International Group insured ships that may have breached Russia sanctions

International Group P&I clubs been forced to cancel cover mid-voyage on an unspecified number of shipowners carrying Russian cargoes in breach of EU sanctions, citing poor drafting of the original regulations as the reason for providing the cover in the first place.

The scale of the slip-up has not been revealed, but the implications could be serious in the event of a $100m-plus claim arising from one of the shipments.

While claims of this size are normally covered by the reinsurance layer of the pool scheme, reinsurance providers would in such circumstances not legally be able to pay up. There is no suggestion that the clubs acted imprudently or in any way facilitated sanction breaking.

The mix-up is said to have arisen from ambiguity in the wording of the original stipulations, and did not come to light until retrospective clarification in a frequently asked questions (FAQs) document published by the EU earlier this month.

The turn of events was slammed by lawyers specialising in sanctions, who claimed the EU’s methods had caused considerable disruption to the market, and that the use of FAQs to sort out the details long after regulations kick in is an obvious recipe for confusion.

Some owners will have been caught out halfway through a voyage they thought to be entirely lawful, they added.

According to a circular from the International Group – published simultaneously by all affiliates – the sanctions regulations as published last April clearly banned imports of fertiliser and coal into the EU.

However, they appeared to offer leeway for owners to carry these commodities to countries outside the bloc.

The provisions were also subject to two wind-down periods for sale contracts concluded before April 9, with the second wind-down expiring on August 10.

But on the August 10 deadline day, the EU issued a further set of FAQs, which contradicted the earlier understanding, asserting that the rules do in fact cover carriage of such cargoes to any other country.

The International Group sought immediate clarification, and was told that while the reference to “import” in the articles was indeed limited to imports into the EU, other restrictions applied to non-EU destinations.

The International Group circular says: “It is therefore now the case that the involvement of an EU entity in the carriage of Russian fertilisers and coal or other solid fossil fuels to any destination whatsoever and whether inside or outside the EU would be in breach of EU sanctions.”

The April regulations also prohibited provision of financial assistance to exports of these commodities, a term defined to include insurance and reinsurance services.

'Increasingly the EU has leaned on FAQs as a means of fundamentally altering the scope and effect of restrictions. This is problematic. As opposed to providing clarity to the market, it has the contrary effect, and gives rise to uncertainty and confusion'

^{Alexander Brandt
Reed Smith}

Most International Group clubs are ultimately subject to EU jurisdiction, with British-based clubs writing EU business through European vehicles. Even the American and Japan clubs are indirectly reliant on pool scheme reinsurance with heavy participation from EU reinsurers.

The circular added that where any club is prohibited under sanctions from contributing their share of any pool claim, the shortfall will have to be picked up by the individual member.

The same principle will apply for claims above $100m, if any EU-domiciled reinsurers are prohibited from paying.

Julian Clark, a senior partner at Ince, said the European Union had likely decided to sharpen the teeth of sanctions post-publication, in what now amounts to economic war against Russia.

“As with all wars, there may well be innocent casualties as a result. In this instance, it would be the environment or innocent third parties, if there were to be a major, now uninsured, incident.

“It’s a particular headache for a vessel mid-voyage conducting what appeared to be a lawful voyage, probably with the benefit of legal advice, and with cover, only to find that such cover has now been lost and that they are now innocently conducting an illegitimate voyage.”

Alexander Brandt, sanctions lawyer at Reed Smith, said that the consequence of the EU’s actions is that both EU tonnage and EU-insured tonnage will have been caught out by these restrictions, without having any opportunity to react.

“Increasingly the EU has leaned on FAQs as a means of fundamentally altering the scope and effect of restrictions. This is problematic. As opposed to providing clarity to the market, it has the contrary effect, and gives rise to uncertainty and confusion,” Brandt said.

“In the present case, whether by amendment to the regulation or promulgation of further FAQs, it is hoped that the EU will provide short term assurances to the market that current contractual commitments can be honoured without enforcement risk.”

A representative of the International Group said that clubs had to respond almost immediately to a novel interpretation which was introduced without consultation or warning.  

It is now unclear whether or not the voyages in question were in breach of the regulations, which will be for the courts to determine if a challenge arises.

Certain voyages post August 10 may be inconsistent with the FAQs, but this is different to being in breach of the law, the representative stressed.

This article first appeared in Lloyd's List, a sister publication of Insurance Day