Sanctions screening after a Sevastopol call
A Lloyd's syndicate writes hull and machinery cover for a 2015-built bulk carrier owned by a Greek shipping company. The policy incorporates the LMA 3100 sanctions limitation clause. The vessel is Panamanian-flagged and trades worldwide. In February the vessel called at Sevastopol, and the syndicate's screening provider later reports that the beneficial owner is 30% held by a Russian state-owned entity and that one director is a designated individual. The insured says the call was a bunkering stop and that the cargo was humanitarian grain. In April the vessel is in collision in the Singapore Strait; repairs are estimated at $4m. The underwriter wants to avoid the policy from inception for breach of sanctions; the claims team wants to pay because the collision is unrelated to the call. The broker warns that a refusal to pay will be tested in the market.
1. What is the effect of the LMA 3100 sanctions limitation clause, and can the syndicate avoid the policy from inception?
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Read the clause as a limitation, not an avoidance provision. LMA 3100 provides that no insurer is deemed to provide cover, and no insurer is liable to pay a claim or provide a benefit, to the extent that doing so would expose it to sanctions, prohibitions or restrictions under UN, UK, EU or US measures. It is a 'to the extent' clause. It operates claim by claim and payment by payment.
It is not a warranty and not a right to avoid. The clause does not automatically void the policy from inception, and it does not make the insured's breach of sanctions a repudiatory breach of the insurance contract. Avoidance from inception would require a separate contractual right, a fraudulent misrepresentation or a breach of a sanctions warranty. Check whether the policy contains a sanctions warranty or a cancellation clause; LMA 3100 alone does not.
The collision is a separate loss. The clause is not a causation exclusion. The fact that the vessel called at Sevastopol does not automatically exclude a later collision. The question is whether paying the collision claim would itself expose the syndicate to sanctions.
Ownership and control: the 30% holding by a Russian state-owned entity may not meet the 50% ownership threshold used in some UK measures, but control can be established at a lower level, and the designated director is a separate red flag. If the insured is a designated person or controlled by one, payment may be prohibited and the funds must be frozen.
Conclusion: the underwriter should not 'avoid from inception'. The correct analysis is whether payment of this claim is prohibited.
2. What should the syndicate do before paying the collision claim, and what reporting obligations arise?
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Screen before paying. Screen the insured, the vessel, the registered owner, the beneficial owners, the directors and the counterparties against UK, EU, UN and US lists. Record the results and the date of screening. Do not rely on the broker's assurance alone.
Assess the specific payment. Identify the payee. If the payee is a designated person or an entity owned or controlled by one, payment is likely to be prohibited and the funds must be frozen. If the payment is permitted, document the basis for that conclusion.
Suspected breach reporting: if the syndicate suspects a sanctions breach, it should report to OFSI and to the Lloyd's financial crime team, and take legal advice. Reporting obligations are separate from the insurance coverage decision and should not be delayed while coverage is debated.
Consider the humanitarian explanation. Humanitarian grain may fall within exemptions, but the call at Sevastopol may still be prohibited under the relevant Russia and Crimea measures. The burden is on the insured to provide a full voyage account, AIS data and cargo documentation.
Coverage handling: issue a reservation of rights, request the full ownership chain and voyage records, and decline only to the extent that payment is prohibited. A blanket refusal to pay an unrelated collision claim is likely to be challenged and may be difficult to defend.
Market conduct: keep the broker informed and explain the distinction between a sanctions limitation and a coverage avoidance.
3. How should the policy wording and the syndicate's procedures be improved for future hull placements?
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Wording improvements:
- Retain a sanctions limitation clause but add an express cancellation right if the insured, the vessel or a beneficial owner becomes designated.
- Consider a sanctions warranty requiring the insured to confirm that it is not designated and is not owned or controlled by a designated person.
- Require disclosure of the beneficial ownership chain and of any state ownership at placing and at renewal.
- Add a voyage reporting or AIS monitoring condition for high-risk trading areas.
- Clarify the position on calls at sanctioned ports and the consequences for cover.
Procedural improvements:
- Screen before binding, not only at claims stage.
- Record the screening methodology and results in the underwriting file.
- Train underwriters on the difference between a sanctions limitation and a coverage exclusion.
- Include sanctions obligations in the broker's terms of business.
- Review the portfolio periodically for exposure to high-risk flags, ownership and trading patterns.
Governance: the syndicate's financial crime and sanctions controls are part of its regulatory obligations. The managing agent should be able to demonstrate that it has risk-based policies, that it monitors them and that it escalates suspected breaches. The claims team and the underwriting team should work from a single documented sanctions procedure, so that a coverage decision is not made in isolation from the payment prohibition.