Why Is War Excluded From Renters Insurance?

Many people read their renters insurance policies from cover to cover. This is, of course, a best practice because it lets you understand exactly what’s covered and just as importantly, what’s not. Inevitably, someone who has read the policy has questions about it, and that’s what drove this question from someone who has Lancaster, PA Renters Insurance.

Why is war excluded from renters insurance? Wouldn’t I want coverage if there were to be a war?

That’s a great question, and it helps to understand a little bit about the insurance industry in general in order to understand why a policy with war excluded is the norm for both personal and most commercial policies.

War Excluded Due To Market Capacity

Market capacity is the total amount of risk that the insurance market can absorb at a given point in time. We’ve written elsewhere on it, linked above, at length. In a nutshell, insurers have a certain amount of funds available to pay claims. They also have a certain amount of insurance against very large claims, which we’ve also discussed in an article asking what is reinsurance. This capacity indicates the maximum amount of risk that a given insurer, or the entire insurance market as a whole, can take on.

Underwriters are, of course, limited as to the risks they can accept based on the total amount of claims that they could pay were there to be a catastrophic loss of some sort. That prevents policyholders from being left in a bad position because an insurer took on more policies than it had claims reserves to handle. On the rare occasion that a small company writes significantly more business than their claims reserves would merit, states have a way to handle that.

The damage from war would be significant enough to disrupt a majority of the insurance market, meaning that those losses could not be handled. If the entire city of Lancaster, PA tried to make a claim at once for their entire policy limit due to war, there might well be a capacity problem. That’s a large part of why the coverage is excluded.

There’s an additional problem. As Munro points out, the World Trade Center was initially considered to be an act of war, and some insurers gave consideration to exercising their rights under the war exclusion. It took very little time for the insurance industry to determine that they were better off offering coverage. “Metropolitan Life quickly said it would pay $300 million in death benefits for [survivors of those who lost their lives] in the WTC attacks.” Chubb, Hartford, and many others went public with their decisions to pay claims wholesale.

Munro goes on to state that those companies honored claims because acts of war were excluded, but not terrorism; because case law was solid that acts of war meant “actions between sovereign nations”; and because failure to pay those claims would greatly change the way Americans perceived the insurance industry as a whole. Regardless of the decisions of the insurers to pay those claims, there remains that pesky additional problem:

Insurance companies depend on reinsurance, or policies that insure the company against significant losses. Would those reinsurance companies pay the losses? And if not, how would claims be paid? Against whom could they subrogate, or attempt to recoup losses from the person or persons responsible?

There’s more that goes into a decision to pay claims or to stand behind an exclusion than just good faith, of course. Good faith is how the contract was signed with the policyholder. Insurers are never obligated to stand behind an exclusion, though they do so as a matter of course because the exclusions are there to protect not only the insurer, but the entire system. It’s worth noting that the commercial exposure is measured in the tens of billions of dollars, and the personal life exposure, over time, may well reach similar numbers.

Had reinsurance payments not been available, paying those claims could have done to the insurance industry what the subprime crisis did to the banking industry. Extrapolate from that loss to a larger campaign of war against even a single US city, and you can see immediately why war risk is excluded from policies. Rand estimates the initial loss from a small nuclear bomb groundburst in a major city to be well in excess of a trillion dollars. That is in excess of one-quarter of the entire 2016 federal budget. No entity except the government, then, could reasonably be able to absorb such a loss, hence the war exclusion.

War Exclusion Not Concerning To Most Policyholders

Most people with renters insurance policies are not terribly concerned about the war exclusion, they ask the question because they’re curious and want to understand their policy. While the United States has been involved in a number of conflicts over the years, war damage on American soil have not happened in a very long time. The risk from war damage is non-zero, like all risk, but certainly approaching zero.

If War Is Excluded From Insurance, How Would People Rebuild?

If there were to be damage from a war, chances are strong that federal and state programs would materialize to mitigate that damage. Those entities are well-equipped to deal with such things, and sometimes the public sector provides better answers than the private sector to certain kinds of damages.

Damage from war or acts of war is not a serious concern for personal lines policyholders, and that is not a risk that the insurance industry was ever intended to cover.

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