The Commercial Court in London has held that insurers subscribing to a marine cargo policy cannot rely on the sanction limitation and exclusion clause to avoid liability to pay a claim in respect of a stolen cargo of steel billets.

The policy and sanctions clause

The policy was a marine cargo policy (the “Policy”) that protected the insured against the risk of theft of cargo, including the steel billets that were the subject of this claim.

The Policy included the following standard “Sanction Limitation and Exclusion Clause”:

“No (re)insurers 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)insurers to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, law, or regulations of the European Union, United Kingfield or the United States of America.”

The claim

Upon discovery of the theft of the steel billets from a port in Iran, the claimant sought an indemnity under the Policy. The insurers denied the claim on the basis that payment “would expose” them to sanction, prohibition or restriction under the regulations or sanctions of the EU and/or the United States of America.

The claimant commenced proceedings. The trial was dealt with on an expedited basis, as it was common ground that, as regards the insurers owned or controlled by a U.S. parent company, sanctions on the payment of insurance claims would be re-imposed from 11:59pm Eastern Standard Time on 4 November 2018. Accordingly, there was a short window within which payment could lawfully be made.

Mr Justice Teare was asked to consider two main issues:

(1) Whether, on a proper construction of the clause, the term “would expose” provides that insurers are not liable to pay the claim if they are “at risk” of being sanctioned (the construction argument); and

(2) Whether payment of the indemnity would be a breach of U.S. and/or EU sanctions (the sanctions issue).

The construction argument

Insurers advanced an argument that “expose” should be construed to include a risk of being sanctioned by the regulator. The claimant submitted that the clause required insurers to establish, on the balance of probabilities, that payment would put them in breach of sanctions. Mr Justice Teare preferred the claimant’s submissions. He expressly noted that the clause before the court did not refer to being “exposed to the risk of a sanction or prohibition” (paragraph [46]). Mr Justice Teare accepted the claimant’s submission that, had the parties intended to include such a provision, it should be expressly stated in the policy. He held that “clear words would be required to establish a common intention that the insurer need not pay an otherwise valid claim where there was merely a risk that payment would incur a sanction” (paragraph [40]). Mr Justice Teare refuted the defendants’ argument that, once the sanctions clause was triggered, insurers’ liability under the Policy was extinguished.

The sanctions issue

Both parties submitted expert evidence in relation to the extent and effect of U.S. sanctions and the application of the “wind down” provision following President Trump’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA). The defendants’ expert sought to argue that the wind down did not apply to claims which arose before the issue of General Licence H. Mr Justice Teare preferred the evidence of the claimant’s expert and accepted that the wind down provision applied to the payment of the insurance claim in question and is consistent with the JCPOA. As to the applicability of EU sanctions, the point was dealt with in short order by Mr Justice Teare, who concluded that, in paying the insurance claim, the insurers are not exposed to any EU sanction.

The claimant’s alternative case

In the event, the court did not need to rule on the claimant’s alternative case that, should payment of the insurance claim have exposed the insurers to U.S. sanctions, the EU Blocking Regulation had the effect of preventing insurers from relying on the sanctions clause to avoid payment. Given the difference in the sanctions regimes in the current political climate, a decision on this point is keenly awaited.