In the aftermath of the terrorist attack on the World Trade Center (“WTC”), people and businesses have begun to consider, not only the human tragedy, but the profound impact the bombing has had, and will continue to have, on industry. The Twin Towers, comprising over 200 floors and 10 million square feet of space, housed over 430 businesses from 28 countries. Outside the immediate WTC complex, scores of other businesses housed in buildings damaged by falling airborne debris and the ultimate collapse of the Towers, have sustained, in many instances, catastrophic losses. And, independent of the physical damage, losses resulting from business interruption continue to mount. Unquestionably, the damages sustained will be in the billions of dollars.

Despite the comfort insurance may provide to the many businesses formerly housed in, and surrounding, the WTC, many prominent political officials, including the President of the United States, have designated the bombing as “an act of war.” Once characterized as an act of war, the bombing assumes an altogether different dimension in the eyes of insurance company executives throughout the country. Acts of war and warlike operations are definitively excluded from most (if not all) all-risk, multi-peril policies. And, as discussed infra, at least one State Supreme Court has held that the President’s proclamation on this subject carries considerable weight in determining the applicability of the “act of war” exclusion.

Nonetheless, insurance carriers would be well advised, not only from a business perspective, but from a litigation posture as well, to provide full coverage under the all-risk policies they issued. As discussed below, neither the President’s statements nor the aggressive nature of the acts which resulted in the losses constitute a basis for disclaiming coverage.

I. General Principles of All-Risk Policies
To recover under an all-risk policy, an insured need only establish the existence of the policy and a “fortuitous” loss to covered property. The insured is not required to prove that the cause of the loss falls within specific provisions of the policy. Indeed, the underlying purpose of obtaining "all-risk coverage" is to protect the insured against unexplained losses.

"To avoid liability, the insurer must show that the claimed loss is excluded from coverage;" in this regard, the insurer bears the burden of establishing the existence and applicability of an exclusion. The exclusion must be couched in clear, unmistakable language and subject to no other reasonable interpretation. Indeed, the carrier must prove, not only that its construction of the exclusion is reasonable, but that "the only reasonable interpretation of the facts leads to the conclusion that the loss fell within the policy exclusion." Where the insurer is unable to demonstrate the applicability of a clearly-worded exclusion, the insured is entitled to judgment on the issue of coverage.

The principle of law requiring coverage in the absence of an unambiguous and clearly applicable exclusion established by the carrier is known as the “rule of construction contra proferentem.” The contra proferentem principle “‘defines the scope of coverage as much as if it were a clause in all-risk policies’; experienced all-risk insurers must expect ‘the exclusions drafted by them to be construed narrowly against them.’”

II. The “Acts of War” Exclusion
As noted previously, virtually all multi-peril and all-risk policies contain an exclusion for war and warlike operations. Historically, the courts have differed in their construction of these exclusions. The Massachusetts Supreme Court in Stankus v. New York Life Ins. Co. ruled that an exclusion for war and warlike operations constituted a full defense against claims arising from losses sustained by Americans during an attack by a German U-Boat in October 1941, two months before our formal declaration of war against the Axis Powers. The Court in Stankus explained that, irrespective of a formal declaration by Congress, the President’s proclamation that war existed, coupled with the subsequent bombing of Pearl Harbor and open hostilities between the governments of the United Kingdom, Germany and Italy, warranted a finding that there was a “war” and that, as such, losses sustained during a torpedo attack were excluded. Similarly, the Tenth Circuit in New York Life Ins. Co. v. Bennion, applying Virginia Law, ruled that an exclusion for “war or any act incident thereto” entitled a carrier to avoid liability for losses sustained during the attack on Pearl Harbor. The Tenth Circuit reasoned that, though there was no formal declaration of war at the time, the attack “marked the commencement of an armed conflict between two sovereign nations” and thus constituted “war” within the meaning of the exclusion.

