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Note: To protect itself from losses, Metalloyd Ltd. (Shipper/Assignor) obtained a maritime insurance policy from, among other underwriters, Aegis Managing Agency Ltd. (Defendant/Underwriter) regarding two cargoes of steel billets being shipped from Russia to Iran. After the cargo was delivered to bonded storage and Shipper/Assignor arranged for a substitute buyer, the cargo was stolen in the latter months of 2012. Upon discovering the theft, Shipper/Assignor made a valid claim on the policy in late March 2013. At that time, Defendant/Underwriter “resisted payment” citing the Sanction Limitation and Exclusion Clause (reprinted below) in the insurance policy.

Subsequently, Shipper/Assignor, by deed, assigned the policy to Mamancochet Mining Ltd. (Claimant/Assignee). Claimant/Assignee sued all 30 underwriters for payment on the policy; 19 underwriters settled and eleven remaining underwriters, including Defendant/Underwriter, cited either EU, U.S., or both sanctions regimes in refusing payment. The High Court of Justice, Queen’s Bench Division, Teare, J., granted judgment in favor of Claimant/Assignee.

The three issues presented by the case were (1) the proper interpretation of the sanctions clause in the policy; (2) whether payment as a matter of fact would “expose” the underwriters to U.S. or EU sanctions within that interpretation; and (3) whether the EU Blocking Regulation would otherwise allow underwriters to refuse payment. The policy was governed by English law and despite having an office in the United Kingdom, Defendant/Underwriter was ultimately owned or controlled by U.S. persons and therefore constituted a U.S. owned or controlled foreign entity (USCFE). At the time the policy was issued, there were no sanctions regarding Iran applicable to USCFEs. On 22 October 2012, the U.S. Office of Foreign Assets Control (OFAC) added section 560.215 to the Iranian Transactions & Sanctions Regulations (ITSR), coming into force 8 March 2013, affecting USCFEs. It was generally accepted that provision of insurance cover, including the payment of a pre-existing claim, constituted a “service” within the meaning of ITSR s.560.204. When payment first claimed by Shipper/Assignor in March 2013, payment would have “exposed” Defendant/Underwriter to sanctions based on USCFE status and ITSR s.560.215, as the wind-down period (ending 8 March 2013) had lapsed.

U.S. sanctions regarding Iran, however, changed on 16 January 2016 when OFAC introduced General License H, made pursuant to Annex II of the Joint Comprehensive Plan of Action (JCPOA), allowing USCFEs to engage in the provision of insurance and re-insurance services. Thereafter, U.S. policy changed yet again when on 8 May 2018, the U.S. announced its withdrawal from the JCPOA; OFAC accordingly revoked General License H on 27 June 2018, subject to a wind-down provision (s.560.537) ending 4 November 2018. Nothing in that wind-down provision supported any distinction between claims which arose after General License H was introduced and those which arose before: it extended to all transactions and activities that were ordinarily incident and necessary to wind down of transactions otherwise prohibited by ITSR section 560.215.

After reviewing the relevant sanctions regimes, the Judge turned to the issue of construction of the sanctions clause in the maritime policy. Both parties focused on the term “exposed”. Defendant/Underwriter argued that the sanctions clause had the effect of extinguishing its liability to pay if it were “at risk of being sanctioned by OFAC”. Claimant/Assignee, however, argued that the clause required the underwriters “to establish, on the balance of probabilities, that payment would put them in breach of the applicable sanctions” so as to “lawfully expose” them to sanctions. The Judge noted that the dictionary definition of “expose” was a “useful starting point” but not determinative of what the clause in full “would convey to a reasonable person.” Accordingly, the Judge concluded that, to a reasonable person, the clause meant that “the insurer is not liable to pay a claim where payment would be prohibited under one of the named systems of law and thus ‘would expose’ the Defendants to a sanction.”

Having interpreted the sanctions clause, the Judge applied its meaning against the changes in U.S. sanctions beginning in 2012. After October 2012, with OFAC’s implementation of s.560.215, USCFEs were brought within the ITSR regime as if also U.S. persons subject to the wind-down provision ending 8 March 2013. Thus, experts from both parties agreed that when the first claim was made by Shipper/Assignor, “payment of the claim would have been prohibited and would have exposed the Defendants to a sanction.” Thereafter, the Judge noted that the parties initiated discussions regarding payment after implementation of General Licence H on 16 January 2016. Under that license, “payment by the Defendants of the claim under the Policy in sterling would not have been prohibited.” (General Licence H continued to prohibit transactions by USCFEs in U.S. dollars and any transactions involving the Iranian military).

As previously mentioned, the analysis changed following the 8 May 2018 decision by the U.S. to end its participation in the JCPOA. Accordingly, OFAC announced its revocation of General License H on 27 June 2018 subject to a wind-down provision (s.560.537) ending 4 November 2018. A witness for Defendant/Underwriter argued that there remained a “serious question” as to whether OFAC “would consider payment of a claim arising before the effective date of General License H to be a wind down activity within the meaning of section 560.537.” Having heard “conflicting testimony” from two U.S. attorneys on how a U.S. court might resolve the issue, the Judge turned to a review of the “plain meaning” of section 560.537 as well as to “FAQs” regarding each ITSR section promulgated by OFAC. After reviewing these materials and others, the Judge concluded that:

[OFAC FAQs] support the proposition that the wind down provision applies to operations that were consistent with the lifting of sanctions under the JCPOA. Payment of the insurance claim in question is consistent with the JCPOA. For these reasons I agree with and accept the opinion…that until 1159 pm eastern standard time on 4 November 2018 payment of the insurance claim in question is not prohibited by the US and so payment by that date would not expose the Defendants to sanction.

Against this finding, and that payment would not be prohibited by EU law, Defendant/Underwriter argued in the alternative that “once the sanctions clause was triggered, its effect was to extinguish any liability of the Defendants to pay the claim.” The Judge rejected that argument noting that the clause only limited payment liability “to the extent that…payment of such claim…would expose” the insurer to sanction (emphasis added). Nothing in the sanctions clause supported a result that would “extinguish liability once the insurer [was] exposed to a sanction.”

In anticipation that Defendant/Underwriter would prevail and be able to rely on the sanctions clause to resist payment, Claimant/Assignee also argued that the EU 1996 Council Reg. (EC) 2271/96 ‘Blocking Regulation’ amended August 2018 in response to U.S. JCPOA withdrawal (protecting against effects of extra-territorial application of legislation adopted by a third country and actions based thereon or resulting therefrom) would prohibit Defendant/Underwriter from relying on the sanctions clause as a violation of that regulation and/or English law. In response, Defendant/Underwriter submitted a “short answer” to the argument by stating that reliance on the sanctions clause to resist payment would simply be to allow the clause to operate as written. The issue was not ripe for determination, however, as the question of whether payment by Defendant/Underwriter before 4 November 2018 would cause it to be exposed to a sanction had been resolved. Nevertheless, the Judge concluded the opinion by stating that there was

considerable force in the Defendants’ “short answer” to the point, namely that the Blocking Regulation is not engaged where the insurer’s liability to pay a claim is suspended under a sanctions clause such as the one in the Policy. In such a case, the insurer is not “complying” with a third country’s prohibition but is simply relying upon the terms of the policy to resist payment. (Emphasis added).

Sanction Limitation and Exclusion Clause: “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 [EU], [UK] or the [U.S.].” (Emphasis added).

[MJK]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.