market bulletin

Ref: Y4916

Title

Lloyd’s Sanctions Guidance – Sanctions Clauses

PurposeTo set out Lloyd’s general position regarding the use and function of sanctions
clauses on insurance and reinsurance contracts

Type

Event

From

Andy Wragg, Senior Manager, International Regulatory Affairs
General Counsel and Risk Management
Ph: +44 (0)20 7327 6387 E: Andy.Wragg@lloyds.com

Date

27 July 2015

Deadline

NA

Related links

www.lloyds.com/~/media/files/the%20market/communications/market%20bulletins/2
012/02/y4560.pdf

Introduction
This Bulletin replaces previously issued guidance regarding Sanctions Clauses issued in
Bulletin Y4832.
Sanctions exclusion clauses and warranties 1 are commonly used across the insurance 2
industry as a useful tool for insurers to mitigate risk arising from the international sanctions
regimes to which they may become exposed.
As sanctions clauses are being deployed in policy wordings across the Lloyd’s Market withgreater frequency, the guidance below has been drafted to assist the market. However, it
should be kept in mind that the principles discussed in this document are general in natureand the precise effect of a sanctions clause will depend on its terms.
The scope of this guidance relates primarily to the EU and UK sanctions regimes but manyof the principles may apply to US sanctions. It also provides guidance with regard to theuse of sanctions clauses on German policies by foreign insurers. Where appropriate legal
advice should be sought both on the drafting of appropriate clauses and their interpretation.
Given the absolute effect of sanctions, breach of which can create criminal and civil liability,
Lloyd’s considers the appropriate and risk based use of sanctions clauses to be a matter ofgood underwriting practice and a means of achieving contract certainty in highlighting toinsureds the sanctions obligations with which the insurer must comply.

1
2

Referred herein collectively as “sanctions clauses”.
References to “insurance” or “insurers” should be interpreted to refer also to “reinsurance” or “reinsurers” as appropriate.

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The sanctions clause most widely used across the Lloyd's Market is the LMA 3100 3. The
most commonly used clause across the aviation market is the AVN111 clause.
This guidance focuses on sanctions clauses only. The use of such clauses does notremove the requirement to maintain appropriate systems and controls, including appropriate
and proportionate due diligence, to mitigate the risk of a breach of sanctions.
This guidance should be read in conjunction with the Sanctions Due Diligence Guidance forthe Lloyd’s Market (see Market Bulletins on www.lloyds.com).
In addition to this guidance, Lloyd’s has issued an abridged version which is attached at
Appendix 1. The purpose of this abridged version is for brokers and managing agents to
inform clients and counterparties of Lloyd’s general position regarding the use and functionof sanctions clauses on insurance contracts, should their clients seek this assurance.
Purpose of a sanctions exclusion clause
Sanctions can affect the scope of coverage an insurer can provide under an insurance
contract, as well as activities they may carry on pursuant to a contract. Where sanctions
apply, one or more of the parties to an insurance contract may be prohibited fromperforming certain contractual obligations. The obligations that the affected party will be
prohibited from performing will depend on the sanctions that apply. Certain sanctions only
have a "suspensory" effect, in that they suspend an underwriter's liability to perform acontract for the period that they are in force. Others may have a more fundamental effecton an underwriter's ability to perform the (re)insurance in question at all.
Broadly speaking:(a)Where asset freezing restrictions apply, the insurer (and/or the broker) may not beable, directly or indirectly, to make payments to or for the benefit of, or receive
payments from, the individual or entity designated under sanctions. So, forexample, where the insured becomes subject to an asset freeze, the insurer may not
be able to pay claims, return premium or other sums.

(b)

Under certain sanctions regimes4, the provision of coverage itself is prohibited. In
these situations, the existence of insurance coverage and the performance ofactivities under it are prohibited.

Sanctions clauses protect an insurer by ensuring that it is not contractually required toperform activities which will expose it (or related persons or entities) to sanctions. Lloyd's
views on how sanctions clauses should operate in the following situations are set out below.

3

The wording of which is: ‘No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim
or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such
benefit would expose that (re)insurer to any sanctions, prohibition or restriction under United Nations resolutions or the tradeor economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America.’
4
Including trade sanctions, those EU sanctions applicable to Iranian and Syrian persons (as defined in EU Council
Regulations 267/2012 and 36/2012) and under certain US sanctions programmes.

