On June 26, 2017, American International Group, Inc. (AIG) agreed to a $148,698 civil settlement with OFAC based on a voluntary disclosure of 555 apparent violations of OFAC’s Iran, Sudan, Cuba and Weapons of Mass Destruction Proliferators economic sanctions programs. AIG processed approximately $396,530 in premiums and paid claims on policies covering maritime shipments of goods destined for or transiting through Iran, Sudan, or Cuba, or that involved a person on OFAC’s Specially Designated Nationals (SDN) list. 455 of the 555 transactions involved Iran, and 33 involved shipments aboard “blocked” vessels belonging to Islamic Republic of Iran Shipping Lines (IRISL). IRISL was an SDN at the time, but was delisted as a result of the Iran nuclear deal in January 2016 (although IRSL remains subject to sanctions for U.S. persons and in limited circumstances also for non-U.S. persons).
OFAC’s Frequently Asked Questions (FAQs) concerning the Insurance Industry make clear that OFAC’s regulations trump state insurance law, and that the mere issuance of a policy or coverage to a prohibited person or for a prohibited activity constitutes a “service” that would violate U.S. law, assuming the insurer is subject to OFAC’s jurisdiction. Furthermore, an insurance policy that involves a restricted government, SDN, or entity owned 50 percent or more by an SDN, could be treated as “blocked” property, in which case the insurer essentially cannot take any action on the policy without a license from OFAC.
The standard practice for insurance companies operating with global scope to cope with these restrictions (in addition to screening the names of parties against the relevant sanctions lists) is to include “exclusionary clauses” in their policies to carve out from coverage any provisions that would violate U.S. economic or trade sanctions. There is no “one size fits all” exclusion clause that OFAC has published or officially endorsed, but the clause should be written in such a way and operate so as to put the insured on notice and legally exclude the sanctioned activity or party from the coverage.
In its AIG-related settlement statement, OFAC acknowledged that AIG’s compliance program included recommendations for when to use exclusionary clauses, and that “a majority” of its policies contained such clauses. OFAC explained, however, that “most” of these clauses were “too narrow in their scope and application to be effective.” It appears that OFAC found systemic shortcomings in AIG’s approach to excluding sanctions-related risks, both in terms of how frequently exclusionary clauses were implemented in policies and the actual substance and operation of the clauses when they were used. It is not clear how the latter determination was made by the agency, and, unfortunately, OFAC did not take this opportunity to offer guidance to the global insurance industry concerning what exactly it found to be “too narrow” about AIG’s exclusionary clauses. It is worth noting that OFAC’s FAQs offer a “standard exclusion clause” for open marine cargo policies: “whenever coverage provided by this policy would be in violation of any U.S. economic or trade sanctions, such coverage shall be null and void.” This clause is fairly straightforward, which leads others to wonder how AIG’s exclusionary language was viewed, rightly or wrongly, as inadequate.
The settlement statement also points out that, “some insureds, mindful of existing exclusionary clauses in their open cargo or worldwide master policies, sought single shipment policies that had no exclusionary clauses,” and “dozens” of the 555 transactions were covered by single shipment policies. The use of single shipment policies raises the question of how an insurance company monitors its product offerings in the single shipment context, where some sanctions risk may exist but may be difficult to detect. The likely answer is the implementation of systems that result in reasonable due diligence to detect such risks.
OFAC’s settlement statement reflects an attempt to address a narrow band of transactions in an industry where competitive pressures exist. Acknowledging that non-U.S. insurers may offer policies without exclusionary clauses so that customers are not left to face the sanctions risk, OFAC’s FAQs state: “In cases where such an exclusion is not commercially feasible, the insurer should apply for a specific OFAC license for the global insurance policy. In making a licensing determination, OFAC will review the facts and circumstances of each global insurance policy, including both risk frequency and risk severity, to assure that issuance of the policy will not undermine U.S. foreign policy goals.” But this advice may be little comfort to insurance companies who must timely draft exclusionary clauses in nuanced circumstances, and who face customer demands for tailored exclusions, one-off policies, and/or no exclusion at all. As anyone who has tried to apply for an OFAC license likely knows, the application process is often not a realistic option unless there is little to no urgency – a rare luxury in the real world.