What’s happening in Ukraine right now is unspeakably tragic. Obviously, the safety of the citizenry there is of paramount importance. What’s of lesser concern, but still consequential, is how the conflict will play out for years to come domestically. Now that businesses ranging from oil companies to Netflix are pulling out of Russia, these companies will probably soon turn to insurers to recoup their losses. That may mean that American courts will become the forum for parsing the meaning of, and decisions emanating from, Russia v. Ukraine. After all, the excommunication of Russia from the global economy will cost hundreds of billions of dollars. When McDonald’s paused its operations there, it was turning its cheek on a market that accounted for nine percent of its revenue. When Warner Bros. pulled The Batman from theaters in the country, it was forgoing the fourth-largest movie market in the world, responsible for 90 million tickets sold two years ago.
Someone’s footing the bill, and the specifics of insurance coverage could mean the difference between hitting financial targets and explaining hard global truths to investors. What’s more, in some sectors, the availability of insurance informs the willingness of financial institutions to lend on the front end for new projects. The insurance industry tries to keep on top of risk on a going-forward basis, but that doesn’t happen without a reckoning of what previously went wrong.
Probably the first big question when looking at the current Russian situation: Is it war? Most insurance policies for business interruption have an exclusion for war. And so, while they’ll hardly be like Vladimir Putin—still lying to his people that the Russian army is being warmly greeted as liberators in a limited military event—insured companies will likely resist that characterization, too.
Semantics can be consequential when it comes to insurance. Not too long ago, NBCUniversal fought in court against Atlantic Speciality Insurance Company for five years after rockets attributed to Hamas were launched into Israel, causing the production of USA Network’s mystery series Dig, starring Jason Isaacs, to shut down. Was that war? Or was it terrorism? Military experts were consulted. The State Department’s guidance was sought. Comparisons to 9/11 were made. The trial judge ruled it was war, but the 9th Circuit Court of Appeals disagreed, saying that Hamas was the “proximate cause” for the relocation, not anything that Israel did.
Expect similar courtroom skirmishes to occur in the aftermath of this Russian invasion, no matter the outcome (unless, God forbid, global thermonuclear war breaks out). There’s just too much at stake financially with every new day bringing news of yet more companies distancing themselves from Putin’s country. Starbucks, Kentucky Fried Chicken, Ford, Disney, Nintendo, Prada… the list goes on and on. (Yes, there’s a list, courtesy of Yale School of Management.) Even international law firms like Freshfields and Linklaters say they now won’t represent those with Russian ties.
While the exact language of the insurance policies will matter above all else—some specifically cover “political risk” while others address interruptions to global trading—the insured will likely press one huge point in attempts to avoid a war exclusion. “The war isn’t in Russia; it’s in Ukraine,” noted Joseph Balice, a partner at BG Law who specializes in fighting insurers. “In terms of a causal relationship between event and loss, there’s a bit of attenuation. It’s going to be interesting to watch this from an insurance perspective.”
For example, what caused Netflix to halt work on Anna K, a contemporary retelling of Tolstoy’s Anna Karenina being filmed in Moscow and St. Petersburg? It’s not quite the firing of ammunition, right? Nobody on set is literally fleeing gunfire. Netflix’s decision resulted from broader geopolitical and financial concerns.
Fighting insurers requires walking a tightrope of legal arguments. If exiting Russia is just about protecting the Netflix brand (and others) from the moral outrage of doing business in the country, that will be framed by insurers as a choice that’s admirable but doesn’t necessarily trigger coverage. Then again, if the collapse of the ruble and pressures on the Russian banking system have made doing any financial transaction in the country an inevitable impossibility, that would likely be presented by the insured as a necessity.
“We had to make the decision [to exit Russian production] given it’s just a complex operating dynamic right now between increasing sanctions, challenges with payment issues and overlaying what’s already a pretty complex regulatory market,” explained Netflix C.F.O. Spence Neumann at an investor conference hosted by Morgan Stanley on Tuesday. Neumann said Russia represented less than one percent of the streamer’s revenues and added, “It just became too difficult to operate relative to the opportunity, and then there’s obviously the moral and other overlay.”
Expect the insured to lean heavily on what the U.S. government has been advising. “If you look at this through the lens of live events, many event organizers along with production companies and sporting teams purchase event cancellation insurance that oftentimes affords broader levels of coverage for political violence,” said John Tomlinson, an insurance broker at Lockton Companies. “I suspect the State Department’s recent directive for U.S. citizens to immediately evacuate Russia would constitute a qualifying circumstance for triggering coverage.”
Yes, all this almost certainly will make it to court, say insiders. “Tendering a claim costs nothing,” Balice told me. “You already paid the premium. Sure, there will be a certain percentage of those who don’t fight back against their insurers, but I think we’ll see, just like Covid, tons of [insurance] cases here, lots of rulings, and quite a bit of literature eventually coming out.”
Covid has triggered thousands of lawsuits around the country, including from entertainment giants such as Disney, ViacomCBS, and Live Nation. Each of those companies fought insurers for tens of millions of dollars, and while some cases have settled, others are still raging and figure to drag on for quite some time. In fact, it wasn’t until 2018 that the last of the insurance lawsuits over the Sept. 11, 2001 attack in New York concluded.
The forthcoming legal discussion of how companies like PepsiCo, Netflix, and Apple have exited Russia figures to be important beyond just reimbursement of losses. After all, Russia isn’t the only authoritative political regime in the world. Have actions against the Kremlin set some sort of new corporate standard going forward? How will the economic risks of global instability now be mitigated for those doing business around the world? As the insurance industry focuses on separating moral discretion from financial imperative, it’ll be critical to watch how decisions from executive suites these past few weeks get framed.
