The Approach of the Supreme Court of the Russian Federation

An insurer is not entitled to invoke Article 964 of the Russian Civil Code unless martial law has been declared. That was the position adopted by the Supreme Court a year ago in case No. A40-266406/2023.¹ There are several reasons why the approach of the Russian Supreme Court gives rise to serious doubts.

To begin with, Article 964 of the Russian Civil Code is drafted in notably broad terms: it is not confined to a formally declared state of martial law and extends to military operations of any kind. Furthermore, widespread experience has been gained worldwide in the application of clauses that either exclude or cover war risks. Established practice demonstrates that formal criteria (such as a declaration of war, martial law, and the like) are not decisive. Instead, the courts consider the circumstances by analysing several factors: the nature of the hostile acts, the weapons used, the nature of the forces engaged in the clashes, and the causes and objectives of the confrontation. By applying the listed criteria, military action (regardless of whether war has been declared) can be distinguished from an isolated terrorist act and other incidents. Consequently, this may prove pivotal in ensuring the correct application of specific clauses or statutory rules relating to war-risk insurance.

Unfortunately, in case No. A40-266406/2023, the Supreme Court relied on a single formal criterion rather than undertaking any detailed analysis, and the lower courts have since widely followed the same approach.²

At the same time, a further noteworthy trend comes to light, though it is implied rather than expressly articulated. The Supreme Court of the Russian Federation places particular emphasis on the internal coherence of insurance policy terms, which must clearly accord with the policyholder’s reasonable expectations. Assuming that reading is correct, it would be possible to speak of a broader trend encompassing disputes over various aspects of insurance, such as war risks, gross negligence on the part of the policyholder,³ and even the question of how particular events are characterised under criminal law.⁴

What Measures to Take in Respect of War-Risk Insurance

As noted above, the recent shift in the practice of the Supreme Court of the Russian Federation towards insurance disputes may be driven by a commitment to ensuring that insurers adopt a more systematic and good-faith approach to drafting and negotiating insurance terms with policyholders, paying particular attention to complex and potentially disputed provisions of the insurance contract.

The Supreme Court of the Russian Federation is likewise critical of situations in which one document forming part of the insurance contract defines the insured risk broadly, while another defines it more narrowly; or where one clause states that a particular event is covered generally, yet another introduces exceptions to that general rule. The same adverse response is prompted by the following practice: words used to describe the subject matter of the contract or the insured risks retain their ordinary meaning in one place, but are given a special meaning elsewhere in the policy.

Within such a framework, it is entirely sensible that if the terms of an insurance contract allow the same event to be qualified either as covered or as excluded, the court will, guided by the principle of contra proferentem, rule in favour of the former.

Pursuing the hypothesis that the Supreme Court of the Russian Federation’s case law reflects a broader concern for internal consistency and for adherence to the policyholder’s reasonable expectations, one may assume that, in relation to war-risk insurance, this approach also encompasses Article 964 of the Russian Civil Code. For many years, that provision was scarcely applied in practice, and its effect may well have been far from obvious to policyholders.

In effect, Article 964 of the Russian Civil Code implies an exclusion from insurance cover by default. That is to say, the events listed in the provision (nuclear explosion, military action, civil war, and so forth) are excluded from any insurance contract under Russian law unless the policy expressly states otherwise. This does not prohibit war-risk insurance itself, of course. Its rationale is different: war risks and other “catastrophic” risks involve a fundamentally different and inherently difficult-to-assess level of exposure, and should therefore be insured separately. A policyholder seeking cover for such risks must make an appropriate agreement to that effect (whether separately from standard cover or by way of an endorsement to it), and the insurer’s assumption of that class of risk must be paid for by a separate premium. This interpretation follows not only from the wording of Article 964 of the Russian Civil Code, but is also consistent with international war-risk insurance practice.

Yet the judgments in the Lafid LLC case and in comparable disputes show that Russian courts approach the application of Article 964 of the Russian Civil Code somewhat differently. Where the exclusion of war risks may have come as a surprise to policyholders, the courts rely on a particular construction that narrows the provision’s originally broad reach to cases of “formally declared martial law.”

The merits of this approach can be contested on a number of grounds:⁵ on one side are arguments about the need to support domestic producers in difficult times and the impropriety of insurers’ playing fast and loose with inconsistent insurance terms. On the other are concerns about the inadmissibility of reading Article 964 of the Russian Civil Code in a manner that departs from its plain meaning, together with doubts as to the propriety of granting, in effect, consumer-level protection to policyholders who, by the nature of their business, are manifestly not consumers. Each side is also likely to invoke economic arguments as to why the recovery of insurance indemnity in such circumstances is either wholly impermissible or, alternatively, strongly warranted.

A constructive way forward may be for both parties to exercise greater care in drafting and agreeing insurance terms, particularly those concerning war risks. For policyholders, it has recently become clear that it is necessary not only to insure war risks separately, but also to undertake serious work to refine the relevant terms.

The emerging approach to the application of Article 964 of the Russian Civil Code does not preclude insurers from incorporating into policy terms provisions defining covered and excluded risks, subject to two conditions: (a) the provisions shall be specific and internally consistent; and (b) they must be expressly agreed with the policyholder, who has first been informed of the possibility of including or excluding different categories of risk and of the effect of that choice on the premium.

Pursuing the argument that exclusions from insurance cover must be specific, one may note that the Supreme Court of the Russian Federation’s latest case law casts doubt on the appropriateness of relying on the initiation of criminal proceedings under a particular article of the Criminal Code as a means of distinguishing covered risks from excluded ones. Practice shows that this method gives rise to a number of difficulties. The characterisation assigned to an event when criminal proceedings are commenced may be unpredictable for both policyholder and insurer. This is particularly relevant in disputes over war risks, where broadly similar events (damage to property resulting from shelling, the crash of aircraft, and the like) may be classified differently by investigative bodies.

Moreover, the constituent elements of a criminal offence plainly do not coincide with the circumstances relevant to a civil insurance dispute, yet courts do not always take that distinction into account. Insurers responsible for drafting standard policy conditions likewise do not always align criminal-law concepts carefully with the other private-law terms of the insurance contract. Finally, some cases reveal judicial hesitation arising from the fact that the legal characterisation adopted at the stage of opening a criminal case is merely provisional.⁶ References to particular articles of the Criminal Code in describing covered and excluded risks should therefore be made with the utmost caution. Recent case law may, perhaps, prompt insurers to devise other, more reliable means of distinguishing between those risks. ■

Notes