London Market Update 

In this Court of Appeal case some guidance is provided regarding the operation and effect of the EU Regulation imposing sanctions against Iran[1] (“the Regulation”) on (re)insurance agreements and, in particular, whether extensions and renewals can fall within an exemption allowing the performance of existing agreements.

Groupama was the leading underwriter on a one year composite marine insurance policy provided to Arash (an Iranian entity) and others, incepting in early May 2010. The dispute related to whether, by reason of the provisions the Regulation, Groupama was entitled to serve notice of cancellation under the express provisions of the Policy. At first instance Burton J held that the cancellation was valid and effective and cover under the Policy ceased on May 9, 2011. The Court of Appeal upheld that decision.

The Policy contained a review clause allowing for an automatic one year extension, provided that certain claims ratios were not exceeded. The Policy also contained an Iran sanctions clause allowing insurers to terminate cover in the event that they may (in the opinion of the insurers) be exposed to sanctions. Five months into the policy period the Regulation was introduced, imposing sanctions on Iran including a prohibition on providing (re)insurance to Iranian entities (Article 26). The prohibition included the extension or renewal of (re)insurance agreements but did not prohibit the performance of agreements already in existence (Article 26(4)). Groupama took the view the that the extension contemplated by the Review clause would breach the prohibition in Article 26, and not be saved by the exemption in Article 26(4), and therefore gave notice of cancellation. Arash contended that the cancellation clause required Groupama to have been exposed or potentially exposed to the specified risk and it required an act or omission on the part of Arash giving rise to that risk.

Delivering the leading judgment of the Court, Burton LJ identified two issues for determination: (1) is the extension of the Policy prohibited by Article 26(4) of the Regulation; and (2) was Groupama entitled to serve notice of cancellation, and was its notice effective?

The Court heard full submissions on Issue 2 and dismissed the appeal on the basis that the cancellation was valid. In relation to the Issue 1, it was noted that the effect of Article 26(4) was of general concern to the insurance market and guidance from the Court would be welcomed; however, Burton LJ set out various reasons as to why he was not inclined to express a view on this issue[2]. Tomlinson LJ delivered a supplementary decision in which, while reiterating that the ECJ was the ultimate authority, and noting that the matter had come before the Court on an expedited basis, he expressed the view that the decision of Burton LJ in the High Court, as to the effect of Article 26, was “plainly correct” - i.e., Article 26 prohibits the provision of insurance after the operative date; Article 26(4) carves out an exception for insurance agreements made before the operative date; but, extensions or renewals such as in the present case do not fall within the exemption and are prohibited. This approach was shared by HM Treasury (the competent authority for such matters), which had indicated that the ‘automatic renewal’ in this case would be prohibited by the Regulation (a view also shared by the European Commission).

This decision will give some guidance to the UK market on the effects of the Regulation and, given that it emanates from the Court of Appeal, it should also carry some weight in influencing other EU jurisdictions; although, obviously, each Member State is free to develop its own interpretation unless and until the ECJ delivers a binding decision.

A copy of the judgment can be found here.