The impact of sanctions on insurance policies

By Xuan | Knowledge hub | Comments are Closed | 9 September, 2022 | 2

Customer advisory: Impact of sanctions on insurance policies

Executive summary

Due to the heightened regulatory environment surrounding trade and economic sanctions compliance, insurers have reminded their insureds to perform proper due diligence before entering into any contract.

They have also announced widened sanctions exclusion clauses — clauses which will allow them to suspend or terminate cover “on such notice as [they] may decide” if a transaction exposes them to the risk of being subject to any sanction, prohibition or other adverse action.

One P&I club in particular, the ITIC, even warns that their new sanctions-related provisions allow them “to suspend or terminate cover in the event that a situation arises which Directors believe could cause reputational damage to ITIC.”

We have a 60-plus team of Compliance researchers, analysts and sanctions specialists monitoring global trading and regulatory developments 24/7. They power the compliance parts of both our DA-Desk and MCaaS (Marcura Compliance as a Service) solutions.

Background

Against the backdrop of the war in Ukraine, this advisory is intended to provide our customers with a brief roundup update on developments we have seen in the insurance rules and policy coverages of P&I clubs in response to the heightened environment surrounding sanctions.

The complexity of international sanctions regimes is impacting several global industries.

In the maritime industry, many insurers and underwriters are seeking to limit sanctions risks through the implementation of programs that drive compliance with global sanctions regimes.

Performing due diligence

In an online advisory [1], The Swedish Club warns: “Members are strongly advised to perform due diligence before entering into any contracts that may expose themselves and/or the Club and its reinsurers to sanctions.” [Our emphases throughout]

The Club further warns: “The Club does not perform due diligence checks for Members on an intended trade as there may be a conflict of interest between the Club and its Members due to the serious effects any sanctions risks may have on insurance cover.”

It goes on that, in line with the position of other P&I Clubs, “all Members are under a duty to take steps to satisfy the legality of their own actions.” Otherwise, the Club warns that “where a Member has exposed or may expose the Club to the risk of being or becoming subject to a sanction, prohibition or other adverse action under certain sanctions regimes, the Club may terminate the period of insurance on such notice as the Club may decide.”

Widening sanctions exclusion clauses

Many insurers and underwriters continue to limit sanctions risks as far as possible and frequently use sanctions exclusion clauses as a tool to mitigate risk.

These clauses enable an insurer to refuse to provide cover or pay a claim if doing so would expose it to sanctions, restrictions or prohibitions.

For instance, the ITIC announced recently that it has widened its sanctions exclusion clause “to allow ITIC to suspend or terminate cover if ITIC is exposed to or at risk of being exposed to sanctions, prohibitions or adverse actions.”

The new clause is more expansive and is no longer limited to just the UK, USA, and EU regimes. Additionally, new provisions would allow ITIC “to suspend or terminate cover in the event that a situation arises which Directors believe could cause reputational damage to ITIC.”

Lastly, “a new automatic cesser of insurance has been added if a member becomes subject to sanctions, prohibitions or restrictions of the UK, USA, EU or UN.” [2]

Likewise, Skuld’s Rules provides in relevant part that its insurance policy “shall not cover liabilities, costs or expenses where payment by the Association or the provision of cover in respect thereof may expose the Association to the risk of being subject to a sanction, prohibition or any adverse action by a state or international organisation or competent authority.” [3]

Similarly, The Swedish Club’s sanction limitation clause provides that “no insurer shall be deemed to provide cover nor be liable to pay any claim or provide any benefit under the insurance to the extent the provision of such cover, payment or benefit would expose the Club, any other insurers involved on the risk or its reinsurers to any sanction, prohibition or restriction due to sanctions.” [4]

Insurance and reinsurance ban

Earlier this year, the EU unveiled an insurance and reinsurance ban covering all maritime transportation of Russian oil, aimed at punishing Russia over its invasion of Ukraine [5]. Without insurance, many ports will not allow ships to discharge cargoes.

Prior to the EU ban, several insurance companies were already moving away from providing insurance cover to ships through which Russian entities had invested or to non-Russian vessels carrying Russian cargoes.

The cautious approach was taken primarily as a result of payment processing issues as several of the banks through which insurance premiums exchanged hands had already been brought under the ambit of Western sanctions. [6]

In updating its members on new trade restrictions against Russia under UK trade law, the UK P&I Club alerted its members that even if they are not directly impacted by the new UK regulations, prohibitions against the provision or insurance and reinsurance render the Club unable to provide cover in respect of these trades or activities because it is subject to UK jurisdiction. [7]

Duty to comply and mitigate

The message from P&I Clubs is clear: members are under a duty to take steps to ensure they are not engaged in any unlawful trade.

Specifically, several P&I clubs impose an “obligation to mitigate” any liability, loss, expense, or costs in connection with the policy, and failure to do so will lead to refusal to cover all or part of the claim [8].

In addition, a breach of sanctions or other restrictions may render it difficult and/or expensive to obtain insurance in the future.

Therefore, it is imperative that senior management is fully engaged and takes responsibility of their own organisation’s Sanctions Compliance Program (SCP) to help ensure compliance with P&I club rules through sanctions due diligence, adverse media screening, and KYC/KYCC processes and procedures.

How can we help?

We have a 60-plus team of Compliance researchers, analysts and sanctions specialists monitoring global trading and regulatory developments 24/7.

They power the compliance elements of both our DA-Desk and MCaaS (Marcura Compliance as a Service) solutions.

About MCaaS and compliance (Marcura Compliance as a Service): Our MCaaS Team delivers global sanctions compliance and KYC services, supported by industrial-scale processes and systems.

The team is comprised of compliance specialists with maritime, legal, due diligence and banking backgrounds.

Organisations and individuals are continuously screened against numerous global sanctions and other official lists using a combination of third-party tools as well as our in-house tools for compliance with sanctions, AML/CTF and other financial crime regulations in order to mitigate the risk of engaging in business with a sanctioned entity or otherwise.

If you wish to know more about MCaaS, please select REQUEST A DEMO.

About DA-Desk and compliance:

DA-Desk enables you to automate and streamline due diligence, mitigate the risk of fraud and provide evidence of regulatory compliance.

Every port call is screened, including every appointment, every proforma disbursement account (PDA), and every final disbursement account (FDA).

To find out more about compliance and your disbursement accounting, please visit DA-Desk.com.

Notes and references

This advisory was written in September 2022.

Disclaimer: The information contained in this circular is for general guidance and is for information purposes only.