses for war or terrorism, but these risks are reinstated via hull war policies, AVN52E/G writebacks and Excess AVN52E/G policies. However, part or all of the war coverage can be automatically terminated in the event of the hostile detonation of a nuclear weapon or the outbreak of war (whether declared or not) between two or more permanent members of the United Nations Security Council (China, France, Russia, UK, USA).
The question that gray zone activities raise is will it be universally understood and accepted if either of these events have actually happened? In a world of gray zone conflict, how do you define hostile activity? How do you know if war between two countries has actually started? When does cyber warfare become actual warfare?
The nuclear detonation automatic termination clauses have existed since the Cold War, and there is a risk that the insurance policy termination clauses would force the grounding of virtually all commercial aviation activity, irrespective of the size of the nuclear weapon or how it was deployed.
What this means is that the deployment of a small nuclear warhead in one of the areas of geopolitical tension could potentially lead to the automatic cancellation of at least part of every insureds’ aviation insurance globally, which could in effect ground the global aviation fleet. With eight declared nuclear states and a further five states assumed to have offensive or defensive nuclear capabilities of some kind, the rising geopolitical tensions create an increasing risk of a nuclear event which could have several ramifications including potential chaos for the aviation industry.
Despite these challenges, the aviation insurance sector has proved to be capable of recognizing where coverage adaptation is necessary and responding to the increased risk that gray zone conflict can create. As ever, if you have any questions regarding how the changing conditions could influence an insurance policy, then please get in touch with us.
WTW offers insurance-related services through its appropriately licensed and authorised companies in each country in which WTW operates. For further authorisation and regulatory details about our WTW legal entities, operating in your country, please refer to our WTW website. It is a regulatory requirement for us to consider our local licensing requirements.
