In brief
- Much has been made of the insurance issues arising from the Ukraine war and how lessons from that conflict might be applied to the current situation in Iran.
- Whilst the maritime and, to a lesser extent, aviation markets are braced for significant losses, the conflict in Iran has already given rise to a broader range of insurance issues.
- In this article, we examine the impact of the conflict on businesses and identify the key insurance flashpoints.
Supply chain, delay and trade credit
One of the most significant challenges facing businesses is the supply chain shock to the global economy caused by the Iran conflict and the US's decision to introduce its own blockade of the Strait of Hormuz . The resulting losses faced by businesses may not fall naturally within standard insurance policies. Whether cover is available will, as ever, depend on the specific terms and extensions of the policies purchased, and those should be carefully reviewed.
What is beyond doubt is that the ripple effect of the Iran conflict will continue to impact industries and businesses far removed from the region in ways that are still developing. The most visible consequence has been the rise in fuel prices, with diesel in the UK increasing by a third since the start of the conflict. Countries more dependent on the Gulf states have fared worse. Nigeria, for example, has seen surges of 50 per cent and 70 per cent in the price of petrol and diesel respectively.
Governments around the world are introducing measures to mitigate rising energy costs, but shortages of less obvious raw materials are also beginning to hit manufacturing across key industries. Iran's attacks on Qatar's LNG facilities have, for example, led to a shortage in helium production, a by-product of natural gas processing. Helium is crucial to the manufacture of semiconductors, which are widely used in all electronic goods and equipment. The longer the conflict continues, the greater the impact on countries such as South Korea, which relies heavily on Qatar for helium supplies for its semiconductor industry. This will have obvious knock-on consequences for businesses that source those components from South Korea.
The increase in the price of energy, fuel and raw materials, combined with disruption to shipping, will directly impact manufacturing as well as construction and development projects around the world as costs and inflation squeeze margins and profitability. Even well-priced projects will come under significant strain from supply chain disruption and delay.
Companies seeking to reduce their supply chain exposure through insurance will therefore need to scrutinise all policies carefully to determine whether they respond in the current circumstances. Delay in Start Up insurance covers the financial loss resulting from delays to the completion of construction projects. DSU cover typically excludes non-physical causes but specialist extensions may have been purchased. By comparison trade credit insurance, (a relatively underused line of cover), protects companies against the risk of buyer defaults on payments, whether due to the buyer's own commercial inability to pay or political events outside the buyer's control. Given the disruption caused by the Iran conflict, such policies could prove invaluable in the current climate.
Aviation
As with Ukraine, the disruption to the aviation industry across the Middle East has been significant. A number of high-profile carriers operate out of the region, which also serves as a stopping point for major international routes. Airspace was promptly closed on the outbreak of the conflict, resulting in severe travel disruption. However, unlike the position in Ukraine, where airspace remains closed, flights have since resumed from most airports.
Aircraft have not been detained or restrained in the region, and policyholders and insurers will not need to grapple with questions of whether aircraft have been "lost", as arose in the AerCap case (see our article for Practical Law on that case: Planes becoming diamonds: issues in aircraft lessors' proceedings against aviation insurers arising out of the Ukraine conflict). War risk claims should therefore be limited to aircraft actually damaged in the region.
Airlines face their own supply chain pressures, with rising fuel costs and longer routes resulting from an expanded network of no-fly zones, compounding those already in place as a result of the Ukraine conflict. Consumer claims for travel cancellation will be significant, prompting major carriers to call on their relevant cover.
Marine
The closure of the Strait of Hormuz has had a significant impact on marine and marine cargo insurance. Depending on how long vessels remain unable to leave the Strait, blocking and trapping and detainment clauses may become operative under marine policies. The US decision to commence its own blockade of the Strait may also give rise to causation arguments including as to the true reason for any detainment.
The impact of the closure on marine transit has already resulted in a substantial increase in war risk premiums.
Property
A number of property claims have already been made for physical damage to buildings and infrastructure in the region caused by drone and missile strikes. The source of those strikes will be highly relevant to the interaction between terrorism cover and war exclusions in the relevant policies.
As the full impact of the conflict becomes clearer, claims for business interruption losses may also follow. Disputes are likely to arise over gaps in cover for business interruption losses in circumstances where there has been no corresponding physical property damage, but where there is an inability to use facilities as a direct result of the conflict.
Cyber
Cyber-attacks have long been associated with Iran, and the conflict has led to a dramatic increase in such activity. In an embarrassing illustration of the threat, the FBI was forced to confirm that its own director's personal emails had been hacked and leaked by an Iranian-linked group.
Whilst the adoption of cyber insurance has increased in recent years, in 2022, Lloyd's of London required that all standalone cyber policies must exclude war and non-war state-backed cyber-attacks (see our article on that issue: State backed Cyber Attacks – too big for insurers to cover?). The application of those exclusions and the interpretation of what constitutes a "state" attack remains untested in the courts.
Contingency
A number of events in the Middle East will have been cancelled as a result of the conflict. Contingency policies often contain war exclusions, though some companies may have purchased extensions to include cover for war and terrorism risks.
Conclusion
The conflict in Iran will have a significant and wide-ranging impact on policyholders and the insurance industry. Many companies drew lessons from the war in Ukraine and adjusted their ongoing exposures accordingly. It remains to be seen where the most significant coverage disputes will emerge and which lines of business will be most affected. Businesses may be left exposed as cover for supply chain risk is limited. That brings wider questions of how, in an era where geopolitical uncertainty is fast becoming the new normal, businesses can manage supply chain risk going forwards and whether insurers will adapt their standard products to cover that risk.
Businesses impacted by the conflict in Iran should carefully review any relevant insurance cover to ensure that all available claims are pursued. Our insurance disputes team, which regularly advises businesses on complex coverage questions arising from geopolitical conflict, including war exclusions, policy interpretation and claims strategy, can assist. If you wish to discuss any of the issues arising in this article, please contact Chris Neilson, partner in the Insurance Disputes group, Mishcon de Reya London or Bushra Ahmed, Head of Disputes, Mishcon de Reya Dubai.