The Sanction Clause as what Malaysian insurers called it has effectively found its place in the industry on 1st April 2011.
What exactly is this Sanction Limitation and Exclusion Clause or Sanction Clause in short?
This Sanction Clause had on 1st April 2011 found its place in the Malaysian insurance industry especially where marine related policies were concerned. Most foreign insurers seemed to have steadfastly adopted this clause in particularly Japanese dominant insurers, however, most local dominant insurers then were spared from this Clause simply because most of their treaty reinsurance leaders (especially those Malaysian owned reinsurers) were prepared to give leeways for not inserting this as part of the treaty programme.
However after 1st July this year the adoption of Sanctions Clause seems to have reached another milestone, most Cargo insurance policies issued to international shipments are now slammed with the clause.
What cause the Clause adoption to spread throughout the Malaysian markets?
Simply put, Malaysian reinsurers that hold sizeable shares of the local reinsurance market are now slapped with the Sanction Clause when their retrocession programme came up for renewal this year – meaning, the flexibility to waive in the past is no longer there. The foreign reinsurers operating in the country saw the opportunity and sealed the Clause adoption across the reinsurance markets.
|No (re)insurer 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)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America.|
[QUOTE] Once this Sanction Clause is made part of the reinsurance contract the insurer would have to issue all of their cargo policy with the Sanction Limitation & Exclusion Clause in place. If the insurer failed to do so they may end up breaching the treaty terms, which means no treaty cover in the event a sanction-related claim occurred, i.e., where a claim that require them to pay to a claimant that is a sanctioned party or for losses to cargo that falls within those prohibitive (or sanctioned) parameters. [UNQUOTE]
What is the repercussion if the insurer waives the application of the Clause in their Cargo policy?
Without elaborating further, the main facts would have been adequately described in the above QUOTE. The following quotes are also relevant to depict the reprecussion if at all these are….
“Naturally most if not all insurers would just apply the Clause not wanting to take any risk. Risks may involve the burden of proving that the claims payment would not all foul of the sanctions.
“If the insurer cannot prove on the balance of probability that claims will not fall foul of those US, UN, EU related sanctions then they would be caught between a legal contractual obligation to settle the claimant’s claim and the constraint of the said burden of proof.
Assignable Nature of Marine Cargo Insurance. The other point being the assignable nature of a marine cargo insurance policy…. where insurable interest must exist at the time of a loss for the claimant to successfully file a claim, something unlike the practices in non-motor insurance. The following is the excerpts….
|A Cargo insurance policy or certificate is an assignable document and title, (i.e. ownership or right to receive the benefits) can be transferred from one party to another either by “endorsement and/or delivery”. This means that a seller who has arranged Cargo insurance on the goods can transfer title to the insurance contract to the buyer, along with title to the goods themselves. This only happens, however: -
Thus in Cargo insurance, unlike many non-marine classes, the person who arranges and buys the policy is not necessarily the person entitled to claim in the event of a loss.
Check out what is insurable interest below….
To be able to claim under a Cargo policy, the claimant has to show that he had an insurable interest in the goods at the time when the loss or damage occurred. This means that he must be the party who suffers the financial loss as a result of the loss or damage to the cargo, as determined by the contract of sale between seller and buyer.
Evidence of insurable interest is required in the event of a claim and this is normally provided by the claimant in the form of the original policy or certificate and a copy of the sales invoice showing the sale terms.
By this principle, insurers can ensure that a loss is paid for only once and that different parties are not reimbursed for the same loss.
How this Assignable nature of a cargo insurance policy could possibly drag the insurer into those prohibitive areas of the sanctions is really unpredictable…. simply say if the insurer is to issue a cargo policy without any sanction clause, that insurer must realise sanction related issues may surface when a claim is eventually made…. It is not a norm for the underwriter to check the background of the eventual beneficiary of the cargo insurance, save perhaps being more alert where the country in which those cargoes are being shipped to, is brought into mention at the time of purchase.
Insurer may eventually comes face-to-face with a claimant (including the country that he/she is identifiable with….) who somehow may fall foul or exposes the insurer to the said sanctions.
