Commercial court exposes weaknesses in standard insurance market sanctions exclusion

• United Kingdom

• Insurance and reinsurance - E-briefings

25-10-2018

Mamancochet Mining Ltd v Aegis [2018] EWHC 2643

Speedread

This case concerned whether payment of an insurance claim by marine cargo insurers would fall foul of US and EU sanctions against Iran so as to engage a market standard sanctions exclusion clause devised by the Joint Hull Committee and adopted by the Joint Cargo Committee.  The clause excluded insurers’ liability for any claim “to the extent that…payment of such claim… would expose that insurer to any sanction…of the European Union, United Kingdom or the United States of America”.  (our emphasis)

The Court held that the term “expose” required that payment of the claim would actually breach the relevant sanctions i.e. it would not be sufficient that insurers were merely exposed to the risk of this being the case.  Further, the Court said that the words “to the extent that” demonstrated that the effect of the sanctions clause was suspensory such that, subject to limitation, where payment of a claim would breach sanctions at one point in time insurers could still be required to pay it in the future if and when sanctions were lifted.  The Judgment may lead to calls for this wording to be modified to prevent such arguments being brought against the market in the future.

Background and the Issues

The underlying insurance claim concerned the theft of steel cargoes in bonded storage in Iran between 22 September and 7 October 2012. It was assumed that the Claimant made a claim against the policy at some point after 8 March 2013, a date of significance in the history of the US sanctions regime.  Prior to this date “US owned or controlled foreign entities” (“USCFEs”) were not subject to the sanctions laws.  However, from that date USCFEs, which 9 of the insurers were, would have been prohibited from making claim payments under the Policy.

Subsequently with effect from 18 October 2015, the sanctions were relaxed consistently with the agreement of the Joint Comprehensive Plan of Action (“JCPOA”) between Iran, the permanent members of the UN Security Council plus Germany and the EU.  Payment of the claim by insurers would have been permitted at this point.

Finally, on 8 May 2018, President Trump made his announcement that the US were withdrawing from the JCPOA with effect from 27 June 2018, subject to the wind-down provision which permitted transactions and activities “ordinarily incident and necessary to the wind down of the following activities [including a USCFE] engaging in transactions…that would otherwise be prohibited…” .

The EU sanctions regime consisted of the Sanctions Regulation (enacted in March 2012), the Amending Regulation (enacted on 21 December 2012) and the Repealing Regulation consistent with the JCPOA (effective from 16 January 2016).  Payment of the claim was not prohibited under the Sanctions Regulation, became so as a result of the Amending Regulation and then became permissible again following the Repealing Regulation.  The Repealing Regulation remains in force.  Accordingly, the Claimant argued that the EU Blocking Regulation, which was designed to protect against the extra-territorial effects of legislation of a third country, prevented insurers from paying the claim in reliance on the sanctions clause. 

The Court was thus asked to consider:

0. The proper construction of the sanctions clause
0. Whether the sanctions clause would be breached by payment of the claim
0. An alternative argument on behalf of insurers that their liability was immediately extinguished when the sanctions clause was triggered due to the fact that payment of the claim was prohibited at the time it was presented
0. Whether insurers’ reliance on the sanctions clause constituted compliance with the US sanctions in a manner that would breach the Blocking Regulation.

The Judgment

Construction of the sanctions clause

Mr Justice Teare held that the word ‘expose’ in the sanctions clause meant that the claim payment would have to constitute an actual breach of the relevant sanctions in order for insurers to be relieved of liability.  The clause would not be triggered, where there was merely a risk that the payment would incur a sanction because, for example, the relevant governmental agency reached such a conclusion even though this was not correct as a matter of law.  The judge stated that clearer words would have been required to achieve such a construction.

Whether the sanctions clause would be breached by payment of the claim

The key question for the Court was whether the wind-down provision could apply to payment of a claim that had arisen before the sanctions were first relaxed through the JCPOA . Insurers submitted expert evidence that payment of the claim would only have been permitted under the earlier wind-down provision applying to the first imposition of a sanction in March 2013.  However, the Court could not find support for this position in the provision under consideration and therefore held that payment of the claim before the relevant time on 4 November 2018 would not be prohibited under US sanctions and the sanctions clause was not therefore engaged. 

Whether the insurers’ liability for the claim was “immediately extinguished” because it was made at a time when payment was prohibited

The Court could not find support for insurers’ submission in the clause itself.  Instead, it held that the words “to the extent that” meant that insurers’ liability would be “suspended” in the period in which payment of the claim was prohibited.  The judge accepted that this could lead to potentially open-ended liability, subject to the effect of limitation.  However, where proceedings that had been commenced to stop the limitation period running he saw no difficulty in staying those proceedings until the claim could be paid.  He added that insurers would be able to account for the suspended liability in their books.

Effect of Blocking Regulation

This point did not have to be determined given the Court’s conclusion that insurers could not rely on the sanctions clause.  However, the Court stated obiter that there was considerable force in the argument that the Blocking Regulation was not engaged because relying upon the terms of the policy to resist payment did not equate to an “act” in compliance with a third country prohibition.  Rather, the judge said that the “contract simply operates according to its terms”.

Comments

Whilst insurers could not rely on the sanctions clause in this case, the Court did acknowledge the possibility that the wording could be adjusted to exclude liability where there were a mere risk that payment of the claim could expose insurers to the risk of breaching sanctions.   Equally the Court’s conclusion the effect of the clause was only suspensory was based on contractual interpretation rather than any principle-based analysis of why the clause could not have permanent effect.  Accordingly, the Judgment may lead to calls for the amendment of the wording to remove scope for such interpretations in the future.  The Court’s obiter comments on the Blocking Regulation are also interesting as it calls into question whether the converse statement would be true i.e. could the Court also say that paying a claim (assuming there is no sanctions clause) is merely a situation where the “contract is operating according to its terms”, even though payment could be seen as an “act” in contravention of a third country prohibition?   Whilst that probably remains to be seen, this decision will undoubtedly contribute to the debate and be seen to be of some importance to the market given the current geopolitical landscape.