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Brokers’ obligations in a sanctioned market

  • United Kingdom
  • Fraud and financial crime
  • Insurance and reinsurance
  • Sanctions

25-04-2022

The sanctions being imposed following the Russian invasion of Ukraine clearly have legal, commercial and practical implications for all participants in the insurance industry.

What must brokers do now?

It is trite advice to say that all market participants must comply with the differing sanctions regimes being imposed by Western powers; not least in view of the severity of the penalties for non-compliance, which can include imprisonment. 

Designated Persons

Brokers need to consider whether they are dealing with any persons or entities who are designated by the various Western sanctions regimes and are subject to an asset freeze (a “Designated Person”). In these circumstances, and in the absence of an exemption or licence, brokers are prohibited from (1) dealing in the assets of a Designated Person and/or (2) engaging in any activity which provides a benefit to a Designated Person, which can include placing (re)insurance and paying claims.  These restrictions also apply to entities which are owned more than 50%, or controlled, by a Designated Person.

Other sanctions

Brokers need to be aware of trade sanctions which restrict the import/export of certain goods and materials, and the movement of vessels and aircraft. A number of these trade restrictions also include prohibitions relating to the provision of financial services (which includes insurance related services) in connection with this restricted activity and therefore brokers will need to avoid involvement in such activities.

In addition, brokers need to be up to date on insurance specific sanctions such as the ban on Russian entities in the aerospace and aviation sectors accessing the UK insurance and reinsurance markets and the EU restrictions in respect of the insurance and reinsurance of iron and steel.

Selection of insurers

Brokers owe their clients a duty of care to select an appropriate (re)insurer. Any dealings with a Designated Person (re)insurer would of course be prohibited. However, even if a Russian (re)insurer is not currently sanctioned, caution should be exercised when considering choice of such (re)insurers.  Whilst there is no general prohibition on dealing with Russian (re)insurance companies, this may change in view of the political climate and expanding sanctions regime.

Bear in mind that the sanctions position might impact on an (re)insurer’s financial stability and the ability to pay claims. 

Further, there is likely to be practical issues in dealing with Russian (re)insurers.  Many Russian banks have been designated as subject to an asset freeze and disconnected from SWIFT, the international financial messaging service which facilitates global financial transactions. This means, in practice, it is very difficult for these bank to participate in international transactions. Dealing with (re)insurers who use these banks has therefore become very difficult.

Duty of disclosure

Policyholders should ensure that they are complying with their duty to make a fair presentation of the risk to their (re)insurers. This duty requires that policyholders disclose every material fact which they know or ought to know, namely anything that “would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms”.  The impact of these sanctions on an insured’s business could well be a material fact.  Clearly an insured or its commercial counterparties being a Designated Person would be a material fact, but less obvious examples could potentially include the impact of sanctions on an insured’s business, such that projected turnover figures are no longer accurate.

Sanctions Exclusion Clauses

The purpose of a sanctions exclusion clause is to ensure that the cover provided under the policy does not breach sanctions. These clauses can be drafted such that no cover is provided under the policy if doing so would cause the (re)insurer to be in breach of a sanctions regime. It is typical for the clause to specify the applicable sanctions regime. Sanctions exclusions clauses can also be drafted more narrowly to prohibit the payment of claims only, if doing so would breach a specified sanctions regime. For clauses which only operate to prohibit the payment of benefits, it is well established that the impact of such clauses is suspensory only. Once the sanctions regime is lifted, the (re)insurer is permitted to pay the claims.

Brokers should advise their client as to the scope of cover under the policy in view of any applicable sanctions exclusions clause. Similar consideration should be given to any other provisions in the policy which may be impacted by the sanctions regimes, which could include war exclusion clauses.

Key Takeaways

The fast pace at which sanctions are being amended, coupled with the significant impact this may have on brokers’ ability to operate, means this is an area which is potentially rife for insurance disputes. Brokers will need to ensure strict compliance with all applicable sanctions regimes, which will necessarily involve assessing each risk, policy and claim at a granular level. Further, brokers are well advised to use this as a timely reminder of the ongoing and ever present duties to their client, which include the selection of suitable carriers, the need to fully advise clients as to their disclosure requirements and the obligation to explain the scope of cover obtained.