The Court of Appeal has upheld a decision that insurers were entitled to cancel a marine insurance policy based on the conclusion that they were exposed to the risk of breaching Iran sanctions if the policy was renewed. Although one of the issues on appeal was more generally whether the extension of the period of the policy was prohibited by the Iran Sanctions Regulations, the Court declined to answer the point, which leaves insurers facing similar issues on renewal without a definitive answer on the issue.

Arash Shipping (a company controlled by an Iranian entity) was a representative of co-insureds under a composite marine insurance covering hull and machinery risks. Groupama and a number of other underwriters subscribed to the 12 month policy which incepted in early May 2010 and contained an Iran Sanctions Clause allowing insurers to cancel their participation in circumstances where the insured had exposed or may have exposed the insurers to the risk of being or becoming subject to any sanction, prohibition or adverse action in relation to Iranian sanctions. The policy also contained a review clause, which stated that after ten months of the policy period, subject to the claims record of the insured, insurers would extend the period of insurance for 12 months on an unaltered basis.

In October 2010, Council Regulation (EU) 961/2010 came into force imposing economic sanctions on Iranian persons and entities. Article 26(4) of the Regulation “prohibits the extension or renewal of insurance and reinsurance agreements concluded before entry into force of this Regulation, but, without prejudice to Article 16(3), it does not prohibit compliance with agreements concluded before that date.” Article 16(3) states that “no funds or economic resources shall be made available, directly or indirectly, to or for the benefit of” certain Iranian bodies, which definition caught Arash Shipping.

In April 2011, Groupama served notice of cancellation of the policy and Arash issued proceedings on the basis that Groupama was not entitled to cancel the policy. The Court of Appeal was asked to rule on two issues:

  1. Was the extension of the policy prohibited by Article 26(4) of the Regulation?
  2. Was Groupama entitled to serve its notice of cancellation, and was the notice effective?

Mr Justice Burton at first instance had answered both of these in the affirmative. In relation to issue 2, Arash made a number of submissions, including that:

  • Interpretation of the Iran Sanctions Clause required an act or omission on the part of the insured. This was rejected on the basis that sanctions were often directed at persons by reference to their nationality or residence, and that such a reading of the clause would be unduly narrow.
  • The notice of cancellation, having been served after the initiation of proceedings, was not served in good faith and failed the test of Wednesbury reasonableness.

The good faith argument was similarly rejected in the Court of Appeal on the basis that the policy conferred on the insurer the right to cancel if it (not the Court) was of the specified opinion. Moreover, the Court ruled that it could not accept Arash’s contention that Groupama could not reasonably have formed the view that the extension of the period of insurance would expose it to the relevant risk. Central to this decision was the fact that HM Treasury, the European Commission, and an experienced Commercial Court judge had all disagreed with Arash’s interpretation of Article 26(4).

Given its conclusion on issue 2, the Court of Appeal declined to answer issue 1. Although urged by the parties to decide this issue due to insurance market concern, the Court cautioned against a hypothetical ruling on the effects of legislation to create a criminal offence, all the more so in the absence of the prosecution authority. Furthermore, any decision would not be binding on other Member States and would only be limited to the London market. Therefore insurers facing similar issues will derive limited comfort from this decision in concluding upon the effect of Article 26(4) on renewals.

For a copy of the full judgment, please click here