In the absence of a Sanction Clause within the policy the said insurer is NOT likely able to void their claims obligation at all. Which also means, the insurer would need to settle the claim despite not only will this settlement exposes the insurer to those US, UN and EU related sanctions but also hauled up by the authorities of the home country, which in our case the Malaysian government.
Incorporating the Sanction Limitation & Exclusion Clause would provide insurer the leeway to void the claims obligation as it was defined in the case of ARASH vs GROUPAMA - giving rights to insurers to terminate a policy inspite of a automatic renewal clause in the policy, which points to the fact, as long as there is this Sanction clause within the insurance policy, insurers are able to terminate the insurance cover immediately citing the various sanction related directives….
|United Nations, European Union and United States of America in recent times have all issued various resolutions and directives. It is important to note those U.S. Prohibited or U.N. Sanctioned Countries as per The Office of Foreign Assets Control (“OFAC”) Regulations of the U.S. Department of the Treasury. You should have guessed it correctly easily, those countries would include, although not exhaustive, Iran, North Korea, Libya, Burma, Ivory Coasts, Somalia…..
This sanctions prohibits dealings (including those shipments to / from / via) with specific countries, persons, ships, aircraft or goods especially with respect to import and export licensing of technology or controlled goods. These lists differ depending on the country the sanctions are being enforced upon. In this respect it makes it the more difficult for (re)insurers to foresee whats lie ahead in days to come….
U.S. Congress approved on 24 June 2010 “the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010″, which came into force as from 1 July 2010. The law imposes new trade sanctions focused specially on the exportation of refined petroleum products to Iran. As sanctions would be imposed on persons, including entities (both US & non-US persons) who/ that provide goods, service, technology, information or support relating to the transportation of refined petroleum products (although not limited in this aspects) to Iran, thus similar sanctions would also be imposed on persons, including entities (both US & non-US persons) who/ that provide insurance or reinsurance for such activities. In respect of this piece of law some felt the Sanction Clause can be waived for those goods that have nothing to do with refined petroleum products, eg. food stuff related…. but then in reality we cannot look at one of the sanction related laws and form a conclusion, therefore take the risk!
Following numerous developments that had impacted many advanced economies, majority of cargo insurance underwriters in Lloyd’s, London and as well as other world cargo insurance markets have now increased their zeal towards attaching the “ Sanction Limitation and Exclusion Clause”. In a nutshell this Clause does not accord coverage for any breach of sanctions.
To put it simply “Sanction Limitation and Exclusion Clause” should be applied to all of the marine cargo insurance policies and/or certificates issued as a matter of avoiding any possible breach of the said Sanction Clause.
What if the insurer is aware of the potential sanction related breach and yet proceed with the hold cover? While having established that insurers are able to terminate the cargo policy in any event of possible breach of those sanctions, it is really NOT being established if insurers having known of a shipment going to any of those sanctioned countries and yet proceed to issue the policy cover, whether the decision in ARASH vs GROUPAMA would still stick…. I supposed this may be much more stickier that we used to think as per the following quote:
[QUOTE] “If an insurer knew that a particular shipment is going to any of those sanctioned countries or having attaching personalities or entities identifiable to those sanctioned countries or that the shipment is directly related to items or trades forbidden within those US, UN or EU sanctions AND yet took a risk issuing the insurance cover, then the said insurer should NOT be allowed to terminate cover or deny liability whenever a claims arose for mention by relying on the sanction limitation & exclusion clause inserted within the insurance coverage.” [UNQUOTE]
The following is the Clause wordings as it is being applied in the original marine cargo policies….
The clause mirror-ed that of the reinsurance version….
THE CLAUSE WORDINGS AS APPLIED IN CARGO POLICY:
No insurer shall be deemed to provide cover and no 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 insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, Japan, United Kingdom or United States of America.
This clause confirms that the insurer will neither offer cover nor pay any claims under a policy if by doing so it places the insurer in breach of any sanctions.
While Malaysian government is not overly pushing for such sanctions compliance, it does not mean they would not act in the event of a severe breach having been identified and complained officially by other countries….. The government will definitely look into breaches committed by the insurer and they would have to do a “sacrificial” act…, “You may be the FALL GUY” in such instances!
Due to the significant penalties, insurers are being overly cautious in their approach to the sanctions and, more importantly, are placing the onus on the Assured to ensure that they are not in breach of the sanctions.
