Written by The conflict between Russia and Ukraine and the threat of heavy sanctions to be imposed by the Western world as consequence of Russian military action, have brought the topic of financial sanctions and the position of insurance again into the focus of consideration.
In view of the rapid developments in the conflict between Russia and Ukraine and military action started on Ukraine territory, GrECo Holding has set up a Task Force responsible for gathering all information on the current crisis and for reactions in all fields of our activities. Starting with today, we will provide information on all topics and developments linked with the situation on our website for the information of clients and partners. In this we will be supported by our colleagues in the countries concerned and information will also be based on statements obtained from insurers and reinsurers.
We are starting this reporting with the sanction topics. The next news will refer to what war and civil war mean to insurance contracts and coverages.
For all further information on sanctions please contact GrECo Group Legal, Nathan Pinhasov, n.pinhasov@greco.services For any information and questions regarding insurance matters please approach GrECo Group Insurance Mediation Services, Andreas Krebs, a.krebs@greco.services
International sanctions and insurance – general principles
The conflict between Russia and Ukraine and the threat of heavy sanctions to be imposed by the Western world as consequence of Russian military action, have brought the topic of financial sanctions and the position of insurance again into the focus of consideration. After sanctions imposed e.g. on Iran in 2012 or Russia in 2014 after the Crimea invasion, a lot of experience with this political instrument has been obtained and clarifications have been made, not at least by the European Union. It is important, therefore, to take another look onto this matter.
Sanctions by the EU
The European Union sees sanctions as a tool to prevent conflicts and to respond to crises, the intention being “to bring about a change in policy or activity by targeting non-EU countries, as well as entities and individuals, responsible for the malign behavior at stake.” Most of the sanctions are in accordance with United Nations resolutions and are also agreed with the United States and the United Kingdom.
Some of the sanctions are published as Guidance notes to the governments of the Member States, but in some severe cases they are issued as Regulation, thus coming into force immediately in all Member States and prohibiting trade or financial transactions with states or persons against which the sanctions are directed. It is forbidden to each EU citizen, company or institution to violate this regulation by any way, and normally the decision is enforced by high penalties.
Although this kind of sanction does not only prevent the conclusion of new contracts it also interferes with existing contracts and, especially important for insurance contracts, prevents for instance the payment of claims. This situation is reflected by exclusions in insurance contracts with the effect that coverage is terminated once the sanction becomes valid. As it is forbidden to insurers, reinsurers and brokers alike to neglect or circumvent this exclusion – for instance by trying to place a contract affected by the sanction in a market where the sanctions do not apply – it is really fundamental, to be compared only with the War or Nuclear exclusions.
Sanctions by Third countries
More difficult and complex is this issue, if the sanction is pronounced by a state outside the EU. There can be bilateral or multilateral sanctions between two or more states. Starting with Cuba, the United States have become very active in putting other states under sanctions. They do this with the same consequences as described for the EU: creation of a Federal Law with effect on all citizens and companies living or having their headquarters or having only assets as foreign owners (companies, capital, licenses and other titles) in the United States. They all risk penalties, seizing or freezing of capital etc., when acting contrary to the sanction act.
For this reason, all reinsurers and most internationally acting insurers have integrated the Sanction exclusion clause into their contracts with the same effect as described for EU sanctions above. This means that, even if an insurance contract has not anything to do with US legislation, cover will be excluded. It is true that the EU reacted on this with a so-called blocking statute, saying that “the extra-territorial application of laws adopted by third countries will not be recognized by the Union”. This has led to European insurers associations issuing own clauses, like in Austria, where it is stipulated that “exclusion from cover is valid if based on sanctions by the US or other third countries, if they are not against European or local law”.
Economic reality and fear of reprisals mean that globally acting reinsurers and insurers will obey US sanctions despite the political attitude of the EU or any Member State. But at least there is the possibility to look for insurance markets not intimidated by US law who may grant cover.
Scope of sanctions
Originally, sanctions were imposed on whole countries, since it was difficult or impossible to separate government interests from that of economic entities of the country concerned (e.g. Cuba, North Korea, Libya). Nowadays, (financial) sanctions have become more sophisticated and detailed. They are directed against persons with political, military or economic functions in that state, against certain industries, institutions and firms. This has led to establishing sanction lists to be checked in the moment when a business relationship is intended or when delivery of goods or financial transactions have to be prepared. For EU sanctions, a Sanction map (Sanctionsmap) has been installed, which is openly accessible, and most states have their own sanction lists to be consulted.
Embargoes
The embargo is the older parent of the financial sanction, having its roots in sea blockades of long times past. It means the prohibition of trade and transport of certain goods to given destinations. Most common are arms embargoes, but they can be extended to all kinds of goods, in most cases still to those that might be used for weapon production or directly for military use. Goods falling under an embargo ruling cannot be insured. Any circumvention by false declaration of the nature of goods or by sending them to third countries that forward the goods to the sanctioned destination will be prosecuted and providing of insurance may be considered as a criminal act. Therefore, insurers will have a close look on shipments, export declarations and the like.
Exemption to sanctions for humanitarian reasons
As we have seen, sanctions disrupt the insurance cover since no further financial transaction is possible. This affects, for instance, construction or erection projects in the country concerned or the operation of a local factory, especially in the case that the sanction is extended to the whole country. If a loss happens where it is necessary and even urgent to send money or relief goods to persons affected by the loss event (accidents of employees, fire, natural catastrophes), the humanitarian aspect may come into consideration. The EU has made clear that it is prepared to make exemptions to sanctions for humanitarian reasons, since the population of a country shall not be punished when its government is under sanction for the afore-mentioned malign behavior. In such cases, applications can be made to the relevant authorities with the aim to allow financial transactions for specific situations.
The role of GrECo as insurance broker and consultant
As this whole sanction topic is a very complex one, GrECo sees its role as insurance broker in the information of all clients with respect to insurance implications, under which circumstances cover can be obtained for countries or industrial sectors where sanctions have been imposed, what consequences there are for running contracts where the cover is stopped due to sanctions, which margin there exists discussing the cover with insurers. By no way, the broker may be ordered to assist in the circumvention of sanctions or embargoes.
In the insurance industry, sanctions have become part of compliance regulations and codes of business conduct. Insurers will, therefore, have a close look on the business offered to them with respect to sanctions, and – in international insurance – on the question where the business comes from, out of which country, who is the insurance buyer, who the insured. Major insurers are aware of the many individual aspects that sanctions may have, and they are prepared to make their decisions according to the situation in each single case.
GrECo will closely monitor all sanctions now imposed by the European Union, the United Nations, the United States and the United Kingdom on Russia in order to be prepared to give thorough advice on the consequences on insurance and insurance payment transactions in this new situation.
We will post further news on sanctions on Russia, once the full scope of them and their implications will be known.
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Andreas Krebs
Head of Insurance Mediation Services
T +43 5 0404 229