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Asset freezes 5
Where an insured is the subject of European and UK asset freezing restrictions, standard
sanctions clauses do not automatically exclude cover. In cases involving financial
sanctions, cover will remain valid in most instances, however transactions must not be
carried out under the contract that would result in funds being made available to any
designated insured or beneficiary (for the period it remains designated under the sanctions).
In such circumstances, under European and UK sanctions it is normally (but not always 6)
the case that whilst claims cannot be paid, they can still can be adjusted provided any funds
payable pursuant to a claim are kept in a frozen bank account (or an escrow account), until
such time that the asset freezes are lifted. When they are, it may be possible to make apayment to that party in accordance with any remaining applicable sanctions 7. Even whereclaims are not adjusted and no funds are required to be frozen, managing agents should
consider whether to post reserves (now or in the future) for the payment of the claim once
the financial sanctions are lifted (subject always to complying with the requirements of theasset freezes).
Where asset freeze restrictions apply to an insured, it may be possible to obtain a licencefrom the appropriate authorities to perform activities otherwise prohibited. Lloyd’s would
generally expect underwriters to take reasonable steps to request the necessary
authorisation or licence to pay or to provide coverage, even though a sanctions clause may
not oblige them to do so.
Trade sanctions 8
Where trade sanctions (including arms embargoes) apply, the provision of insurance
coverage itself may be prohibited unless an appropriate licence is available or is obtained
prior to underwriting the cover in question.
Where a contract is underwritten which, despite appropriate due diligence having been
undertaken, would otherwise provide coverage prohibited under trade sanctions, asanctions clause should have the effect of excluding coverage in relation to the activities,
transactions or persons/entities which are the subject of trade sanctions. Its effect is suchthat it deems that no coverage is provided in respect of those activities, transactions or
persons/entities under the insurance contract in question.
5

Managing agents should note that very different freezing/blocking obligations arise under US sanctions and certain activities
listed as permissible in this section in relation to EU/UK sanctions may not be permissible where US sanctions apply. US legal
advice should be sought as to the relevant compliance obligations.

6Managing agents should also be aware of the wider restrictions on the provision of financial services to designated persons
under the Terrorist Asset Freezing Act 2010 ("TAFA"). TAFA prohibits the provision of financial services to designatedpersons and this technically includes the provision of insurance cover. There is a currently a licence (AFU/2011/G1) issued
by HM Treasury which allows for the provision of insurance as an exception to this prohibition. However, this licence isrevocable. In addition, the definition of "financial services" in the TAFA may, dependent on the facts, include certain activities
to be performed in relation to insurance claims. Where this is the case, managing agents may not be able to adjust or conduct
other activities in relation to that claim.

7

Managing agents should keep in mind that on occasion certain asset freezes are left in force in relation to funds arisingduring specified periods of time. A current example of this can be seen under certain remaining Libyan sanctions. This issometimes the case where asset freezes are directed at assets that have been expropriated from a state by a government
regime that is subject to sanctions.

8

Including those EU sanctions applicable to Iranian and Syrian persons, trade sanctions under certain US sanctions
programmes and the trade restrictions contained in the UK Export Control Order 2008.

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A sanctions clause may not have this effect if the insurer has knowledge of theactivities, transactions or persons/entities subject to trade sanctions at the time they
underwrite the risk, or where they have accepted premium specifically allocated tothose activities, transactions or persons/entities. For this reason, such activities should
be clearly and specifically excluded from cover to put this question beyond doubt and theinsurer should not accept any premium in respect of them.
It is also worth noting that HM Treasury’s view is that that both the knowledge based
defence and sanctions clauses can only be relied on if, having conducted due diligence,
insurers have no reasonable cause to suspect there is a sanctions breach. Therefore, theprotection offered by a sanctions clause will always depend on the particular facts of thecase.
In addition, HM Treasury have said that if an insurer knows a breach will occur, providing
cover (even if specific activities are carved out) would be contrary to the spirit of sanctions
regimes and therefore contrary to the UK Government’s policy.
Considerations when applying a sanctions clauseManaging agents are expected to consider the circumstances in which sanctions clauses
are likely to be effective and should ensure that these clauses are deployed as part of theirrisk-based sanctions compliance procedures. The risk factors set out at paragraph 2.1 of
the Sanctions Due Diligence Guidance for the Lloyd’s Market (which are not exhaustive)
may be relevant in this regard.
In doing so, managing agents should consider which terms are likely to be most effective tomanage the risk to which they are exposed. Managing agents should be aware that
inappropriate clauses can create additional and unnecessary risk. As a minimum,
managing agents should ensure that sanctions clauses:(a) exclude from cover any risk or activity that would expose the managing agent tosanction or penalty under EU, UK or other applicable financial or trade sanctions(including UN Security Council Resolutions); and(b) exclude liability for managing agents to pay claims or other sums including return
premiums (or provide any other benefit under the insurance contract concerned)
which would put them in breach of such sanctions 9.
However, other considerations may be relevant to managing agents and may need to bereflected in the sanctions clause. Certain examples are set out below.
Separately, managing agents should note that certain jurisdictions may not allow for
sanctions clauses to be deployed on certain insurance contracts covering risks in theirjurisdiction, or will not permit certain wordings to be used Please see below regarding theposition regarding the use of clauses in Germany.

