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In a recent decision, the United States District Court for the Southern District of New York, applying Colorado substantive law, ruled that a War Exclusion in a commercial general liability insurance policy (“CGL”) issued by Hartford Fire Insurance Company (“Hartford”) to Western Union Company and Western Union Financial Services (together, “Western Union”) barred coverage for an underlying lawsuit claiming that Western Union and other financial institutions provided financial support to the Donetsk People’s Republic (the “DPR”), a Russian-backed separatist group in eastern Ukraine. Hartford Fire Ins. Co. v. W. Union Co., No. 22-CV-0557 (JMF), 2022 WL 4386836, at *3-5 (S.D.N.Y. Sept. 22, 2022).
THE FACTS
A. Background and the underlying action
The DPR is a self-proclaimed state in eastern Ukraine that is backed by Russia. In July 2014, DPR forces fired a surface-to-air missile at Malaysia Airlines Flight 17 (“MH17”), killing 283 passengers, including 18-year-old Quinn Lucas Schansman, and 15 crew members. Mr. Schansman’s estate and family members subsequently filed a lawsuit, styled Schansman v. Sberbank of Russia PJSC, et al., No. 1:19-cv-02985, in the United States District Court for the Southern District of New York, against Western Union and other financial institutions, alleging that they provided “material support and funding” to the DPR (the “Underlying Action”).
B. The coverage litigation
Western Union tendered the Underlying Action to Hartford, which denied coverage on various grounds, including under the Policy’s War Exclusion. That exclusion stated:
This insurance does not apply to: […]
i. War
“Bodily injury” or “property damage,” however caused,
arising, directly or indirectly, out of:
(1) War, including undeclared or civil war;
(2) Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign or other authority using military personnel or other agents; or
(3) Insurrection, rebellion, revolution, usurped power, or action taken by governmental authority in hindering or defending against any of these.
After advising Western Union that it was denying coverage, Hartford filed suit, seeking a declaration that Hartford owed neither a duty to defend nor a duty to indemnify Western Union in the Underlying Action. Western Union asserted counterclaims for breach of contract and bad faith denial of coverage, alleging that Hartford breached its duty to defend. Western Union filed a motion for partial judgment on the pleadings, and Hartford filed a cross-motion for judgment on the pleadings as well as a motion to dismiss Western Union’s counterclaims.
THE DECISION
On September 22, 2022, the court denied Western Union’s motion for partial judgment on the pleadings, and granted Hartford’s two motions, finding that under Colorado law, Hartford had no duty to defend or indemnify. Hartford Fire Ins. Co., 2022 WL 4386836, at *1-6. Notably, the court’s conclusion was based in part on the court’s determination that the War Exclusion precluded coverage. Id. at *3-5.
In evaluating the potential applicability of the War Exclusion, the court began by noting that, “[p]er the plain language of the Exclusion, each prong [was] independent.” Id. at *3. “Thus, the War Exclusion applie[d] if Schansman’s death arose, directly or indirectly, out of ‘war,’ ‘warlike action,’ or ‘insurrection, rebellion, revolution, or usurped power.” Id. (internal alterations omitted) (emphasis in original).
The court then determined that “there [was] no need to decide whether the [Underlying Action fell] . . . within the scope of the exclusion for ‘war’ and ‘warlike action’ because” the Underlying Action fell “squarely within the exclusion for ‘insurrection.’” Id. The court explained that “Colorado courts [had] not addressed the meaning of the term ‘insurrection’ in the insurance context, but several federal courts of appeals [had] done so.” Id. (citing Home Ins. Co. of New York v. Davila, 212 F.2d 731, 736 (1st Cir. 1954); Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989, 1017-19 (2d Cir. 1974); Younis Bros. & Co. v. CIGNA Worldwide Ins. Co., 91 F.3d 13, 14 (3d Cir. 1996)). The court added:
As the Second Circuit explained in Pan Am, “‘[i]nsurrection,’ ... ‘rebellion,’ ‘revolution,’ and ‘civil war’ are progressive stages in the development of civil unrest, the most rudimentary form of which is ‘insurrection.’” 505 F.2d at 1017. More specifically, the term means “(1) a violent uprising by a group or movement (2) acting for the specific purpose of overthrowing the constituted government and seizing its powers.” Id. at 1017; see id. at 1005 (“[F]or there to be an ‘insurrection’ there must be an intent to overthrow a lawfully constituted regime....”). Notably, to qualify as insurrection, “the revolutionary purpose need not be objectively reasonable. Any intent to overthrow, no matter how quixotic, is sufficient.” Id. at 1018.
Id. (footnote omitted).
