Application of “Sanctions Limitation and Exclusion Clause” in Insurance Contracts in China

The Sanction Clause means that when an insurer (reinsurer) provides insurance coverage for certain risks, the insurer (reinsurer) shall not be deemed to have provided insurance cover for, or be liable to, pay any indemnity in respect of such risks where the payment would expose the insurer (reinsurer) to sanctions of certain countries or regions.

When applying the Sanction Clause, insurance institutions should consider whether the relevant transaction subjects may be subject to a risk of relevant sanctions at the time of the insurance claim settlement.

In practice, sanctions issued by European and North American countries vary across different countries and different types of transactions. In terms of scope of application, EU sanctions may be limited to “primary sanctions”, which apply only to the subjects with a connection to the EU, while US sanctions usually involve “secondary sanctions”, which apply to non-US entities who may not have any connection to the US.

The existing domestic and foreign judicial cases may have different results on the application of Sanction Clauses.

In such case, an insurance company underwrote a marine hull insurance policy for a shipowner, which contained a Sanction Clause. During the coverage period, the shipowner learned that its ship was on the UN sanctions list and thus informed the insurer, who then immediately issued a notice of rescission and terminated the policy. Subsequently, the shipowner was successful in having the UN sanctions against its ship lifted, and it notified the insurer who then issued a new policy.

After that, the shipowner learned that its ship was still on the US OFAC sanction list. However, the shipowner did not inform the insurer of any such sanctions against its ship during the policy’s duration or renewal. In the following renewed insurance year, the ship involved had an insurance accident, and the insurer learned through other channels that the ship was subject to US sanctions, and thus denied the claim according to the Sanction Clause. The shipowner sued the insurance company before the Qingdao Maritime Court, who ruled that the insurer was entitled to exclude liability under the policy in accordance with the Sanction Clause.

The Civil judgment issued by the Commercial Court of the High Court of Justice of England and Wales (Mamancochet Mining Ltd v Aegis Managing Agency Ltd & Ors [2018] EWHC 2643 (Comm)) showed that a mining company registered in the EU obtained certain steel billets from Iranian citizens under US sanctions which were subsequently stolen from the warehouses. The mining company sued before the court after the insurer declined to pay compensation on the grounds that payment of the claim “would expose” it to sanctions.

One of the controversies in this case was the proper interpretation of the wording of “would expose the insurer to sanctions” of the Sanction Clause. The insurer argued that it is entitled to rely on the clause if it is “at risk” of being sanctioned for paying a claim. The judge, however, ultimately decided that the defendant could claim exemption under this clause only if the payment of the claim would de facto be prohibited and result in relevant sanctions, and that such violation should be a direct and definite violation, not merely an anticipated or probable violation.

Further, the decision held that even if the insurer was allowed to rely upon this clause to withhold the payments, according to the terms of the policy, that is, “to the extent that the provision of such cover…”, the liability under the insurance was “suspended” rather than “extinguished”, which means the insurer is still liable to pay the claim under the insurance policy when the claim ceases to be in violation of the relevant regulations.

For insurance institutions in China it is also necessary to consider whether the relevant sanction measures will be affected by Chinese countering sanctions measures. In response to the unjustified extra-territorial jurisdiction of other countries, the Law of the People’s Republic of China on Countering Foreign Sanctions and the Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures (hereinafter referred to as the “Blocking Measures”) provide for countermeasures of foreign sanctions.

The competent commerce department of the State Council may issue a prohibition order to the effect that the relevant foreign measures are not observed when the foreign measures are deemed to be “unjustified extra-territorial application of foreign legislation and other measures” after assessment. In this case, the insurance agency cannot then apply the Sanction Clause to deny the claim. In addition, insurance institutions may apply to the competent department of commerce under the State Council for exemption from compliance with the prohibition order, thereby denying claims.

In order to prevent claims disputes, the following suggestions may be advised: