Sanction Limitation & Exclusion clause

One clause which is seen in almost all marine cargo policies but which is  not born only from underwriting prudence is the Sanction Limitation & Exclusion clause. This clause is necessitated more out of political compulsions in supporting trade and economic sanctions against specific countries, ostensibly for the good of the world at large. Sanctions vary in terms of severity, areas of sanction,time periods, particular persons/classes of persons/entities against whom sanctions are imposed & particular classes of persons/entities who have to strictly abide by the sanctions. 

Even though we talk of sanctions & see this clause on a regular basis, not many of us would have gone through the wording. The general understanding is that movements to, from and through certain countries under the policy have to be excluded because these countries are under sanctions. It is not that simple — as said earlier the severity of sanctions vary from country to country, person to person or entity to entity and more importantly, from time to time. Hence the need to be abreast of the latest position as regards sanctions against particular countries, persons or groups. The standard wording of this clause reads as below:

“No insurer shall be deemed to provide cover and no 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 insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, Japan, United Kingdom or United States of America. “

Being a clause borne more out of political decisions rather than underwriting safeguards, one might feel that  this clause may not be the subject of interpretation before a Court of Law. A recent judgement pronounced by the High Court in England in the case of Mamancochet Mining Ltd vs Aegis Managing Agency Ltd & others proves otherwise. It also brings out the true spirit of this clause. Facts of the case were as under:

• Mamancochet Mining was the beneficiary by assignment under a marine cargo policy issued by the defendant covering a shipment of steel billets from Russia to Iran in 2012
• Sanctions against Iran at the time of taking the policy was limited to ‘US persons’ and the insured/beneficiary did not fall under this as they were only ‘subsidiaries of US persons and not US persons themselves’.
• Cargo was stolen from a storage facility in Iran between late September & early October 2012. The claim was payable as per the policy terms & conditions, as was discovered later and agreed to, by the insurer as well.
• However, in March 2013, when the claim was submitted, the sanctions against Iran extended to ‘entities owned or controlled by a US person’. Payment of the claim would have ‘exposed the insurer to a sanction’.
• In January 2016, the situation changed again following the JCPOA ( Joint Comprehensive Plan Of Action) on Iran. Partial lifting of sanctions followed and this claim could have been paid with the only condition being that the claim was not paid in US dollars.
• Following the US withdrawal from the JCPOA, 4th November 2018 was set as the day, when sanctions against Iran would become absolute yet again.

The defendant insurer took the plea that, when the claim was submitted, payment of the same would have exposed them to the ‘risk of a sanction or prohibition’ and hence their liability under the policy was extinguished. The Judge while delivering his judgement in favour of the plaintiffs, Mamancochet Mining said that ” exposure to sanction” as stated in the wording was different from ” risk of exposure to sanction” as stated by the defendant. The conduct of granting cover for a transit to Iran was not prohibited at that point in time and hence the insurer (defendant) had to establish that payment of the claim would have been subject to sanctions, which they did not. Secondly, defendant’s contention that liability under the policy stood extinguished was incorrect.  It would only stand suspended till the sanctions remained and could never get extinguished completely. The defendants could well have made payment of the claim any time between January 2016 and 4th November 2018.

Learning: Sanction Limitation & Exclusion clause is extremely dynamic in line with the prevailing political conditions. Even if the wording remains the same, underwriters and claim settlers have to be up to date on the latest sanctions position to take meaningful decisions and to avoid penalizing clients by refusing cover or having granted cover, decline legitimate claims under shelter of this clause.