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Marine insurers practice due diligence as sanctions bring increased scrutiny

Due diligence efforts increase as insurers monitor activities of policyholders

Marine insurers practice due diligence as sanctions bring increased scrutiny

A recent proliferation of economic and trade sanctions that can apply directly to insurers means that marine insurance companies must undertake detailed due diligence.

While sanctions have been used as a political tool for many years, the more recent introduction of sanctions that specifically target insurance has made detailed due diligence ever more vital and has created a complicated picture for insurers and their policyholders.

National insurance associations and other insurance groups have worked to produce sample clauses to help insurers comply with sanction regimes, sources said. But, they add, insurers must undertake their own rigorous due diligence of specific risks that could breach sanctions.

Insurance companies must undertake adequate due diligence when underwriting marine risks, particularly with regard to sanctions against Iran, said a spokesman for the London-based International Underwriting Association, which represents insurers in the London company market.

Ensuring that marine insurers are able to comply fully with sanction regimes is a lot of work, said Lars Lange, secretary general of the International Union of Marine Insurers.

Mr. Lange, who is based in Hamburg, Germany, said that before 2009, sanctions typically were applied to exporters and importers — the companies that insurers cover, meaning that marine insurers were not permitted to offer them insurance coverage.

But since then, some sanctions have been imposed that directly apply to insurers — and may not apply to their policyholders, he said.

Marine insurers now must monitor what their policyholders are doing and be aware that there may be instances where clients may be allowed to export goods, but insurers are not permitted to insure those shipments, Mr. Lange said.

As a result, certain shipments may be uninsurable in some cases, he said.


Sanctions imposed by governments and other bodies on trade with Iran are a particular concern for marine insurers, said Jamie Rogers, a senior associate at law firm Hogan Lovells International L.L.P. in London.

For the marine insurance market, there is now a heightened need to perform due diligence before committing to a risk, he said. While this imposes greater compliance work upon insurers that is proportionate to the risk, he said, penalties for breaching sanctions can include heavy fines and imprisonment.

Some sanctions now are extraterritorial, said Mr. Rogers.

For example, the U.S. Iran Freedom and Counter-Proliferation Act of 2012 (see related story), which came into force this year, has extraterritorial scope, which means that a company or individual does not need to be U.S.-based to be deemed in contravention of the sanctions.

In addition, Section 1246 of that act refers specifically to “the provision of underwriting services or insurance or reinsurance for activities for persons with respect to which sanctions have been imposed.”

“The act is broad and extraterritorial,” said Mr. Rogers, and — because insurance activities and shipping activities are specially referred to in its text — the law creates the possibility of a “mismatch” whereby an insurer may be prevented from underwriting a risk that itself is not in contravention of the sanction.

“Our advice to members, which is in addition to advice from Lloyd's of London to managing agents, is to undertake your own due diligence with regard to sanctions,” said Neil Smith, head of underwriting at the Lloyd's Market Association, which represents underwriters in the Lloyd's market.

He noted that the LMA has produced clauses that insurers can add to their policies. “But that is a first line of defense as far as we are concerned,” he said.


Mr. Smith said the sanctions issue arises at a time when the marine insurance market is extremely competitive, and that there may be advantages for companies that are not subject to certain sanctions because of where they are based.

IUMI's Mr. Lange said the organization has worked with member associations and companies to produce sample clauses, adding that this had to be done on a national or individual basis because of antitrust rules.

Many large companies have developed their own clauses, Mr. Lange said.

Lloyd's has developed a set of e-learning modules on the topic of sanctions for insurers and reinsurers, though it stresses that these are not a substitute for professional advice.

And the International Group of Protection and Indemnity Clubs, the group of the 13 largest protection and indemnity marine mutual insurers, regularly updates a set of “frequently asked questions” on the topic.

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  • Economic and trade sanctions apply to Iran, North Korea, Syria and Cuba

    The U.S.' Iran Freedom and Counter-Proliferation Act of 2012 came into force in 2013 and imposes sanctions “with respect to the provision of underwriting services or insurance or reinsurance activities for persons with respect to which sanctions have been imposed,” among other things. The act also places sanctions on individual entities and activities connected to Iran's energy, shipping and shipbuilding sectors.