The court concluded that the foregoing definition of “insurrection” “plainly encompasse[d] the DPR’s downing of MH17 ‘by a surface-to-air missile launched from territory [it] controlled.’” Id. The court reasoned:
Among other things, the Schansman Complaint alleges that the DPR “seek[s] to ... creat[e] a proto-state, Novorossiya, through the control of territory in Ukraine acquired through acts of intimidation and coercion.” . . . The DPR, it continues, grew out of “demonstrations by pro-Russian and anti-Ukrainian government groups,” which eventually led to the “occup[ation] [of] the Donetsk regional legislative building” by “the founder of the so-called ‘People's Militia of Donbass,’ who demanded that he be made the head of Donetsk’s regional government [and] thereafter proclaimed himself the ‘governor’ of the DPR.” . . . To drive the point home, the Schansman Complaint explicitly states that the DPR is “unambiguous about [its] intent: to ... undermin[e] the Government of Ukraine ... [and] increas[e] the Russian Federation's control over territory in eastern Ukraine.” . . . In short, as alleged, the DPR was in the midst of a “violent uprising” to “overthrow[ ] the constituted government” — in other words, an insurrection — in eastern Ukraine when it shot down MH17. . . . It follows that Schansman’s death arose out of an “insurrection,” see, e.g., Northern Ins. Co. v. Ekstrom, 784 P.2d 320, 323 (Colo. 1989) (defining “‘arising out of’ to mean ‘originat[ing] from,’ ‘grow[ing] out of,’ or ‘flow[ing] from’”), and the War Exclusion applies.
Id. (record citations omitted).
The court then addressed Western Union’s argument that the exclusion was inapplicable because allegations in the underlying complaint did not “foreclose the possibility” that the “DPR also may have been acting out of other motivations, including to: ‘intimidate[e] and coerc[e] civilians’; ‘influence the Ukrainian government and other governments seeking to contain Russian aggression’; ‘profit,’ specifically by stealing the personal belongings of its terror victims; and ‘affect government policy and intimidate[ ] citizens around the world.’” Id. at *4 (internal alterations omitted) (emphasis in original). The court rejected that contention, noting that the “other motivations” cited by Western Union were “not inconsistent with insurrection.” Id. The court further stated:
[I]in any event, it does not matter if the DPR had additional motivations for its surface-to-air missile attack on MH17 beyond its desire to overthrow the Ukrainian government and establish a pro-Russia state. As the First Circuit explained in [Home Ins. Co. of New York v. Davila, 212 F.2d 731 (1st Cir. 1954)], an “insurrection” may exist even if a group’s “objective” is to create “a series of ... ‘civil commotions,’ ” to cause “embarrass[ment]” to the constituted government, or to spread “propaganda,” so long as it “had also in mind the maximum objective” of overthrowing the government. 212 F.2d at 738 (emphasis added).
Id.
Finally, the court explained that Holiday Inns Inc. v. Aetna Insurance Co., 571 F. Supp. 1460 (S.D.N.Y. 1983)[1] “d[id] not call for a different conclusion.” Id. The court elaborated that, in contrast to the Holiday Inns court’s findings regarding the forces at issue in that case, the allegations in the underlying complaint “plainly allege[d] that the DPR was an identifiable group or movement and that it had the ‘requisite intent to overthrow the established government of Ukraine and assume at least de facto governmental control itself.’” Id. (internal alterations and citation omitted). For those reasons, the court held that Hartford had no duty defend, and therefore, no duty to indemnify. Id. at *5.
Western Union has appealed the ruling to the Second Circuit Court of Appeals. We will continue to monitor this case and report on developments.
[1] Holiday Inns Inc. v. Aetna Insurance Co. was a declaratory judgment case concerning whether a war exclusion in an all-risks property insurance policy—which barred coverage for “loss or damage” that was “either in origin or extent . . . directly or indirectly, proximately or remotely, occasioned by or contributed to by . . . or, either in origin or extent, directly or indirectly, proximately or remotely, [arose] out of or in connection with . . . insurrection”—precluded coverage for the destruction of the insureds’ hotel in Beirut, Lebanon during fighting between armed forces in the city in 1975 and 1976. 571 F. Supp. at 1463, 1487-93. The United States District Court for the Southern District of New York held that the war exclusion did not apply because, among other things, the evidence did not support a finding that the destruction of the insureds’ hotel was the result of an “insurrection.” Id. at 1487-93. In arriving at that conclusion, the court, following Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989 (2d Cir. 1974), noted that “the test for insurrection [was] two-pronged: was there an identifiable ‘group or movement’; and, if so, did that group or movement have the requisite intent to overthrow the established government and assume at least de facto governmental control itself?” Holiday Inns, 571 F. Supp. at 1487-88. The court then determined both that the forces at issue were not an identifiable group or movement, and that the forces did not act with insurrectionary intent. See id. at 1488-91. Consesquently, the exclusion for “insurrection” did not apply. Id. at 1493.
Insurance and reinsurance
United States