In Universal Cable Productions, LLC, et al. v. Atlantic Specialty Ins. Co., 929 F.3d 1143 (9th Cir. July 12, 2019), the United States Court of Appeals for the Ninth Circuit reversed the district court's entry of summary judgment in favor of Atlantic Specialty Insurance Company ("Atlantic") with respect to the application of war exclusions in a policy issued to Universal Cable Productions, LLC, and Northern Entertainment Productions, LLC (“Universal"). Universal had submitted a claim for loss related to the need to relocate its production of a television series known as “Dig” due to rocket attacks conducted by the group known as ("Hamas") which is affiliated with the Palestinian Authority located in the Gaza Strip adjacent to Israel.

In response to Universal's claim for loss due to the need to relocate its film production, Atlantic denied the claim based on the following war exclusions:

“1.        War, including undeclared or civil war; or

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 the governmental authority in hindering or defending against any of these. Such loss or damage is excluded regardless of any other cause or event contributed concurrently or in any sequence to the loss.

4.         Any weapon of war including atomic fission or radioactive force, whether in time of peace or war….”

In response to Atlantic's denial of coverage, Universal filed a lawsuit against Atlantic alleging claims for breach of contract and bad faith. Atlantic took the position the war exclusions barred coverage. Thereafter, Atlantic filed a motion for summary judgment arguing that based on the plain meaning of the exclusions, coverage is not afforded under its policy for the Universal loss. The district court agreed and entered summary judgment in favor of Atlantic, holding that the plain meaning of the war exclusions applied, such that coverage was not afforded under the Atlantic policy for the Universal claim. The district court rejected Universal's argument that the exclusions should be interpreted based on California Civil Code Section 1644 which states that terms in an insurance policy are "understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed."

In reversing the district court's entry of summary judgment, the Court of Appeals held that the district court should have applied the specialized meaning for “war” and “warlike” action based on customary usage of these terms in the insurance industry, as opposed to the plain meaning of such terms. The Court of Appeals stated as follows:

“We note that Section 1644’s requirement that courts apply customary usage is cabined by a few requirements. Generally, a party asking a court to apply customary usage would be engaged in the relevant trade – here, the insurance trade. See Restatement (Second) of Contracts Section 222 (3) (stating that “unless otherwise agreed, a usage of trade in the vocation or trade in which the parties are engaged or a usage of trade of which they know or have reason to know gives meaning to or supplements or qualifies their agreement” (emphasis added)). Although Universal is not in the insurance trade, it is a sophisticated party that frequently engages in business related to the insurance trade. Moreover, it is represented by a broker – who is Universal’s agent – in the insurance trade.

If any party is not engaged in the trade, the party offering customary usage must show the parties had actual or constructive notice of the customary usage. See id. Section 220(1) (stating that “[a]n agreement is interpreted in accordance with a relevant usage if each party new or had reason to know of the usage and neither party knew or had reason to know that the meaning attached by the other was inconsistent with the usage”). Here, Universal has met that burden. As discussed below, Universal provide unrebutted expert evidence demonstrating the customary usage of “war” and “warlike action by a military force” in the insurance context. Caselaw and insurance treaties buttress Universal’s argument that ordinary, popular meanings of these terms do not control in this context. Moreover, as Universal notes, Atlantic’s own denial letter stated that “Appleman on Insurance discusses exclusions for war, including the meaning of war and similar terms. “War is a “course of hostility” between “states or state-like entities.”’” And Universal’s expert noted that “if the policy does not contain a terrorism exclusion, there is a reasonable expectation that acts of terrorism by a known terrorist organization, regardless of however else they may be characterized, will be covered.” Universal stated that it reasonably expected the exclusionary clause would be interpreted according to customary usage, especially after the December 2013 emails about the policy’s coverage in Israel. At the least, both parties should have known the customary usage of “war” and “warlike action” in the insurance context.

Accordingly, we apply the customary usage of the terms in the insurance context here."

Based on the customary usage of the terms "war," and "warlike action by a military force," the Court of Appeals held that the meaning of such terms related to the existence of hostilities between de jure or de facto governments. Here, because the Hamas did not constitute a de facto government, the Court of Appeals held that the “war” and “warlike” exclusions in the Atlantic policy did not apply to bar coverage of Universal's claim. Because the district court's entry of judgment did not include exclusion three, the Court of Appeals declined to consider such exclusion connection with the parties’ dispute. As such, the Court of Appeals remanded the case back to the district court for consideration of whether the third exclusion for “insurrection, rebellion or revolution” applied to bar coverage of Universal's claim.

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