Cancellation Of Cover - A Complex Choice

The sanctions in place against Syria have been in the headlines recently, after the Russian-operated cargo ship MV Alaed, en route from Kaliningrad to Syria and reported to be carrying military helicopters, first halted off the coast of Scotland and then turned back after its insurance cover was withdrawn by the Standard Club.

The majority of policies written in the past few years where the subject matter of the policy may touch on sanctions will contain a sanctions clause; and situations such as that involving the MV Alaed will be a clear breach of such a clause. Even in contracts that do not contain such a clause, the insurance may still be deemed illegal and therefore void.

However, in other circumstances, it may be less obvious that sanctions have been breached, or there may only be a possibility that sanctions will have been breached as a result of the insured's actions. Insurers may come under significant pressure to cancel cover in these situations; however, they must take care to ensure that such a cancellation is made legitimately and does not leave them open to action by an insured for breach of contract.

Alterations to the scope of cover by insurers in the context of economic sanctions has been examined by the courts in recent years. Two decisions stand out in particular – Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Limited1, in which cover was cancelled, and Arash Shipping v Groupama2, where renewal of a policy was refused.

IRISL v Steamship Mutual

Islamic Republic of Iran Shipping Lines (IRISL) was a member of Steamship Mutual P&I Club (the Club) and had cover for a wide range of risks including bunker oil pollution (as required by the Bunkers Convention 2001). Under the terms of the Financial Restrictions (Iran) Order 2009 (the Order), effective 12 October 2009, transactions and business relationships between the financial sector and designated Iranian entities were prohibited. IRISL was such a designated entity.

HM Treasury issued two licences for specific periods authorising the Club to continue providing cover to IRISL, before issuing a further licence, with different terms, on 30 October 2009 (the October Licence). The Club terminated cover, taking the view that it was no longer permitted to provide insurance cover due to the different terms of the October Licence. The next day, an IRISL vessel, the ZOORIK, suffered a casualty off the coast of south east China, resulting in...

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