9

As noted above, this should not preclude managing agents from seeking a licence to make certain payments and/or freezing
funds pertaining to otherwise valid claims where such activities are permissible under sanctions.

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Other Sanctions Regimes, including the US
Where a sanctions clause names certain countries' sanctions regimes, for example the US,
it should not create an obligation for a contracting party to comply with those sanctions
unless it is otherwise exposed to those sanctions 10. So, whilst certain sanctions clauses
specifically refer to US sanctions this does not mean that they will exclude coverage inrespect of activities which would be prohibited under US sanctions unless those sanctions
actually create exposure for persons performing activities under or pursuant to theinsurance contract.
With the above in mind, managing agents will also want to consider whether the sanctions
clause they use mitigates any exposure to their employees, group or related companies asa result of their activities, where appropriate. For example, if under their internal corporate
procedures, business decisions must be referred to group companies in the US, themanaging agent should consider whether its sanctions clause needs amending to refer to
US primary sanctions and to reflect its referral procedure. Similarly, even if they are notpart of a US group, managing agents need to consider the position of staff who are US
nationals.
German insurance policies and the LMA 3100
Under German domestic anti-foreign boycott legislation (Section 7 of the “Foreign Tradeand Payments Ordinance”), the issuing of a declaration in foreign trade and paymenttransactions whereby a German resident participates in a boycott against another state(boycott declaration) shall be prohibited.
Following an enquiry by the German Insurance Association, the German Federal Ministry
for Economic Affairs and Energy (BMWi) has recently set out its view that the London
market standard sanctions clause (LMA 3100) is not in compliance with German anti-foreign
boycott legislation, as the clause also refers to sanctions not applicable in Germany (inparticular US sanctions) and the insurer declares that it will only discharge its obligations
under the insurance agreement in accordance with the clause.
Lloyd’s has sought and received clarification from the BMWi that this view relates to the useof LMA 3100 by insurers resident in Germany, and that it accepts Lloyd’s position that theuse of the LMA 3100 (and any similar sanctions clause naming sanctions regimes beyond
Germany, the EU and the UN) by foreign insurers (i.e. insurers who are not German
residents as defined by applicable German law) does not contravene German anti-foreign
boycott legislation. Use of such a clause by a foreign insurer should also not create aposition where a German person (i.e. the insured) is deemed to have breached local
legislation by supporting an overseas embargo, as LMA 3100 is limited to setting out the
obligations of the insurer. Therefore foreign insurers may generally use this sanctions
clause on local German insurance policies without infringing German anti-foreign boycott
legislation. It should be noted, however, that statements by BMWi are not binding on
German authorities or courts.

10

Either because the sanctions apply to the entity directly, or apply to its employees or companies in its group, or to persons
or entities with whom it must deal to perform its obligations under the insurance contract.

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Where foreign insurers delegate authority for their German insurance business to acoverholder resident in Germany, no clear view has been expressed by the BMWi about
whether the use of the LMA3100 would lead to the coverholder contravening the Germananti-foreign boycott legislation, but nevertheless legal advice that we have received
suggests that it is unlikely. Of course, managing agents and their coverholders should seek
legal advice if they have any concerns in that regard and should consider, if necessary,
restricting the scope of sanctions clauses in a manner that complies with German
legislation.

Amendments and Variations to Standard Wordings
Lloyd’s is aware that there are many different sanctions clauses in use in the London
Market. Managing agents should exercise caution in agreeing to sanctions exclusions or
warranties which deviate from market model wordings (or their own internal standard
wording). Managing agents’ sanctions compliance procedures should always allow for fullconsideration of the effects of such deviations (which may include internal compliance andlegal review of such terms) prior to underwriting such contracts.
Insurance subject to Foreign Law
Managing agents should take steps to understand how the chosen or applicable law andjurisdiction of the contract may affect the interpretation of the sanctions clause, so as toensure that they have their intended effect. It may be necessary to seek local legal advice
on the appropriate terms that will achieve the desired protection.
In the event of any doubt as to the treatment of such terms under the chosen law of thecontract, managing agents may wish to alter the choice of law/jurisdiction of the insurance
contract concerned (if this is permissible pursuant to applicable local insurance regulation).
Due Diligence and Sanctions Clauses
Whilst the insertion of a sanctions clause may give a measure of protection for insurers inspecified circumstances in relation to relevant sanctions legislation, it does not remove a
managing agent’s obligation to carry out, or to have performed on their behalf, due diligenceappropriate to the type of contract in question and to ensure that that it is evidenced
accordingly.
Lloyd's has previously issued guidance to the effect that where sanctions clauses
are likely to have the effect of excluding all risk under that contract, managing agentsshould not underwrite the contract concerned. This remains Lloyd's view. In situations
where particular matters giving rise to risk are known by insurers prior to underwriting,managing agents should take additional measures (in addition to applying appropriate
sanctions clauses) to ensure that such matters are fully and appropriately excluded fromcover provided by the insurance contract. Such measures may include:••

Using specific geographical or territorial exclusions in the contractual wording,Excluding particular entities, individuals or activities from cover.

