On June 25, 2012, the Foreign Affairs Council (Council) of the European Union (EU) published a press-release stating that it will not renew an exemption, scheduled to end July 1, 2012, for the provision by EU insurers and (re)insurers, of environmental and third party liability coverage for the transport, import, or purchase of Iranian crude oil and petroleum products destined to non-EU countries. Accordingly, any coverage by EU insurers or (re)insurers will be prohibited as of July 1, 2012. See Council Regulation 267/2012, art. 12(2).
The Council also decided not to renew a similar exemption applicable to the (re)insurance of any type of risk provided in relation to the execution of trade contracts concluded before January 23, 2012 for the transport, import, or purchase of Iranian crude oil and petroleum products destined to EU and non-EU countries. See Council Regulation 267/2012, art. 12(1)(b). Trade contracts for importing Iranian oil that were concluded before January 23, 2012, as well as their insurance and (re)insurance coverage, thus must be terminated by July 1, 2012.
The corresponding exemption for Iranian petrochemical products under art. 14 lapsed on May 1, 2012 and therefore is not specifically referred to in the EU’s press release.
Scope of the Prohibition
Because the Council decided not to renew the current exemptions, a formal amendment of Council Regulation 267/2012, the Regulation imposing the latest round of EU petroleum sanctions on Iran, is not necessary. This decision reinstates the full application of arts. 11 and 13 of the Regulation providing that “it will be prohibited to provide, directly or indirectly… insurance and (re)insurance related to the import, purchase, or transport of Iranian crude oil and petroleum products”, as well as petrochemical products of Iranian origin or imported from Iran that previously lapsed.
EU-licensed insurers and (re)insurers will fall within the scope of the prohibition, regardless of the final destination of Iranian crude oil, petroleum products, or petrochemical products. The wording of the Regulation is sufficiently broad that the (re)insurance prohibition applies to the transport of such Iranian items, without reference to the underlying purchaser, carrier, route of shipment, or destination.
Stated differently, the prohibition is imposed upon any EU (re)insurer solely because the underlying risk relates to the purchase, import, or transport of Iranian crude oil or petroleum / petrochemical products. Thus, if a cedant insurance company is domiciled outside the EU, an EU (re)insurer will still be subject to the prohibition. Furthermore, the Regulation prohibits (re)insurance coverage by an EU (re)insurer of a risk arising from the transport, purchase, or import of Iranian crude oil and petroleum / petrochemical products, even where the purchaser, transporter, or importer of such items is not an EU person or Iranian person.
The Council’s position not to renew the temporary exemption marks the end of a vigorous debate involving numerous stakeholders among the European insurance and (re)insurance industry, third country buyers of Iranian crude oil and petroleum products, third country governments, and owners of non-EU vessels.
These stakeholders advocated strongly in favor of renewing the exemption that had been granted for a limited period of time. The stakeholders cited the possibility of unacceptable liability risks and catastrophic environmental harm in the event of a tanker accident, without adequate coverage to remediate potential damage from such an incident. They also argued that the prohibition has extra-territorial implications adversely affecting companies located outside Europe that are transporting Iranian crude oil through voyages which do not transship Europe and who would be unable to secure (re)insurance coverage from European-based insurers and (re)insurers.
The European insurance industry, including in particular the International Group of P&I Clubs, currently provides most (re)insurance coverage and capacity for the worlds’ ocean-going tonnage.
Alternative Sources of Coverage
Although the Government of Iran has offered to underwrite coverage provided by EU (re)insurers beginning on July 1, 2012, several countries have expressed concerns about Iran’s ability to pay claims or provide indemnities should liabilities arise.
Japanese purchasers of Iranian petroleum noted that, even if Iran’s newly-formed P&I club were to offer insurance and (re)insurance, Japan would have no collateral or other means of assurance that Iran would honor its obligations. Moreover, Iran’s P&I club is not authorized to insure foreign vessels. US and South Korean experts also expressed doubts that port operators would accept Iranian insurance or (re)insurance.
Even if Iran did agree to pay a claim or provide an indemnity, multilateral financial sanctions on Iran could make any transfers of funds difficult, as the payments typically would need to originate from an Iranian financial institution. Further, loan covenants often require mortgaged vessels to be covered by triple-A insurers, and it is not clear that Iran (nor it’s P&I club) could meet that condition. Nevertheless, the Government of India has reportedly stated that it will allow state refiners to import Iranian oil, with Tehran arranging shipping and insurance.
Rather than rely on Iranian insurance or (re)insurance, Japan has opted to proceed with a government insurance program. The law became effective on June 27, 2012 and provides for up to $7.6 billion in coverage against claims. Aside from questions that have been raised about Japan’s ability to administer this program, a significant limitation exists in that the coverage would extend only to vessels in Japan’s territorial waters.
South Korea, for its part, recently announced that it will suspend all imports of Iranian oil beginning on July 1, 2012. South Korea will instead turn to other Middle Eastern producers for supplying crude oil and petroleum products, including Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar.
The US Approach
The US Government is watching the sovereign self-insurance trend carefully, but because of the economic obstacles, has not taken a clear position. Officials in the US Congress have expressed skepticism that Iran has the capacity to self-insure their oil exports. These officials believe the costs and potential liabilities are too high, and that importers (perhaps with the exception of India now) will not rely on Iranian guarantees. At the same time, US officials are mindful of upward pressure on oil prices resulting from a lack of insurance and (re)insurance, and may not view the prospect of non-insured or (re)insured ocean-going vessels as desirable.
It is unclear whether Japan’s approach of providing limited sovereign insurance, and whether other countries following suit, will affect US policy and further sanctions efforts.
It should be noted, however, that the US Government already restricts US persons from providing any service, including financial services like insurance or (re)insurance, or related brokering services, to Iran.
Furthermore, under Section 1245(d) of the National Defense Authorization Act for Fiscal Year 2012 (NDAA), the US President is allowed to sanction foreign financial institutions located in countries that have not received waivers from sanctions, if they conduct or facilitate significant financial transactions with the Central Bank of Iran or other designated Iranian financial institutions, involving transactions for the purchase of petroleum products. The NDAA’s definition of “foreign financial institutions” does not specifically include insurance or (re)insurance companies, but the term is broadly worded.
As discussed in our recent advisory, on June 11, 2012 the US Government granted South Korea, India, and Japan, among 17 other countries, waivers of 180 days from Section 1245(d) sanctions due to significantly reduced purchases of Iranian petroleum products by those countries. On June 28, 2012, the US Government announced it also was granting waivers to China, one of the world's largest purchasers of Iranian oil, and Singapore.