By contrast, in 1945, the Supreme Court of the then-territory of Hawaii ruled in Pang v. Sun Life Assur. Co. of Canada that the war against Japan did not begin until formally and constitutionally declared by the United States Congress. The Supreme Court of Idaho, also in the context of losses sustained during the Pearl Harbor attack, reached the identical conclusion in Rosenau v. Idaho Mut. Benefit Ass’n. In both cases, the Courts relied on the cardinal rule of construction of insurance policies that ambiguities drawn by the carrier are strictly construed against it. And, since “war” could mean either a formally “declared war” or a war in a more figurative sense, the courts were bound to apply the interpretation that most favored insureds.

Over the ensuing years, the courts were unable to reconcile their interpretation of the “acts of war” exclusion. Owing to the ambiguous political character of the Korean and Vietnam Conflicts, the courts alternately ruled that the exclusion applied, finding in many instances that such constituted “wars,” and still, in other cases, determining that the exclusion did not apply in the absence of a formal declaration by Congress. The divergent opinions and holdings of the courts on the meaning of the “acts of war” exclusion led one commentator to conclude that the cases were “in irreconcilable conflict.”

III. The “Acts of War” and “Warlike Operations” Exclusions as Such Relate to Hijackings and Other Terrorist Acts

With respect to acts of terrorism, the courts have been decidedly more uniform in their interpretation of the “acts of war” exclusion. Whether the terrorist group is part of a greater network of operatives or a singular guerilla unit, the courts have consistently held that a “war” within the meaning of an “act of war” exclusion can only exist as between two sovereign or quasi-sovereign governmental entities.

Similarly, the courts have been in agreement that “warlike operations” cannot be deemed to have been carried out in the absence of hostilities between two or more participating sovereign entities; warlike operations pertain solely to those instances in which two countries engage in military action, though in the absence of a declared war or conflict.

Viewed through the lens of existing precedent, as such relates specifically to terrorism, the pronouncements by President Bush, Senators John Kerry and John McCain, and countless other political figures - - - that the bombing of the WTC constituted an act of war - - - have little practical significance to the insurance claims filed in connection with the bombing of the WTC. In the absence of direct involvement by a sovereign state, the exclusions for war and warlike operations are irrelevant.

Moreover, the fact that the attacks on the WTC may have been financed by other countries, such as Afghanistan for example, is similarly irrelevant. It has long been established that it is of no moment that the terrorist group in question may have been financed by sovereign states. Without direct military participation of sovereign nations, the attacks on the WTC cannot be deemed to constitute acts of war or warlike operations.

The facts of the 1973 Pan Am case are eerily similar to those presented by the current situation and bear emphasis here. In Pan Am, just as with the WTC, a terrorist group arranged to hijack four commercial air flights over a short period of time, with three of the attacks being successful. The terrorist group involved in the Pan Am case, the Popular Front for the Liberation of Palestine (“PFPL”), like the group suspected of terrorism here (Al Qaeda), was loosely identified with terrorist cells opposed to the state of Israel and American foreign policy associated therewith, but did not enjoy any international recognition as a nation-state; nor was the PFPL even recognized as an affiliate of more well-known organizations at the time such as the PLO.

The insurers in Pan Am argued, notwithstanding the foregoing, that the “acts of war” and “warlike operations” exclusions warranted denial of the claim. The Second Circuit rejected those arguments, concluding that terrorist acts, against civilians, by operatives of a political organization or guerilla group, cannot be characterized as “acts of war” or “warlike operations” within the meaning of all-risk insurance policies. Given the similarities between the facts of Pan Am and those presented by the WTC tragedy, it is particularly unlikely that any challenge to coverage by the insurers would be successful.

V. Conclusion

The bombing of the WTC is a national tragedy, having resulted in the loss of (apparently) thousands of Americans. The designation by political luminaries of this terrorist attack as an “act of war” could well have suggested to insurance carriers that the prospect existed for successful avoidance of their obligations under the policies they issued to businesses housed in the WTC and the surrounding buildings. The case law confirms otherwise; well-established precedent demonstrates rather conclusively that, irrespective of the characterizations by our government officials, the bombing of the WTC is a covered loss, requiring the insurance industry to pay claims accordingly, without regard to any exclusion.