Sanctions: fear of breach not enough – impact on marine insurers
Mamancochet Mining Limited v Aegis Managing Agent Limited and Others [12.10.18]
On 12 October 2018 the Commercial Court handed down judgment in the Mamancochet Mining case.
Judgment was handed down on an expedited basis by Mr Justice Teare, as a result of the decision made by President Trump on 8 May 2018 to end US participation in the Joint Comprehensive Plan of Action (JCPOA), subject to a wind-down provision that sanctions would not be imposed until 11:59 pm on 4 November 2018.
The case concerned a claim made under a marine cargo insurance policy (the Policy) to protect the insured against risk of theft of steel billets, which were carried on board vessels from Russia to Iran on 23 and 25 August 2012. Upon arrival of these goods in Iran, the goods were stolen.
Defendant underwriters declined coverage on the basis of the ‘Sanction Limitation and Exclusion Clause’ in the Policy. This clause was the standard wording developed by the Joint Hull Committee and adopted by the Joint Cargo Committee:
No (re)insurer shall be deemed to provide cover and no (re)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 (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America.
The claim was issued against thirty defendants (underwriters) on 22 May 2018 in response to President Trump’s announcement. The effect of US withdrawal from the JCPOA will mean that sanctions on Iran are re-imposed following expiry of the wind-down period.
The court considered three issues which were central to its reasoning.
1 The interpretation of the phrase “would expose that insurer to any sanction, prohibition or restriction.”
The court held that the defendants were required to establish, on the balance of probabilities, that payment of a claim under the Policy “would expose” insurers to a breach of the applicable sanctions and therefore lawfully expose them to a breach.
Teare J considered that if “would expose” was interpreted as referring to a mere risk of exposure as opposed to actual exposure, then insurers could avoid paying an otherwise valid claim. He considered this result to be unfair.
Teare J also held that the sanctions clause suspends liability when a sanction is in place. However, once the sanction is lifted, insurers’ liability engages again. As long as an insured does not allow its claim to become time barred, this could result in long-tail liability for insurers.
2 Whether payment of the claim would, in this case, “expose” the defendant underwriters to a risk of sanction within the meaning of the sanctions clause.
Teare J considered that payment of the claim in this case would be consistent with the JCPOA. The court held that until 11:59 on 4 November 2018 payment is not prohibited and insurers would not, on the balance of probabilities, be exposed to a sanction.
As of 5 November 2018 the US will not be subject to the JCPOA, however the EU will. This poses considerable challenges for insurers who operate in the two regimes.
3 The issues presented by the EU Blocking Regulation.
This makes it an offence to comply with US Sanctions to the extent that such compliance contradicts EU law. Where insurers have an interest in both the US and in the EU, this potentially leaves insurers in the unenviable position of trying to comply with contradictory regimes. Although Teare J did not have to decide the issue in this case, he placed “considerable force” in underwriter’s argument that the refusal to pay would arise from the policy wording and not due to US sanctions.
If this opinion is upheld, this may provide welcome relief for insurers who are caught between both sanctions regimes.
Implications for marine insurers
Marine insurers must be aware that even after 4 November 2018 the JCPOA rules are still in force within the EU. Certain business by EU entities is permitted with Iranian companies. If insurers of those businesses have a presence in both the EU and the US, they may be caught in the middle of two opposing sanctions regimes.
An example of this difficulty could be the insolvency of a major shipping line. When Hanjin Shipping entered bankruptcy a considerable amount of cargo and equipment ended up in Iran without the knowledge of either the insureds or the insurers. If insurers have interests in both the EU and the US, then the risks are clear.
Insurers must also be aware of the implications that the suspension has on their liability. Insurers may be able to refuse to pay if US sanctions apply, notwithstanding the Blocking Convention, for as long as the US sanctions are in force. However, insurers are not discharged from liability and according to this judgment, will still be liable to pay otherwise valid claims in the event that the political climate changes and the sanctions are lifted.