Getting to grips with the insurance “Sanctions Clause”
01 October 2012 | Magazine Archives FAnews & FAnuus | Features / Profiles | Robin Burgess, Centriq Insurance
Europe and the United States are imposing stricter economic sanctions against countries that are not United Nations compliant. Financial and criminal penalties are enforced for non-compliance while the provision of insurance is increasingly prohibited. Robin Burgess, senior underwriter at Centriq Insurance, examines how the sanctions clause affects the provision of insurance.
In light of the European Union (EU) Council Regulation’s decision to impose economic sanctions on Iranian persons and entities – thus increasing the application of (or the potential application of) international sanctions to the provision of insurance – many policies contain sanctions clauses.
The correct approach to sanctions
Some clauses are worded so as to provide insurers with a right to terminate the contract, should
a. the insurance be rendered illegal by sanctions or
b. the insured expose the insurer to a risk of being subject to any sanctions.
Other clauses provide that
a. the insurance will effectively be suspended or
b. the insurance will not operate at all should it be rendered unlawful by any sanctions legislation.
Whether or not the above-mentioned clauses take priority over automatic renewal or extension provisions, as found under the Review Clause, is open for debate. We can consider the case of Arash Shipping vs. Groupama Transport the Court of Appeal to get a feel for how Regulation 961, an automatic renewal clause, and a Sanctions Clause, interact.
Case in point
The policy, which incepted before the imposition of EU sanctions, contained an Iran sanctions clause, which gave insurers a discretionary right of cancellation. It also contained a Review Clause, which stated that the insurers would extend the policy by 12 months on an unaltered basis, provided that the loss-ratio at a specific date did not exceed 50%.
In light of Regulation 961 certain insurers gave prospective notice of cancellation on expiry under the Sanctions Clause. After discussions these insurers withdrew the notice of cancellation without prejudice to their rights, only to re-tender notice of cancellation shortly thereafter.
Premature cancellation
The insured sought to challenge the validity of the re-tendered notice of cancellation on various grounds, including that the notice was premature on the basis of the Review Clause and unreasonable because there was no risk of sanctions being imposed. Article 26(4) of Regulation 961 did not prohibit the automatic extension of the policy!
The High Court decided that, on balance, the Regulation should be interpreted as prohibiting the automatic extension of the policy and that the notice of cancellation was valid and effective. The Court of Appeal subsequently heard and dismissed the Insured’s expedited appeal.
Implications of the decision
There are a variety of sanctions and termination clauses in insurance and reinsurance contracts. Some operate by giving the insurer a right to terminate while others are expressed to suspend rather than to terminate the insurance… The latter clauses lead to increased uncertainty as the Court of Appeal recognised in the case of Arash.
Whether insurers have a right to terminate on the grounds of any sanctions legislation will thus depend on the proper interpretation of the relevant clauses in each individual case. In policies where each insurer’s subscription is made a separate contract of insurance, it is likely that each insurer will have to give separate notice.
The effectiveness of any notice may depend on whether or not the insurers have reasonable grounds for tendering it, which in turn depends on that insurer’s assessment of its exposure to the risk of sanctions. Where market placements involve insurers both inside and outside the EU, the assessment may be different.
Proceed with caution
Any decision by the insurers not to renew, extend, accept or bind a contract on the basis of a risk of sanctions is based on a contractual option in the policy. The provisional interpretation of Article 26(4) by the Court could make it harder for an insured or reinsured to argue that their decision was unreasonable.
South African insurers need to take a more cautious approach to automatic contract renewals or extensions of Iranian business, or obligatory treaty reinsurance of Iranian risks, or any other sovereignty for that matter.
