An awaited decision on the enforceability of the sanctions provision in policies of insurance heard in the UK courts has turned out to be of not much general assistance.
The English High Court found that, although an insurer is not liable to pay a claim where the payment would be prohibited under EU or US law and thus ‘would expose’ the insurers to a sanction, in the context, the EU sanctions did not apply because payment of the claim is no longer prohibited under the recent EU rules. In addition the consequences under US law were deferred under a wind-down clause to 4 November 2018 and therefore did not expose the particular defendants to a sanction within the meaning of the sanctions clause.
The judgment is helpful in finding that the ‘Sanction Limitation and Exclusion Clause’ in policies refers to being ‘exposed to sanctions’ and not ‘exposed to the risk of being sanctioned’.
Before a sanction can lawfully be applied to a reinsurer they must be guilty of conduct which is prohibited. The government agency charged with applying sanctions may or may not decide to penalise the prohibited conduct with a sanction.
It is necessary for the insurer, on the usual wording, to show that the payment of the insurance claim in question is conduct which is prohibited by the applicable US or EU law or regulation. The standard clause provides that the insurer is not liable to pay a claim where payment would be prohibited under the named systems of law as a fact (and not as a risk).
On the facts of this case the defendant insurers were unable to discharge the burden of proof to show, on the balance of probabilities, that the intended use of the steel which was imported into Iran and stolen fell within one of the stated exceptions (for example military use). In addition, there is nothing in the sanctions clause which purports to extinguish a claim. The clause provides that ‘to the extent that’ the payment of the claim would expose the insurer to sanction, the insurer is not liable to pay the claim. If the law changes and the insurer is again liable to pay the claim under the policy, payment must be made. In the meantime, that liability is suspended.
In the circumstances, if a different outcome is required by insurers of the sanctions clause, the wording should be changed so that the risk of sanctions is sufficient and the claim is extinguished and not suspended (assuming policyholders will agree to that provision).