What is Sanction Limitation and Exclusion Clause? What are the Implications?

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.

 

Omitting the Sanction Limitation & Exclusion Clause is a big burden to carry

Something interesting.... a big burden to carry for waiving the Sanction Clause

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.

(as applied within the treaty reinsurance contract)

Sanction Limitation and Exclusion Clause(JW 2010/004)
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….
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: -

“If there is a contractual arrangement to transfer the insurance, e.g. a “C.I.F.” contract of sale (see Terms of Sale),

and

“The seller “endorses” the policy or certificate by signing it on the back before passing it to the buyer.

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….

Insurable Interest

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….

 

Some Development Brief with some short arguments….
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…..

The nature and types of sanctions are quite complicated or rather long and tedious for understanding, and the list of countries gets extended over time.

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!

Summing up it is best we refrain from dealing with those countries and/or targeted people on the LIST and also those designated sanctioned goods and services….

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.

The worst part in this equation is that the clause wordings are so general to an extent the onus of proving that those sanctions are not operative against any of the marine claims lies with the insurer rather than the treaty reinsurers. Where the nature of the claims or the identity of the claimant exposes the insurer to a possible breach of those sanctions, this would have made the tasks of proving otherwise extremely difficult!

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….

 Sanction Limitation and Exclusion Clause

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….

http://www.asialaw.com/Article/2303548/Channel/16973/Impact-of-sanctions-law-on-financial-institutions.html

 

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.”

Do comment, whether you agree or disagree with this blog posting to help build better understanding of this subject – please insert this into the comment column below.

 

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10 comments for “What is Sanction Limitation and Exclusion Clause? What are the Implications?

  1. Ken
    December 11, 2012 at 23:42

    I think all being said, four things make the most important cut here – the government of the country, the blacklisted entities / organisations, blacklisted persons and the sanctioned goods.

  2. Tan Chian Fong
    October 4, 2011 at 12:10

    Thanks for your update in your articles.

    I discovered some insurers also imposing this clause in their Fire Policy.

    I wonder whether this clause have been ‘approved & allowed’ by PIAM.
    Pls advice.

  3. Tan Chian Fong
    October 4, 2011 at 12:10

    Thanks for your update in your articles.

    I discovered some insurers also imposing this clause in their Fire Policy.

    I wonder whether this clause have been ‘approved & allowd’ by PIAM.
    Pls advice.

    • October 9, 2011 at 11:31

      Most companies do not insert any sanction clause within the Fire insurance policy unless their treaty reinsurance programme require them to do so. The inclusion of sanction clause has nothing to do with PIAM or Fire Tariff. It is really the constraints of their treaty RI programmes, something global, not just Malaysia…..

  4. Anad
    October 2, 2011 at 08:28

    I heard of CEO being prosecuted for such breaches especially once they set foot on US soil. This is how serious the whole thing is.

  5. Teoh
    September 27, 2011 at 09:19

    Thanks for your articles..
    As we understand now, some insurer/reinsurers have been imposing this sanction limitation clause not only on marine clasee, but on other classes as well.. so may we have some articles/your comments on the implications if sanction limitation clause were to be imposed in the non-marine class of insurance like property class.. FWC.. etc..

    • October 2, 2011 at 09:19

      At least I know of one insurer where their treaty programme is imposed with sanction clause for all classes of insurance. I think the markets misunderstood what sanction clause simply means. Imposing sanction clause in the policy simply means the insurer does not wish to cover the insured parties in any event they trade, invest or involve in projects with any of those US, UN and EU sanctioned countries. It is really the pyschology behind finding the sanction clause in the policy – usually it has to do with brokers making whoa-haa over the appearance of this clause! Ex. if you insure (with or without Sanction clause) a construction project in Iran where the main contractor is a Malaysian owned subsidiary, you may still face with a claim from the principal or a third party claimant who is a citizen of a sanctioned country. Now the question is how are you going to pay them? Reinsurers and Insurers putting in the sanction clause into the policy is for the purpose of avoiding unnecessary obligation which fall foul of the sanctions….

      • koh cc
        October 3, 2011 at 09:34

        I supposed sanction limitation and exclusion clause (if inserted into the policy whether marine or non-marine) helps insurers avoid contractual obligations if called to settle a claim involving parties or country falling foul of those US and UN sanction directives. Thus in time to come such sanction clause forming part of any insurance policy would be a common sight. The world would have to live with it.

  6. Ng Eng Yew
    September 20, 2011 at 09:03

    Marine insurance unlike conventional insurances are issued on journey specific (ie warehouse to warehouse or port to port) and not based on period of cover. One tricky aspect would be on policies that are already issued (esp on MOC), where these restricted countries are already allowed (bearing in mind that an MOC is deemed to be “open” until cancelled). Another would be how the ship will travel (they are just like busses, stop at each port and unload those containers – so if my container is to reach US but ended up in Somalia will the reinsurer be held responsible?)

    Also in marine based policies there are scenarios (which are unintentional) which needs to be addressed (ie port of distress, piracy) as these are perils are included esp if issued under ICC(A).

    Am uncertain whether such a clause will really be enforceable. After all, marine insurance already have a Marine Insurance Act (where it is already acceptable that trade can be conducted anwhere in the world) and whether can this clause can be used to overwrite any proviso under the Act.

    • October 2, 2011 at 09:06

      If the policies are already issued and issued without any sanction clause, these policies should be cancelled as soon as possible, and this includes MOC as well. Since this is without sanction clause, notification to all interested parties should be given.

      If the cargo is destined for US but landed in Somalia…. I do not see a problem since any settlement of a claim is to the US buyer (if any) unless this was done purposefully to circumvent the laws. If the policy was issued with a sanction clause it would accord protection to the insurer in any circumstances the insurer is reqt to settle a claim with a buyer domicile in a sanctioned country. The said insurer would be able to avoid the policy liability to settle.

      While on a journey to an intended destination the cargo is hijacked by Somali pirates and landed in Somalia whether the policy has a sanction clause of not this does not affect the coverage accorded by the policy. However this may not be true in circumstances where ransom money was paid to Somalian pirates – the US sanctions may prohibit such settlement but I am not too sure how this falls within the sanctions…. ANYONE CARE TO COMMENT?

      These recent sanctions as provided by the US government, UN charter and EU directives affect government to government, and country to country so these sanctions would override the provisions of the MIA if there are irregularities in between. Because of the nature of these sanctions it is not whether enforceable or not it has to be enforced…. you may have a situation where US government decides to place Malaysia within the sanction list of country for consistently breaching against the sanctions directives, which means Malaysia as a country would be affected! If Petronas insists of continuing with their O&G investment in Iran then Malaysian government would be pressured to ensure Petronas makes enough attempt to exit from Iran….

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