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Silent cyber ruling has insurers looking closer at war clause

policy review

A ruling issued by a New Jersey court that addresses the issue of “silent cyber,” where cyber coverage is not explicitly covered, is expected to be influential in changing the traditional war clause exclusion in non-cyber policies.

Merck & Co. sued a Chubb Ltd. unit seeking coverage under its all-risk policy for damages sustained in the 2017 NotPetya ransomware attack, according to the Jan. 13 ruling in Merck & Co. v. Ace American Insurance Co. The insurer refused to provide coverage based on the policy’s war clause exclusion.

The New Jersey Superior Court in Elizabeth ruled in favor of Merck agreeing that, under a reasonable understanding of the war clause exclusion, it should apply when there is a use of armed forces. 

Industry observers are also awaiting an Illinois state court ruling in a similar NotPetya-related case, Mondelez International Inc. v. Zurich American Insurance Co., which was filed by the Chicago-based snack company against the Zurich Insurance Group unit.

The New Jersey ruling “is making insurers go back and take a deeper look” at the war clause, said Rajeev Gupta, founder and chief product officer of cyber insurer Cowbell Cyber Inc. in Pleasanton, California. 

“It’s not a very persuasive opinion of great precedential value,” said Judy Selby, a partner with Kennedys Law LLP in New York. But, she added, the court adopted “a very static view of the relevant terms and the exclusions” and did not take into account “that things change over time” and that what is considered war is different now.

 “When you have a decision like this court’s and there’s so much money at stake, insurers are going to take a hard look at the decision” and consider its business impact, Ms. Selby said.

“I assume the carriers will be looking to introduce new exclusions going forward,” said Peter A. Halprin, a partner with Pasich LLP in New York.

Michael Dion, vice president and senior analyst with Moody’s Investors Service Inc. in New York, noted Merck & Co. v. Ace American Insurance Co. is a 2017 case, and the insurance industry has been working since then to eliminate silent cyber coverage.

“The policy language where we stand today is better defined and more limited,” and the insurance industry is “much better protected,” he said. 

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