On a separately note,
BIMCO has introduced a sanctions clause for Time Charterparties. Shipowners are being encouraged to include the new clause in all their charterparties as it allows them to use their judgement as to whether or not to comply with charterer’s orders where to do so may constitute a breach of the sanctions. This is already having an effect as owners are invoking their right under that clause to avoid trade to Iran. The International Group of P&I Clubs have issued numerous circulars on the issues arising from the sanctions and we would be pleased to provide copies of these upon request.
Are insurers complying with the Sanction Clause adoption as prescribed in their reinsurance arrangement?
Firstly, it is important to note that there are currently no laws forbidding Malaysian dealings with most countries sanctioned in those US, UN or EU sanctions, neither does the Insurance Act or Malaysian Central Bank forbids the issuance of insurances for any transactions with those sanctioned countries.
Generally the markets are reasonably well restrained…. but there are two or three insurers still providing the flexibility to waive the Clause despite having the Sanction Clause in their treaty arrangement…. at least I know they are linked to foreign companies from US! Of course, there are also a few local insurers that are not currently applying this Clause having renewed their treaty programmes prior to 1st July 2011, where they have no such constraint.
Anyway this is not such an important question for in no time such Sanction Clause would have to be fully complied simply because insurers will not be able to recover any possible sanction related losses from their treaty and is likely exposed to a sanction related situation that they are not able to manoeuvre itself out from it. And even if the insurer intends to pay a claim that is likely to run foul of those sanctions, it is unlikely this can be done as banks may not be in any position to assist with the funds transfer to the claimant in a sanctioned country….
“How could you make the payment of claims to the claimant who is the buyer domiciled in a sanctioned country?”
Are Cargo Insurance buyers facing problems?
There are currently not many issues raised by Malaysian exporters or importers in as far as the Sanction Limitation & Exclusion Clause in the Cargo insurance policy is concerned, save for a small group that have existing dealings with those countries falling under the sanctions’ listings….
Where sanctions clause is applied in the policy, Assureds or any parties in which benefits of the policy are accrued are compelled to comply with those sanctions although Malaysian government has not enforce any of such prohibitions as yet. Nonetheless it is good to keep in mind that the Malaysian government is equally compelled by various forms of bilateral agreements to comply with the US, UN and EU sanctions.
For this small band of international traders, sanctions like this is really a pain-in-the-neck and some smaller ones may have to close their transactions with those sanctioned countries indefinitely. In reality this is not just about insurances only, it is also about how money could be paid by the buyer to the seller…. as the hands of the financial institutions are also tied within the equation of such sanction. The following should makes good reading….
What can Malaysian EXPORTERS or IMPORTERS (SELLERS or BUYERS) do within this overall equation?
There is currently nothing much that they can do…. the only simple advise that we can look at; if you are an exporter or seller, simply ship your cargo on either Costs & Freights (C&F) or on Free On Board (FOB) basis and then buy a marine cargo insurance covering to an extent that you still have an insurable interest in the said cargo, i.e. in as far as the payment is still NOT received. In this manner, your willing Malaysian insurer will just settle the claim amount identified in the loss adjustment process directly to you via financial institutions within Malaysia.
However you may still face with the question of how best to recover the balance of the undamaged portion of your cargo in the sanctioned country…. But at least you got your insurance claims paid!
And if you had already secured your payment for the cargo from the buyer, it is no longer your problem or any further issue for your insurer to resolve when the cargo eventually arrived damaged…. Shipments on C&F and FOB simply means the insurance would be procured by the buyer….
What if you are the importer or the buyer in the transactions with those entities domicile in a sanctioned country? It is also getting a willing Malaysian insurer to insure the cargo on basis that as far as the payment for the cargo had not been made to the seller. In this case it is preferred that shipment is on Costs, Insurance & Freights (CIF) ex-port of the sanctioned country….
But at the end of the day you would need to find that WILLING Malaysian insurer to do just that! What we meant by WILLING here is, insurer would be exposed to numerous problems….
“….still there are possible breaches of sanctions although much lesser, said Sanction Limitation & Exclusion Clause removal from the policy may bring issues that are currently unknown to us, and there may arose some possibilities of contractual misalignment that we may not be able to comprehend as of now…. unless you the readers can point this out to me.”
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