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English Commercial Court considers scope of U.S. sanctions exclusion clause

1 November 2018

In the context of sanctions and heightened tensions in the Middle East and Russia, the recent Mamancochet Mining Limited v Aegis Managing Agency Limited and Others [2018] EWHC 2643 (Comm) judgment is important and will be of interest to insurers who insure businesses that are exposed to risks in these markets. The analysis of the Mamancochet judgment that follows is intended to help insurers and insureds understand the importance of a well drafted sanctions exclusion clause to avoid any regulatory contravention.

The facts in Mamancochet

On 12 October 2018 the Commercial Court handed down judgment in the case of Mamancochet v Aegis. The insured, Metalloyd Limited, was insured under a marine policy against, inter alia, the theft of steel billets worth US$3.8m that were in bonded storage in an Iranian port prior to purchase. The billets were stolen by individuals who presented fraudulent documents, and the insured made a claim under their insurance policy on 8 March 2013.

The Defendants insurer's denied the claims on the grounds that their liability was excluded under the Policy’s ‘Sanction Limitation and Exclusion Clause’ (a standard London Market Clause), which states:

“No (re)insurer shall be deemed to…be liable to pay any claim… to the extent that the provision of such cover… would expose that (re)insurer to any sanction… under… regulations of the European Union, United Kingdom or the United States of America.”

In total there were 30 defendant insurers, of which 19 settled their claims. The remaining Defendants sought to rely on the exclusion clause in the contract.

The construction of the exclusion clause

The Court drew a distinction between being exposed ‘to a risk’ of being sanctioned and being ‘exposed’ to a sanction. The Court held that the exclusion was clear in applying only where the payment of the claim ‘would expose’ the insurer to a sanction, and not where there was merely a ‘risk’ of exposure. It followed that just because the relevant authority may find that the payment to the insured is prohibited this is insufficient to show that the insurer was, in fact, ‘exposed’ to such a risk.

In addition, the Court also confirmed that even where the sanctions exclusion clause did apply and prohibited payment of the claim the effect of the exclusion would not be to extinguish the claim entirely, but merely to stay liability (on a suspensory basis) until the exposure to the sanction has lapsed. Consequently, clauses of this kind will be ‘open-ended’ unless the wording contains a long-stop date.

The United States sanctions

The Court considered whether the payment of the claim would be prohibited under section 560.537 of the Iranian Transactions & Sanctions Regulations, 31 C. F. R ('ITSR') subject to the exceptions in paragraph (c) of General License H.

Section 560.537 ITSR authorises ‘all transactions and activities that are ordinarily incident and necessary to the wind down of the following activities’, the activities are listed under section 560.215 ITSR. The Claimant argued that General License H only applied to claims made after 16 January 2016. The Court agreed with the Claimant that there is no prohibition in US Law on payment of the claim prior to sanctions being re-imposed at 11:59 (EST) on 04 November 2018.

The European Union blocking regulation

Given that the Court found in favour of the Claimant (as above) the impact of the EU Blocking Regulations was not considered in great depth. The Claimant sought to rely on the Blocking regulation in three ways:

  1. That the reliance on the sanctions clause in the policy constituted ‘compliance’ with the Iranian Transactions & Sanctions Regulations which is a breach of Article 5 of Council Regulation (EC) 2271/96.
  2. That the US sanctions are illegal under the Blocking Regulation and therefore would not ‘lawfully expose’ the insurer to sanctions.
  3. That the Blocking Regulation would render enforcement of the sanctions illegal and/or contrary to public policy.

These points were not addressed substantively, although the Court gave considerable weight to the argument that the ‘blocking regulation is not engaged where the insurers liability to pay a claim is suspended under a sanctions clause’. This is an indication by the English Court that the exclusion clause used did not breach the EU Blocking Regulations, however it remains to be determined by English or European Courts whether parties will be allowed to use exclusion clauses to avoid compliance with the EU Blocking Regulations.

What are the implications for international businesses and insurers?

The use of clear wording in the drafting of a sanctions exclusion clause has always been of vital importance. However, the judgment in Mamancochet, draws a distinction between whether a payment of a claim would ‘expose’ the insurer to a sanction, or more broadly, simply risks ‘exposure’. Insurers should be clear when drafting sanctions exclusion clauses whether they wish to exclude the ‘risk’ of a sanction, or more narrowly only to exclude ‘exposure’ to the sanction.

The Mamancochet judgment indicates that when a sanction exclusion clause applies it only suspends the requirement to pay out under the policy until the exposure to the sanction has been removed. This means that insurers may need to consider whether to time-limit sanctions exclusion clauses. In a case where sanctions last for a prolonged period insurers will be indefinitely carrying the burden of payment of the claim until sanctions are lifted. For insurers who have significant market share in areas where sanctions apply (or may apply) this could have negative commercial consequences.

The Court clearly opined that the exclusion clause used in Mamancochet did not breach the EU Block Regulation, but it is unclear whether this view will withstand future judicial scrutiny. This is a first instance English Court decision and any future interpretation by the ECJ will provide a clearer picture of the regulatory landscape. Whilst this may appear to be a positive aspect of the decision for those insurers who rely on sanctions exclusion clauses, the impact may be limited, and insurers should be cautious to rely upon this aspect of the judgment until future authorities provide further clarification.

Should you wish to discuss the Mamancochet judgment or the implications for your business please do not hesitate to get in touch with Colin Peck or Francis Mackie.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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