It is well known that the sanctions system has long been an important element of international trade in the insurance sector. A very recent decision of the High Court in the case Mamancochet Mining Limited v. Aegis managing Agency Limited and others  EWHC 2643 (comm) is the first real decision on the issue of the formulation of some of the sanction clauses in insurance contracts.
The case concerned the theft of a steel shipment owned by the plaintiff, deposited on Iranian territory. Mamancochet Mining sought to enforce the insurance cover offered by a policy with Aegis, which contained the following clause: “…. no (re)insurer shall be liable to pay any claim [that]… would expose that (re)insurer to any…trade or economic sanctions, Laws, or Regulations of the European Union, United Kingdom or the United States of America”, against the opinion of the insurers complained of who argued that the payment of the insurance claim exposed them to the risk of infringement of the sanctions, and this circumstance was sufficient to trigger the Sanction clause.
The judgment also analysed the implications arising from the application of Council Regulation (EC) No. 2271/96 (so-named “Block Regulation”), which prohibits Community entities from complying with certain US sanctions. The picture was complicated by the fact that there were multiple changes in the US system of sanctions against Iran between the signing of the policy and the ruling.
The US withdrawal declared on 8 May 2018 by the Joint Global Action Plan (“JCPOA”) has in fact led to the reintroduction of US sanctions, which were previously lifted following the entry into force of the JCPOA. This is the so-called“snap back”, which the US has declared by granting 90 and 180 days to ensure This is the so-called“snap back”, which the US has declared by granting a period of 90 and 180 days to ensure a transition in relation to activities and contracts being executed.
US sanctions were therefore reinstated on 6 August 2018 and then fully restored on 4 November 2018. Following the withdrawal of the United States and the extraterritorial application of the sanctions reintroduced for EU companies in trade with Iran, the European Union has taken some counter-measures to safeguard the interests of EU companies investing and trading with Iran, and in particular the updating of the EU Block Regulation, which therefore provides a shield for EU companies against the extraterritorial effects of US sanctions against Iran.
In the present case, the Court made a distinction between exposure to sanctions and exposure to a risk of sanctions, taking the view that the Sanction clause in the policy could only justify non-payment if, in particular, the insurer who had been sued had shown that a payment resulted in infringement of the sanctions. On the other hand, the mere risk of an infringement could not be considered included in the policy settlement.
In particular, Judge Teare took over “…the language and context of the clause show that the meaning of the clause which would be conveyed to a reasonable person is as follows. The clause provides that the insurer is not liable to pay a claim where payment would be prohibited under one of the named systems of law and thus “would expose” the defendants to a Sanction“.
The Court also held that the Sanction clause, where it operates, merely suspends the insurer’s payment obligation, not completely extinguishes it.
The judgment is undoubtedly interesting and relevant, although it reflects some of the specificities of the case analysed. The expression “expose to sanctions” is found in many Sanction clause texts, but many of these clauses have different and more restrictive formulations.
See for example the wording of the Sanction clause recommended by the German Insurance Federation Gesamtverband der deutschen versicherungswirtschaft (“GDV”) which reads: “Notwithstanding other provisions of the insurance contract, cover shall be granted only insofar as and as long as not in contradiction to economic, trade or financial sanctions or embargoes enacted by the European Union or the Federal Republic of Germany that are directly applicable to the contracting parties”.
Since the decision has attached great importance to the text of the clause, We must also ask ourselves whether it is necessary today to revise the texts of the Sanction Clauses adopted in the insurance market in order to reflect the changed regulatory and geopolitical framework.
The statement in the judgment that the effect of the Sanction clause is only to suspend, rather than extinguish, the obligation to pay the insurers complained against, generates a situation of uncertainty and long-term exposure dependent on unpredictable geopolitical factors and certainly outside the control of the party (with uncertainties affecting the estimate of reserves and provisions in the balance sheet).
A remedy could be the adoption of clauses excluding sanctions which provide for the definitive termination of the obligation to indemnify, if not immediately at least within a reasonable period of time.
One comment remains on the mechanism provided for in the Block Regulation, which makes it illegal for EU entities to comply with US sanctions laws and with extraterritorial effects.In the present case, the insured party argued that the de facto blocking regulation prevented the defendant insurers from invoking the Sanction clause.
The Court, however, adhered to the insurers’ argument, pointing out that relying on a Sanction clause to oppose the claim did not in itself lead to an act of compliance with the penalty regime of a third country and therefore did not infringe the Rules of Procedure.