Marine Insurance threatened by Sanctions? Nandia A. Zormpa* writes:
Sanctions. A phenomenon that until recently seemed to have only political aspects. The great impact of sanctions is not only illustrated on financial results for the sanctioned countries but it expands in shipping industry causing a great uncertainty as it is the source of legal dispute and controversy over the past few years. Lately the number of imposed sanctions internationally is rising and its impact has a considerable expanding rate. But what are the key issues that one should know?
First of all, a distinction should be drawn between the U.S. sanctions and the E.U. ones. The U.S. sanctions have extra-territorial effect, rendering them of high importance and world-wide application. This means that even a transaction or trade between a European firm with Cuba or Iran for example on a U.S. sanctioned subject could be considered as a breach of the sanction, as usually the payment of freight or hire is made in USD, involving a U.S. bank. The EU sanctions refer solely to the actions of member states. The United States is known for its long history on introducing embargoes and sanctions with Presidential Orders and Department of Treasury regulations, by the U.S. Department of Treasury, the OFAC (Office of Foreign Asset Control) and issues a constantly updated list of SDNs (specially designated nationals).
The IG P&I Clubs are instructed not to insure or cover losses from sanctioned transactions and insurers are not obliged to cover the loss of an illegal marine adventure as the implied warranty of legality (s.41 MIA) is breached and the insurers are automatically( Good Luck) discharged from any further obligation. Therefore, the risk of losing insurance cover is high in suspicious transactions and trade activities. The remedy? Due diligence. As usual, the shipowner or charterer has to exercise due diligence to ensure that the voyage is not in breach of any sanction and is a lawful one.
There is always the possibility of frustration of the contract due to supervening illegality in the event a sanction is imposed at a later stage from the conclusion of the contract. The result is that lately a new P&I market has started to grow, especially from Asian countries that aim to grant protection specifically for the losses deriving from sanctions. Even domestic insurance markets are blossoming as in the case of Iran and Kish P&I Club. The financial capability of these new insurance markets, though, it is uncertain, especially in comparison with the strong London one.
The final advice for shipping professionals is that the screening process of the companies with which they interact is highly recommended and exercising due diligence is required in any transaction, as any breach can result in the freezing of bank accounts and financial penalties.
How much “due diligence” is sufficient, though? This is a whole different story, a controversial one, to be analyzed in another article.
*Nadia A. Zormpa is a maritime lawyer, holder of LL.M. in Maritime Law from Swansea University. Having worked for ITOPF in London and shipping companies in Greece she has international background and both law and shipping experience. She is also now a Lecturer of Maritime Law at London Metropolitan University.