Mexico - From Cartel Retaliation to Policy Response: Navigating Coverage After Violent Rampage

Members of the Cartel Jalisco Nueva Generación (CJNG) went on a violent rampage after the Mexican army killed cartel boss Nemesio “El Mencho” Oseguera, setting fire to cars, malls, and convenience stores, and blocking roads by throwing spikes and nails onto the tarmac.

It is expected that attacks will continue over the coming months as the cartel undergoes a restructuring process, during which regional leaders of the CJNG may seek to take control of the organisation’s operations.

Coverage for vandalism and malicious damage may be found under different types of products, ranging from standard property policies — either under All Risks cover or as an “add-on” or carve-back to Terrorism and Political Violence Insurance (T&PVI) — to other standalone covers such as SRCC (Strikes, Riots and Civil Commotion) or Organised Crime policies.

Under All Risks policies, coverage for the above perils is, in most cases, capped by a sub-limit. However, if the policy is silent, coverage for these perils may extend up to the full policy limit. A failure to exclude the relevant perils generally means that coverage is afforded.

In most instances, All Risks policies contain terrorism exclusions. These exclusions may have the effect of removing cover for events that may not obviously be regarded as terrorism. The focus of this note is their potential application to the recent disturbances following the death of El Mencho.

The application of terrorism exclusions is not without difficulty. The fact that a government (or other recognised authority) states that certain individuals are terrorists or are committing acts of terrorism — for example, the designation of the CJNG as a Foreign Terrorist Organization by the US Department of State — does not necessarily mean that this will be determinative from a policy coverage perspective.

Policies may define “terrorism” or an “act of terror”, either expressly or by reference to a statutory definition or the determination of an organisation. Where the policy contains a definition, there is often no need to look further. However, the term is sometimes left undefined. In addition, there is a risk of mismatch between the insurance and the reinsurance.

In our experience, the most common terrorism exclusions used for Latin American risks (including Mexico) are NMA 2918,  NMA 2919, NMA 2920, and NMA 2921. These exclusions were developed following the events of 9/11. Their purpose was to provide broader exclusions than those previously available, encompassing any terrorism-related losses.

The wording of these exclusions is sufficiently wide that an argument may be made that they apply to at least some of the recent events. For example, an “act of terrorism” is not limited to the use of force or violence but includes the threat of force or violence. The definition of the perpetrator has also been broadened: whereas it was previously limited to organisations, it now includes individuals acting alone (so-called “lone-wolf” terrorists).

The motivation required to trigger the exclusion has similarly been broadened. It has evolved from political, ideological, or religious purposes to include “similar” purposes and is no longer limited by a requirement to demonstrate an intention to influence the government or to put a section of the public in fear.

These exclusions also contain broader causation language, referring to “direct or indirect” causes. Accordingly, the “act of terrorism” need not be the proximate cause of the loss; it may be a more remote cause.

Nevertheless, if (re)insurers are seeking to rely on these terrorism exclusions, in our experience, they will face the following practical issues:

Reverse burden of proof

Terrorism exclusions often contain “reverse burden of proof” provisions. This means that if (re)insurers can demonstrate a reasonable basis for asserting that a terrorism or political violence exclusion is triggered, the burden shifts to the insured to prove that the exclusion does not apply.

In our experience, however, regardless of the wording of the exclusion, courts in Latin America are unlikely to shift the burden of proof onto the insured.

Intention (Political, Ideological and/or Religious vs Economic Interest)

Establishing intention can be particularly challenging.

In civil unrest or riot scenarios, in most instances, you will not have the relevant people getting arrested and declaring the reason why they have done what they did. On this occasion, some perpetrators have been arrested, and authorities in certain states have indicated that they will face terrorism-related charges.

However, based on the videos available to date, the perpetrators have not made statements or left evidence clearly demonstrating that the attacks were directly connected to the death of El Mencho, even if "everyone" know that the death of the cartel boss was the cause of those attacks.

Although proving the intention of specific individuals or groups vandalising insured property may be difficult, due to the nature of the crimes, there appear to be grounds to argue that there was an intention to influence the government or put a section of the public in fear with the apparent purpose of preventing the government prosecuting any member of the cartel and allowing them to continue with their criminal operations.

Overlapping policies

It is possible that perils covered under All Risks policies may also be covered elsewhere, such as under Political Violence Insurance (PVI) or Organised Crime policies. In such cases, it is necessary to consider whether the respective policies contain contribution clauses. If the All Risks policy includes a primary insurance clause, it may override principles of contribution and effectively allocate the loss to the All Risks policy.

Evidence

Given the nature of the events, there is plenty of evidence of malicious damage and vandalism. However, proving intention to trigger an exclusion or to trigger coverage on a standalone coverage will be challenging.

Number of events

Events of this nature are often fluid and diverse. While the initial trigger for the violent rampage may be identifiable, subsequent actions may evolve over time. It may be difficult to establish that an act of vandalism occurring, for example, six months from now remains connected to the death of El Mencho.

This may affect whether losses arising from particular criminal acts fall within policy coverage.

Moreover, different perils may be triggered simultaneously in different locations. For example, looting following a fire may be covered under certain wordings, whereas looting not preceded by fire may be excluded.

These are only some of the issues that may complicate the assessment of which policy, if any, responds to a given loss.

Legal actions against the Mexican government due to its failure to maintain public order

Another aspect to consider is whether insureds might bring legal actions against the Mexican government, alleging failure to maintain public order and to prevent the CJNG from continuing random attacks on insured property.

If an insured is successful in such an action while also receiving indemnification from insurers, questions arise as to whether insurers may recover amounts paid under the principle of double indemnity. Alternatively, insurers may seek recovery from the government for losses not covered under the available policies. In such circumstances, complex allocation issues may arise, particularly where it is difficult to determine which peril (covered or excluded) caused the loss.

Conclusion

Commonly used terrorism exclusions are broad in scope, and (re)insurers may argue that they apply to many of the attacks that took place following the death of El Mencho.

However, reliance on these exclusions may not be straightforward.

Similarly, in relation to standalone products such as SRCC or Organised Crime policies, establishing the requisite intention to trigger coverage may also present significant challenges.

RPC have advised Reinsurers on political violence, criminal activity and terrorism losses (coverage, litigation and arbitration) in Latin America for more than a decade utilising our extensive network of local partners.