Sanctions are an increasingly-used tool in geopolitical disputes. The flurry of international sanctions from the US, EU, UK and others in response to Russia's invasion of Ukraine demonstrated that punishment aimed at a nation's economy and trade is now viewed as the first port of call by a number of States and international bodies.
Insurers can inadvertently find themselves in the cross-hairs of sanctions. The world is ever more unpredictable and developments move quickly; insurers do not possess a crystal ball, as much as some would argue they do (or ought to). The ability of an insurer to provide protection to an insured, or in respect of a risk located in a certain jurisdiction without any perceived sanctions issues can change in very short order. These changes occur as States and in turn their regulators respond to unpredictable geopolitical developments – often without notice and using emergency or administrative powers - with the implementation of financial and trade sanctions, placing both insureds and insurers in a difficult position.
LMA3100 and its interpretation
The Lloyd's Market Association (the LMA) has long appreciated the difficulty inherent in offering sufficient protection in the event that sanctions impact a particular risk. In 2010, in response to Iranian sanctions, it introduced the LMA3100 clause. Its intention: to ensure that insurers did not inadvertently find themselves in breach of international sanctions by providing a benefit under an insurance policy – be that ongoing coverage or the payment of a claim. Its wording is as follows:
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 European Union, United Kingdom or United States of America.
LMA3100 has been used extensively over the past 13 years. Notwithstanding the reference to 'exclusion' in its title, it has long been understood to provide a suspension of benefits only. However, this position was challenged in the English High Court in 2019. Insurers argued that once the clause was triggered with the imposition of applicable sanctions, any liability under a policy subject to LMA3100 was terminated. Disagreeing with this position, Justice Teare confirmed that the words in the clause 'to the extent that' were to be construed in a way that meant when insurers were exposed to sanctions, the benefits of the insurance to the insured were suspended, but once that exposure ceased, so did the suspension. While the Court accepted that this might yield 'potentially open-ended liability', it indicated that this was not a sufficient reason to agree with insurers that applicable sanctions extinguished liability.
The perceived requirement for change
Of course, not all insurance policies are subject to English law.
In the Summer of 2022, the Paris Court of Appeal addressed the validity of a sanctions clause in a French law-governed Directors & Officers liability policy. The French Court found that the clause was unenforceable by insurers against the insured as, in part, the clause failed to comply with article L.112-4 of the French Insurance Code requiring exclusions to be 'in very conspicuous characters' (i.e. bold, framed, or underlined) which the sanctions clause in question was not.
Partly in response to this decision, the LMA consulted extensively for over a year with industry stakeholders. On 5 October 2023, it published two further sanctions clauses – LMA3100A and LMA3200.
LMA3100A provides exactly the text as LMA3100, save for the removal of the word 'exclusion' from the title. However, LMA3200 goes further and provides additional explanation as to the desired effect of the clause. It refers expressly to benefits being 'suspended', and to the limit of such suspension being the end of an insurers' exposure to sanctions.
Sanctions Suspension Clause
It is a condition of this (re)insurance, and the (re)insured agrees, that the provision of any cover, the payment of any claim and the provision of any benefit hereunder shall be suspended, to the extent that the provision of such cover, payment of such claim or provision of such benefit by the (re)insurer would expose that (re)insurer to any sanction, prohibition or restriction under any:
- United Nations’ resolution(s); or
- the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America.
Such suspension shall continue until such time as the (re)insurer would no longer be exposed to any such sanction, prohibition or restriction.
The LMA guidance produced with the release of these additional clauses indicates that LMA3200 is intended to have the same effect as both LMA3100 and 3100A. It also indicates that LMA3200 'might be considered better to use' in the context of (a) coverage provided in a non-common law jurisdiction (such as France), (b) coverage provided in numerous jurisdictions, including non-common law jurisdictions, (c) policies providing for the law and jurisdiction of a non-common law country, or (d) in cases where a more 'user friendly' clause may be preferable such as for SMEs or consumers.
Sanctions clauses are critical to insurers to ensure that they have appropriate contractual protection in circumstances where they might find that a bargain they struck in the past suddenly, with the shifting of geopolitical tectonic plates, exposes them to substantial regulatory risk. Of course, there is also a need for insurers and their advisers to recognise when the increasingly complex web of sanctions provisions may impact a particular group, or category, of policies in its book, such that the relevant clauses are in fact triggered. An added layer of complexity may be the extent to which different jurisdictions / governing law will interpret particular provisions in sanctions clauses, even if those provisions have a settled meaning in the UK/US.
Given the global nature of coverage often provided by insurers, these additional clauses provide helpful additional options for the drafters of insurance contracts. However, underwriters are not obliged to use these clauses as drafted by the LMA; additional and / or bespoke wording can be added to meet the particular need of insurers on any given risk – such as reference to sanctions emanating from other jurisdictions. Furthermore, just because LMA3200 is said to be directed towards non-common law jurisdictions/risks or consumers/SMEs, there is nothing to stop underwriters from its use in policies that do not fit within these categories. Indeed, although the longer form clause might take up a few more lines on the page, it provides greater clarity as to its intention than perhaps that which is offered by LMA3100 and/or LMA3100A.
Achieving such clarity and minimising ambiguity is a principal aim of policy drafting. Few instances of the need to achieve this are more critical than in respect of sanctions clauses. The fact that cases such as Mamancochet Mining and that in the Paris Court of Appeal exist demonstrates that it is vital insurers get these provisions correct at the outset, in order to avoid, at best, expensive disputes and, at worst, exposure to breaches of international sanctions.