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In addition, premium should not be accepted for these territories, activities or
persons/entities.
Managing agents should not underwrite a contract without a sanctions clause in order toobtain a competitive advantage, where such a clause is clearly appropriate.
Classes of business for which Managing Agents should consider deploying
sanctions clauses
Lloyd’s does not mandate the use of sanctions clauses, however, managing agents should
consider using a sanctions clause on a risk sensitive basis, in line with their own sanctions
risk assessment. There are some types of business for which Lloyd’s considers that it isbest practice to deploy an appropriate sanctions clause on the policy, because these may
increase risk by including coverage for mobile or complex risks which create exposure in
territories where sanctions apply. These include, but are not limited to:••••Open covers, including marine open cargo covers and line slips,
Treaty reinsurance,
Global policies, e.g. product liability,
Master policies, e.g. worldwide travel.

Additionally, managing agents should consider using an appropriate sanctions clause on
any contract where there is potential for additional insureds, activities or locations to be
declared to the policy without prior approval by the managing agent.
There are likely to be other circumstances in which it is appropriate to deploy an appropriate
sanctions clause on the policy.
Subscription Market Issues
When subscribing (as a following market) to an insurance contract, managing agents will
still have to confirm that any sanctions clause applied to that contract is suitable for theirneeds. If it is not, managing agents should consider requesting an amendment to theclause or applying additional wording to their line on the contract.

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Appendix 1 – Client / broker sanctions clause fact sheet
This is a summary document, and is not a substitute for specialist legal advice on issues
specific to individual contracts.
Sanctions can affect the scope of coverage an insurer can provide under an insurance
contract, as well as activities they may carry on pursuant to a contract. Sanctions clauses
are now used increasingly frequently across the Lloyd’s and London markets to achieve
contract certainty in respect of sanctions and to mitigate sanctions risk.
They are also recommended as good practice for underwriters by regulators such as US
Treasury’s Office of Foreign Asset Control (‘OFAC’) when providing global coverage toinsureds that could potentially expose underwriters to sanctions risk.
Lloyd’s general position regarding the use and function of sanctions clauses on(re)insurance contracts can be expressed, briefly, as follows:• A sanctions clause should be used as part of an overall sanctions complianceprogramme, which should also include appropriate due diligence and screening.
• The clause is designed to recognise that in certain circumstances (determined bylaw, not the underwriter) the underwriter may not be able to pay a claim, provide
another service to the (re)insured or provide the cover as originally anticipated.
• Certain sanctions only have a "suspensory" effect, in that they suspend anunderwriter's liability to perform a contract for the period that they are in force.
Others may have a more fundamental effect on an underwriter's ability to performthe (re)insurance in question at all.
• Sanctions clauses are designed to protect against matters which cannot reasonably
be identified through pre-underwriting due diligence and uncertainties inherent insanctions regimes, including changes to the law, post inception.
• Sanctions clauses do not affect the nature of cover given, nor do they affect thescope of cover the underwriter can or cannot provide without exposure to sanctions.
• Sanctions clauses are designed to promote contract certainty – and to alert theparties to the contract that different sanctions regimes to which the parties may be
exposed.
• Lloyd's would generally expect underwriters to take reasonable steps to request thenecessary authorisation or licence to pay claims or to continue to provide coverage,
where sanctions prohibitions apply, even though a sanctions clause may not oblige
them to do so.
• Regulators and enforcement agencies recognise that sanctions clauses should be
used on a risk-sensitive basis in the (re)insurance market.
• It is good practice to use a sanctions clause as a risk mitigation tool on lines ofbusiness which represent a higher risk of sanctions exposure, such as marine,
aviation or energy, but this does not mean that sanctions clause should not be usedin other lines of business.
• A sanctions clause will be appropriate where:
o the underwriter does not know the identity or location of all possible(re)insureds or beneficiaries to a (re)insurance contract, for example global
policies or treaty reinsurance, or,o where the exact details of the (re)insured activities are not known at
inception by the underwriter, for example marine open cargo covers.
This is not an exhaustive list, but illustrative of some common examples.

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