Worldwide: Cancellation Of Cover - A Complex Choice

Last Updated: 15 August 2012
Article by Nigel Brook, Mike Roderick and Henrietta Wells

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military helicopters, first halted off the coast of Scotland and then turned back after its insurance cover was withdrawn by the Standard Club.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 bunker oil pollution.

There were two questions for the Court to consider: firstly, was the Club permitted to continue to provide cover to IRISL under the terms of the October Licence; and secondly, did the October Licence and the Order effectively frustrate and therefore discharge the insurance?

The October Licence permitted the provision of insurance cover by Steamship Mutual to IRISL "in accordance with the Blue Cards issued to IRISL" for three months3. It was argued that the licence did not apply to cover given to IRISL, an argument rejected by the judge, as there was no indication in the October Licence that a fundamental change in the nature of the cover and of the insured was intended. The licence was intended to ensure that the UK continued to comply with its obligations under the Bunker Convention.

It was further held that the Order and the October Licence did not discharge the insurance by frustration. The October Licence did not render the Club's obligations so radically different as to frustrate the contract. Although the cover under the licence was significantly narrower than previously, the nature of the insurance – the provision of cover for liabilities under the Bunker Convention – did not change.

As a result of this decision, the Club was required to indemnify IRISL for the costs and liabilities incurred as a result of the casualty, and was not entitled to an indemnity or reimbursement from IRISL in respect of liabilities incurred to third parties.

Arash Shipping v Groupama

Groupama were the lead underwriter on a hull & machinery policy providing cover to Arash Shipping, a Cypriot company controlled by an Iranian entity. A number of vessels were insured under the policy. The annual policy, which incepted some months prior to the entry into force of Council Regulation (EU) 961/2010 (961/2010), contained a specific "Iran Sanctions" clause, which stated that the insurer was permitted to cancel the policy where the insured had exposed, or in the insurer's opinion might expose, the insurer to the risk of being or becoming subject to any sanctions whatsoever against Iran by the UK, the US, the EU, the UN, or the flag state of a given vessel.

There was also a "Review Clause", which permitted the automatic renewal of the policy, on identical terms, provided that the "Credit Balance" as defined by the policy was at a set threshold.

In December 2010, Groupama served notice of termination on Arash in reliance on the terms of the Iran Sanctions clause. It subsequently withdrew the notice on a without prejudice basis, before serving a final notice of termination on 8 April 2011. Arash issued proceedings to require Groupama and those of the following market who had also cancelled cover to comply with the terms of the Review Clause, claiming that it was entitled to an automatic renewal of the policy under the terms of that clause.

The judge at first instance, Burton J, determined that the extension under the Review Clause was prohibited under Article 26(4) of 961/2010. There was evidence before the court from HM Treasury that it considered automatic renewal to fall within the Article 26(4) ban. It was also determined that Groupama had been entitled to serve the notice of cancellation, and that the notice was effective.

The Court held that Groupama was entitled to give the notice of cancellation, provided that such notice was given in good faith and could not be considered unreasonable in the context of "Wednesbury unreasonableness" (a decision so unreasonable that no reasonable person acting reasonably could have reached it, from the ruling in Associated Provincial Picture Houses v Wednesbury Corporation4).

It was held that Groupama was not unreasonable in forming its opinion that the extension of the period of insurance would expose them to a possible breach of sanctions as a result of HM Treasury's interpretation of Article 26(4).

As a result of its rulings on the notice point, the Court did not need to rule on the Article 26(4) issue – despite its importance to the insurance market. However, Tomlinson LJ suggested in his judgement that the interpretation taken by Burton LJ was likely to be correct.

It is worth noting that under the sanctions in place against Syria, a (re)insurer is not prohibited from renewing or extending cover if it is contractually obliged to do so.


What do these cases mean, therefore, to insurers who have written insurance for entities who may potentially expose them to the risk of breaching sanctions? Provided that an insurer acts in good faith and reasonably in cancelling or amending the terms of cover, if it believes that it may breach sanctions by continuing to provide that cover, then under the ruling in Arash Shipping v Groupama it is unlikely to face liability for doing so.

Furthermore, there will generally be a "good faith" provision in EU sanctions legislation, which states that actions carried out in good faith on the basis that they are in accordance with a Regulation (such as the freezing of funds or the cessation of insurance cover) will not give rise to liability on the part of any person or entity implementing those sanctions, unless it is proved that the actions were taken as a result of negligence on the part of that person or entity.

However, if an insurer does not act in good faith, and withdraws cover which it is not prohibited from providing, this wrongful repudiation of cover may result in the insured either enforcing the contract, or treating the withdrawal of cover as a breach of contract, entitling them to sue for return of the premium as damages for that breach. There may also be additional liabilities, as was the case in Steamship Mutual, where it was held that the Club was not entitled to an indemnity from IRISL in respect of liabilities incurred to third parties.

The facts of individual situations may be complex, and it is therefore important that insurers take appropriate steps to fully investigate potential sanctions breaches before withdrawing cover.

It is also important to ensure that contracts which may potentially be touched by sanctions contain provisions which could aid an insurer's position in the event of having to withdraw cover, including but not limited to an effective sanctions clause.


1 [2010] EWHC 2661 (Comm.)

2 [2011] EWCA Civ 620

3 A Blue Card is a document issued by an insurer as evidence that the cover required by the International Bunker Convention 2001 is in place.

4 [1947] 2 All ER 680

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nigel Brook
Henrietta Wells
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