What is 'War Risk'

War risk is the probability of loss of, or damage to, cargo, vessels and/or passengers from war. Specifically, war risks include derelict torpedoes, floating mines and events such as armed rebellion, revolution, hostilities and civil unrest. War risks are usually excluded from standard insurance policies and must be specifically added with additional premiums through a separate policy.

BREAKING DOWN 'War Risk'

War risk includes:

1. The possibility that an investment will lose value because of a major, violent political upheaval. War generates uncertainty in the financial markets and causes many investors to panic and sell, which leads to a decline in prices.

2. The possibility that an individual or company will experience a major financial loss related to the destruction of property caused by a major, violent political upheaval.

War risk falls under the broader category of political risk, which is one of several types of risk investors face. Others, to name just a few, include liquidity risk (the possibility of being unable to sell), currency risk (the possibility of an investment losing money because of a change in exchange rates) and capital risk (the possibility of losing the principal invested).

War risks like terrorism, insurrection, military coup and other events can create significant losses for personal and business property owners. Standard insurance policies do not always cover acts of war; in some cases, it may be necessary to purchase separate war risk insurance.

War Risk Insurance

War risk insurance can be purchased separately, as it is not included in most standard insurance policies. An investor may consider purchasing war risk insurance if making investments in politically unstable areas.

War risk insurance covers damage due to acts of war, including invasion, insurrection, rebellion and hijacking. It is most commonly purchased by businesses in the shipping and aviation industries. War risk insurance generally has two components: war risk liability, which covers people and items inside a craft; and war risk hull, which covers the craft itself and is calculated based on its value.

Private war risk insurance policies for aircraft were temporarily canceled following the Sept. 11, 2001, attacks. They were later reinstated with substantially lower indemnities. In the wake of this cancellation, the U.S. government set up a terror insurance program to cover commercial airlines. The International Air Transport Association has argued that airlines operating in states that do not provide war risk insurance are at a competitive disadvantage in this area.

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