George W Bush's emotive statement to the American people that “we are at war” has left the insurance industry with a potential legal nightmare. Though it is still too early to apportion blame, war risk insurers fear the decision will go against them and an avalanche of claims will fall at their feet.

Head of advocacy at law firm Linklaters, Mark Humphries, said: “Not all the facts have been uncovered as to whether this is regarded as a war risk or not. But I am aware that syndicates at Lloyd's are working on the assumption it is going to be declared a war risk.”

So analysts predict the London Market will take the brunt of the claims, but these will be paid quickly by war syndicates, due to capacity fears.

Humphries said: “If this is correct, it is one of those occasions when the market believes it should accept the claims, otherwise it may end the war market for good. The issue is reputation and, though I am not aware of all the financial aspects involved, this would definitely have a long-term effect on syndicates finding capacity.”

Risky area
The London War Risks Committee has already designated a substantial portion of the Middle East a war risk area. Speaking at the International Union of Marine Underwriters' annual conference in Genoa, John Moloney, a representative of the Lloyd's Underwriters' Association, said the committee was set to amend hull warranty risks for the whole of the Middle East region 24 degrees north. This includes the Arabian Gulf, Oman, Yemen, Pakistan, The Red Sea, Egypt, Syria and Algeria. Any ships travelling into these areas will have to notify their underwriters before doing so.

According to aviation lawyer at London's Essex Court Chambers, David Joseph, the wording of Lloyd's US policy forms for hull and liability (the AVN1C) have exclusions for war and war-like operations, but not for terrorism.

“Depending on the form that was taken out, there could be a difference between whether this was classified as war or terrorism. Obviously insurers would be arguing that this was war and therefore excluded, in which case the liability would fall on the all-risks insurers who would pick up the bill,” said Joseph.

The legal semantics of this case will be unique, as the politicians' rhetoric keeps jumping from outright war to a more contained war on terrorism. However, unless the tragic events at the World Trade Centre kick-started an all-out declaration of war, then the politician's posturing holds no sway in either US or UK courts.

Wide-reaching investigation
The majority of US policies exclude war, not terrorism, but according to rating agency AM Best, the estimated $30bn (£20.4bn) bill for aviation, property, liability and workers compensation will be regarded as a war risk.

Philip Reed, partner at Norton Rose and aviation litigator, said: “If this is litigated, then it will be one of the most unusual investigations ever to take place – it is such a vague area. The tiny bits of investigation will embroil many other insurers.”

What has to be ascertained is whether the attacks were state-funded or if the hijackers used private funds of a terrorist group, such as Osama bin Laden's organisation, al-Qaida.

Reed said: “What has never been explored before is what the impact is of state-sponsored terrorism. Does this have the attributes of war and war-like operations? No one has really explored the context of state-sponsored acts and how would these be construed.”

Lloyd's spokesman Adrian Beeby, however, said the situation was too complex to make any generalisations at this time.

“Whether it is war or terrorism will come down to what really happened, what the policy said, what exclusions were in that policy, what the underwriter decides and then what the lawyer decides. We know the aviation policies in this case were covered against terrorism. The hull claims of $130m (£88.6m) for the four planes will be paid quickly. We also know that, although the US property policies excluded terrorism, terrorism was rewritten back into the policy at a later stage.”