Seizure in the Straits of Hormuz - implications for insurers

Geopolitical conflicts between the US and Iran remain a major concern for marine (re)insurers as tensions in the Strait of Hormuz continue to make headlines. The ongoing situation continues to affect whether vessels and cargo such as crude oil can go into or out of Iran, and the cover marine insurers can provide.

Background

On 14 July 2015 the UN Security Council’s five permanent members: China; France; Russia; the UK; and the US; plus Germany, the European Union, and Iran reached an agreement to limit and ensure that Iran’s nuclear program of uranium enrichment was exclusively peaceful, and provided Iran with phased sanctions relief upon verification that it had implemented key nuclear commitments.

In May 2018 then-US President Trump abandoned the JCPOA and reinstalled all US sanctions on Iran, including placing the Iranian Revolutionary Guard Corps-Qods Force (IRGC-QF) on the Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked Persons List.

In 2021 we commented that the inauguration of Joe Biden as the 46^th US President may bring a different approach to foreign policy, including the challenging topic around Iranian sanctions. President Biden made it clear that he wanted the JCPOA deal brought back to life, but expected Iran to comply with its commitments in respect of reversing its breaches in respect of excess production of enriched uranium first; Iran wanted the US sanctions - which caused its economy to fall into a recession and inflation to soar - lifted before it would start complying with its commitments again.

Impact on shipping

The impact on global commerce has been significant, particularly in the Strait of Hormuz, a key shipping lane through which 20% of global crude oil supply passes. Since 2021 it has been reported that nearly twenty internationally flagged merchant vessels have been harassed, attacked, or seized by Iran whilst transiting the narrow waterway linking the Persian Gulf with the Gulf of Oman.

• In July 2019 the British-flagged oil tanker STENA IMPERO was seized by the IRGC-QF and held for two months. Iran accused the vessel of colliding with a fishing vessel, and denied that the seizure was an act of retaliation for the British Royal Marines’ involvement in the detention of the Iranian tanker ADRIAN DARYA-1, which was detained off Gibraltar whilst carrying 2.1 million barrels of Iranian crude on suspicion of breaking EU sanctions on Syria, and blacklisted by the US.
• In May 2022 the IRGC-QF seized two Greek-flagged tanker vessels, the DELTA POSEIDON and PRUDENT WARRIOR. This was in retaliation against the US for confiscation of Iranian oil onboard the Iranian-flagged LANA in April that year. Both the DELTA POSEIDON and the PRUDENT WARRIOR were released in November 2022.
• On 27 April 2023 the oil tanker ADVANTAGE SWEET was seized and remains detained by the IRGC-QF. Reports suggest that this was in retaliation to the US seizing 980,000 barrels of Iranian crude oil onboard the SUEZ RAJAN, which has recently been discharged in the US and forfeited by the owners according to recently unsealed court filings in the Washington federal Court.
• Most recently on 5 July 2023, the US Navy destroyer USS McFaul prevented attempts to seize two tankers, firstly the TRF MOSS, and then the Bahamas-flagged, Greek-owned, US-operated oil tanker, RICHMOND VOYAGER, at which shots were fired by an Iranian naval vessel hitting the vessel’s hull near the crew living spaces, whilst on route to Singapore from Saudi Arabia.

As a direct result of the actions by the IRGC-QF, the US has increased its military presence and rotation of ships and aircraft patrolling in the region in an attempt to ensure the safe passage of vessels. In August the UK and US authorities issued warnings to shipping in the Middle East to avoid Iranian waters as a precaution, amid the heightened tensions.

Insurance implications

The Lloyd’s Market Association Joint War Committee, which monitors and lists areas where shipowners are required to notify underwriters of voyages, has included the Strait of Hormuz since 2018, and considers that tankers transiting the area are specifically at risk of harassment.

Negotiations for the release of vessels and cargo seized by the IRGC-QG have generally been conducted via Iranian diplomatic channels in third-party countries such as Sweden, and can take place over several months. During this time, careful consideration needs to be given to ascertain whether there has been a loss covered under any one of the relevant policies of insurance for the property interests, which may or may not be triggered depending on the facts and the breadth of coverage.

There are several factors which will inevitably come into play in any policy coverage assessment.

Seizure, state terrorism and piracy

Seizure by the authorities or military forces of a state government is unlikely to be an act of terrorism, despite the IRGC-QF having been designated as a Foreign Terrorist Organisation by the US since 15 April 2019, although this may depend on the relevant jurisdiction policy in the insuring clause. At the time of writing the UK has declined to follow suit and proscribe the IRGC-QF as a terrorist group and increase the sanctions regime around it.

Acts by a state military towards a commercial vessel are, by definition, not acts of terrorism, and therefore any policy exclusions for terrorism are unlikely to avail underwriters of cover in respect of property seized by the IRGC-QF.

The term ‘seizure’ has been considered at length by the English Court, the position having been summarised in Bayview Motors Ltd v Mitsui Marine and Fire Insurance Co Ltd (upheld on appeal) as requiring:

1. The taking of forcible possession.
2. By a lawful authority, acting as organs of the state (whether acting lawfully or otherwise).
3. Using any display or threat of overpowering force.

The actions of the IRGC-QF may satisfy the above elements required for the peril of ‘seizure’.

However, policy exceptions for piracy may or may not also be relevant depending on the policy wording. The IRGC are unlikely to be ‘pirates’ as defined in Marine Insurance Act 1906, which includes rioters who attack ships from the shore.

Nor is any seizure by the IRGC-QF likely to fall within the United Nations Convention on the Law of the Sea 1982 definition of ‘piracy’, which is confined to:

 So it appears unlikely that ‘state piracy’ could be relevant either.

Ransoms for the release of seized vessels have not been demanded by the IRGC-QF. This tends to suggest that there is no seeming intention to retain the vessel and cargo property indefinitely, and that the prospect of recovery is likely at some stage.

This therefore calls into question whether a IRGC-QF seized vessel and cargo could ever been deemed either an actual or constructive total loss. To succeed in a claim for a constructive total loss, the property owner would need to demonstrate that it had been irretrievably deprived of possession of the property and that its recovery was unlikely within a reasonable time frame (i.e. there was no realistic prospect of recovery (see Masefield v Amlin [2011] The Bunga Melato Dua)), or that the actual or estimated cost of recovery exceeds its value.

All of the above clearly demonstrates that there is much to be considered if and when a claim for property loss may arise as a result of the seizure of a vessel by the IRGC-QF in the Strait of Hormuz.

Related item: London marine market forecast 2021

Read other items in Marine Brief - October 2023