In Mamancochet Mining Limited v Aegis Managing Agency Limited and Others  EWHC 2643, the High Court held that, in order to avoid payment of a claim, insurers were required to show that payment would expose them to sanctions under US or EU law. A mere exposure to the risk of a sanction was not sufficient.
This case concerns the interpretation of a sanctions clause in a marine cargo insurance policy (the Policy).
The Policy was issued by various Lloyd’s syndicates and subject to English law. It protected the assured (Metalloyd Limited) against the risk of theft of two cargoes of steel billets shipped from Russia to Iran. Sometime between 22 September and 7 October 2012, the goods were stolen from the bonded storage in which they were held. The assured submitted a claim under the Policy sometime after 8 March 2013.
The defendant insurers resisted payment on the basis of the ‘Sanction Limitation and Exclusion’ clause in the Policy, which relevantly provided that:
“….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”
The Court determined that there were three main issues for decision:
- What is the proper interpretation of the sanctions clause in the Policy?
- As a matter of fact, would payment of the claim “expose” insurers to US and/or EU sanctions within the meaning of the sanctions clause in the Policy?
- If the question above is answered affirmatively, are insurers prevented from relying on the sanctions clause by virtue of the EU Blocking Regulation?
The Court’s findings on each issue are examined below.
Contractual Interpretation (First Issue)
Insurers argued that, on its true construction, the sanctions clause provided that they were not liable to pay a claim where there was a risk of exposure to any sanction. Therefore, the insurers argued, they were entitled to avoid payment of the claim if they could show that there was a risk that the relevant government agency might have concluded that insurers had engaged in prohibited conduct (when in law there was not or might not be such conduct) and so impose a sanction.
The Court found against the insurers. It held that the sanctions clause required insurers to establish that payment would put them in breach of applicable laws and thus expose them to sanction. The Court noted that the clause did not refer to the risk of being exposed to any sanction, but rather requires that a payment of a claim “would expose” an insurer to sanction. Clear words would be required if the mere risk of a sanction was to entitle an insurer to avoid paying the claim. Nor was the effect of the sanctions clause, if engaged, to extinguish the insured’s claim as insurers argued. As a result, if proceedings were commenced to stop the limitation period running, there was no difficulty in staying such an action for the period during which the insurers’ liability to pay was suspended by the sanctions.
It therefore fell to the Court to decide whether payment of the claim in question would in fact expose the insurers to sanction under US or EU law.
US and EU Sanctions Regimes (Second Issue)
The US Sanctions
Of the 11 defendant insurers, 9 were US owned or controlled foreign entities (USCFEs). Section 560.204 of the Iranian Transactions & Sanctions Regulations (ITSR) contains a prohibition on the provision of “services” to Iran. It was common ground that the provision of insurance cover, including payment of a pre-existing claim, constitutes a “service”.
The parties agreed that:
- at the time the Policy attached (i.e. when the cargoes were shipped from Russia to Iran on 23 and 25 August 2012 respectively), the ITSR did not extend to USCFEs. Therefore, the insurers were not prevented from insuring the cargoes;
- at the time the cargoes were stolen (sometime between 22 September and 7 October 2012), the ITSR did not extend to USCFEs and therefore the insurers would not have been prevented from paying a claim under the Policy; and
- at the time the claim was submitted in March 2013, the ITSR was extended to include USCFEs by section 560.215. Therefore the relevant 9 insurers would have been prohibited from paying a claim under the Policy and would have been exposed to sanctions
Effective from 18 October 2015, the Joint Comprehensive Plan of Action (JCPOA), provided that Iran was to receive relief from various international sanctions in return for various commitments related to nuclear non-proliferation. On 16 January 2016, General Licence H was issued by the US Office of Foreign Assets Control (OFAC) which had the effect of permitting insurers to pay the claim in question (provided such payment was made in sterling).
On 8 May 2018, President Trump announced that the US would withdraw from the JCPOA. General Licence H was revoked, subject to a wind down provision. The wind down provision permitted transactions which would otherwise have been prohibited by section 560.215 to occur until 4 November 2018.
The parties disagreed on the effect of the wind down provision. The insured Metalloyd argued that the wind down provision extended to transactions lawfully entered prior to General Licence H. It therefore followed that the insurers were permitted to pay a claim arising from an insurance contract entered prior to 16 January 2018, including the claim in question.
In contrast, the insurers advanced an argument that the wind down provision did not apply to transactions that arose prior to the issue of General Licence H.
The Court held that, on a plain reading, the wind down provision extended to all transactions that would otherwise have been prohibited by section 560.215 (the insurance claim in question being such a transaction). Therefore, the wind down provision permitted payment of the insurance claim until 4 November 2018, and so payment by that date would not expose insurers to a sanction within the meaning of the sanctions clause. While there were exceptions to the wind down which might have entitled insurers not to pay the claim (for example, if the steel had been destined for military use) insurers had been unable to prove this was the case. The Claimant was therefore entitled to payment of its claim.
The EU Sanctions
Of the 11 defendant insurers, 2 relied solely on EU law to resist payment of the claim in question.
It was common ground that EU law permitted the provision of cover at the time the Policy was written, and also permitted the payment of the claim in question.
Nevertheless, the insurers submitted that because the relevant authorities had either failed or refused to confirm that payment of the claim was permitted, the insurers were exposed to the imposition of sanction (or the risk of sanction).
The Court rejected the insurers’ argument, finding that such an absence of confirmation did not expose insurers to sanction because the payment of the claim in question was not prohibited by EU law.
The EU Blocking Regulation (Third Issue)
The Claimant advanced an alternative argument to the effect that, if payment would expose insurers to sanction, insurers were prevented from relying on the sanctions clause of the Policy by virtue of Council Regulation (EC) 2271/96, as amended (EU Blocking Regulation). The regulation was intended to protect against the effects of the extra-territorial application of legislation adopted by a third country (including various US sanctions against Iran). The Claimant argued that, by relying upon the sanctions clause, insurers were complying with US extra-territorial legislation in breach of the EU Blocking Regulation.
In light of the Court’s conclusion that payment of the claim would not expose insurers to sanctions, the Court was not required to express a final view on the Claimant’s alternative argument. Nevertheless, the Court saw “considerable force” in the insurers’ argument that the EU Blocking Regulation was not engaged where an insurer’s liability to pay a claim is suspended under a sanctions clause of an insurance policy. In such a case, the insurer is not “complying” with a third country’s prohibition but is simply relying on the terms of a policy to resist payment.
This decision seeks to highlight the importance of the use of clear language to establish a common intention between parties to an insurance contract. In determining that the sanctions clause of the Policy did not permit insurers to avoid payment of a claim by reason of the mere risk that a sanction may be imposed, the Court commented that “…one would expect that an assured would only be willing to agree that the insurer was not obliged to pay an otherwise valid claim where the insurer was prohibited in law from paying – rather than where there was merely a risk that a relevant authority would (perhaps wrongfully) impose a sanction on the insurer”. The Court went on to stress that clear words would be required to establish a common intention that insurers need not pay otherwise valid claims where there is merely a risk that payment might be considered prohibited, without having to show that payment was prohibited as a matter of law.