In light of recent geopolitical events, Anna Morgan, Legal Director at BPL Global, addresses some of the questions that have arisen around sanctions clauses in non-payment policies, specifically the market standard ‘LSW 1865’, and sets out some key points to consider.
Is non-payment due to sanctions covered under a standard non-payment policy wording?
The short answer is yes. That is the beauty of a properly drafted comprehensive non-payment policy. It covers non-payment, regardless of cause. The precise cause of loss does not have to be specified in the policy. Further, the BPL policy wording does not, and any policy wording eligible for treatment as an unfunded guarantee under the EU Capital Requirements Regulation (“CRR”) would not, include an exclusion for non-payment caused by sanctions.
How will the operation of the sanctions clause contained in my non-payment policy affect payment of a claim?
It will depend on the drafting of the clause. The BPL policy wording and the vast majority of non-payment policies that we see contain a sanctions clause in the form of the London standard wording ‘LSW1865’ or substantially similar. Taking LSW1865 as a basis, it establishes that neither Insured nor Insurers are obliged to do anything under the policy that would cause them to breach sanctions to which they are subject. The key points are that i) the clause covers the relationship between the Insured and Insurers and their respective obligations under the policy. The clause is not triggered simply by sanctions being imposed on an Obligor; the sanctions must apply to the insurance relationship between Insurer and Insured and each party’s obligations in that context. And ii) the clause deals specifically with sanctions that apply to the Insurer and Insured named on the policy, not sanctions at large.
Under what circumstances will this sanctions clause come into play?
They are not as wide as they first appear. Indeed, taking into account the objective of sanctions and the fact that a claim payment does not aid the Obligor nor discharge its debt obligation but rather supports the Insured in complying with sanctions, there is a sound logic for sanctions not to prohibit payment of a claim or continued cover under an existing policy. Of course, whether sanctions do prohibit the performance of policy obligations depends on the detail and scope of the sanctions set by the relevant authorities. The position continues to evolve and each organisation needs to make its own determination regarding the application of sanctions. It is worth noting that if either Insurer or Insured wanted to rely on the sanctions clause in the policy to avoid performing an obligation, including payment of a claim, then it would have the onus of proving that the circumstances described in the clause have arisen.
If sanctions prevent payment of a claim, what does the clause require of the Insurer?
If it is the case that the relevant sanctions prevent an Insurer from paying a claim under the policy, then the clause requires the Insurer and Insured to co-operate in good faith, and for the Insurer to use best endeavours (which is a pretty high bar) to enable claim payment, for example, by obtaining a formal license or exemption from the regulating authority.
Is an Insurer still liable under the policy if an exemption is not obtained?
If an exemption is not obtained despite best endeavours, an Insurer is not automatically relieved of liability under the policy. The effect is rather that an Insurer cannot be forced to make a payment that would be in breach of sanctions. Sanctions would have to require the winding-up of the insurance policy for that to happen. In summary, the existence of sanctions does not give insurers an easy ‘out’ under an existing non-payment policy.
Does this apply to all sanctions clauses?
The above considers LSW1865. More bespoke sanctions clauses and different LMA clauses for different types of cover should be considered separately. Do get in touch if you would like to discuss any of these issues further with us.
The above article is intended for general information purposes only and should not be relied upon as a substitute for external advice should you have specific questions or concerns.