On 12 October 2018 the High Court handed down judgment in a case that concerned a claim brought against insurers for payment under a marine cargo policy relating to the theft of steel billets from an Iranian port in late 2012. The 11 defendant underwriters sought to rely on a London standard insurance market sanctions exclusion clause included within the policy in resisting payment of the claim:
“No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, law or regulations of the European Union, United Kingdom or United States of America“.
Construction of the Sanctions Exclusion Clause
- The Court rejected the notion that being exposed to a risk of sanctions was sufficient to rely on the sanctions exclusion in question. The wording of the clause did not refer to “risk” – it referred to a payment which would expose the insurer to any sanction. Therefore Mr Justice Teare concluded “…the language and context of the clause show that the meaning of the clause which would be conveyed to a reasonable person is as follows. The clause provides that the insurer is not liable to pay a claim where payment would be prohibited under one of the named systems of law and thus “would expose” the Defendants to a sanction.”
- To this end, the Court held that an Authority’s refusal to confirm that payment of a claim can safely be made is not sufficient to “expose” insurers to sanction.
- The Court also confirmed that nothing in the sanctions exclusion clause purported to extinguish a claim; liability was therefore merely suspended until payment would no longer expose an insurer to sanction.
- By looking at the “plain meaning” of the wind-down provision introduced into the US Iranian Transactions & Sanctions Regulations, 31 C.F.R. Part 560 as part of the US re-imposition of sanctions against Iran following the US withdrawal from the Joint Comprehensive Plan of Action (“JCPOA”), it was accepted as a finding of fact that payment of the claim until 11.59pm on 4 November 2018 EST would not be prohibited by the US (as it would be consistent with the lifting of sanctions under the JCPOA), and so would not expose the Defendants to sanction.
Council Regulation (EC) 2271/96, as amended (the “Blocking Regulation“)
- The Claimant sought to rely on the Blocking Regulation in the event that the Defendants were otherwise entitled to rely on the sanctions exclusion clause to resist payment. However, as it was concluded that the Defendants were not entitled to rely on the sanctions clause, this issue was not specifically decided.
- Nevertheless, perhaps surprisingly, Mr Justice Teare did comment obiter that he recognised “considerable force” in the Defendant’s response on this point, namely that the Blocking Regulation was not engaged as the insurer had no liability to pay a claim due to reliance on the sanctions exclusion clause. Accordingly, he commented obiter “In such a case, the insurer is not “complying” with a third country’s prohibition but is simply relying upon the terms of the policy to resist payment“.
What can we learn from the judgment?
The judgment provides a number of useful points of clarification in relation to the interpretation of sanctions exclusion clauses in the London insurance market. In particular:
- A distinction was drawn in the interpretation of the sanctions exclusion clause in question between exposure to sanction and exposure to risk of sanction (the wording of the exclusion clause in question encompassing the former but not the latter). Such standard insurance market wording may therefore now not be considered broad enough to encompass US secondary sanctions exposure, highlighting the need for insurers to review sanctions exclusion wording when using it to manage secondary sanctions risk.
- Whilst Mr Justice Teare stated obiter that he could “see considerable force” in the argument that insurers could rely on the sanctions exclusion clause in question without breaching the Blocking Regulation in the present case, there remains uncertainty in this area. Although the obiter remarks may assist US-owned insurers in legacy claims situations that become problematic under US sanctions coming back into force after 4 November 2018, (i) it should be noted that these remarks were not a finding as such, (ii) such analysis will be highly fact dependent, in particular, regarding the exact sanctions exclusion wording used and at what point in time such wording was included in the policy/slip, and (iii) these were remarks of an English judge and European authorities enforcing the Blocking Regulation may not agree with this approach. Likewise, uncertainty remains regarding the use of sanctions exclusion clauses for the purpose of complying with blocked US sanctions post 7 August 2018.
Please feel free to get in touch if you would like to find out more about the implications of the Mamancochet judgment for your business’ approach to sanctions compliance or if you have any other sanctions-related queries.