News
Now Lankan insurers include sanction clauses
Sri Lankan insurers, like their international counterparts, have begun stating in their contracts that policy cover will be suspended in case of the United States, the European Union or the United Nations imposes sanctions against the country. The Government and sections of the private sector are fighting back—but experts warn that ‘sanction clauses’ are here to stay.
Some weeks ago, a leading Sri Lankan insurance firm gave a local construction company a draft agreement to provide cover for a government building contract it had secured. One of its provisions took the company and the relevant State agency by surprise.
It was titled ‘Sanction Limitation and Exclusion Clause’ and held: “No insurer shall be deemed to provide cover and no 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 insurer to any sanction, prohibition or restriction under United Nations Resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America”.
The construction company and the State agency rejected the provision outright, forcing the insurer to drop it. This pattern —with insurers adding these clauses to their policies and the Government and private sector dismissing them, as and when — could continue until a uniform approach to the contentious subject is agreed upon.
The Attorney General’s Department has also been objecting to similar provisions in agreements drafted by European credit agencies. Their precise wording is not known. Finance Ministry officials and the AG’s Department did not respond to requests for information.
According to highly placed Government sources, however, the clauses state that export credit insurance cover will not apply in the event of economic, trade and financial sanctions or embargoes. After negotiations, the sections could be amended or dropped.
The Sunday Times wrote to Bank Austria, one of the credit agencies Sri Lanka did business with last year, asking about sanctions clauses in their agreements. A spokesman replied that they understood the “sensitivity of the relatively new topic of sanctions”. However, Austrian laws precluded them from revealing details of their contractual relationships with third parties.
While unfamiliar to Sri Lankans, sanctions clauses have been imposed for several years and will crop up more frequently in coming months. “In the long term, it could well be harmful to keep objecting,” said Clive O’Connell, a partner with the London-based Goldberg Segalla law firm.
“The current position, as we understand it from discussions within our market committees, is that most policies issued in the London Market will normally include a sanctions clause as a standard,” said Scott Farley, Director of Communications of the International Underwriting Association, in an email interview.
Even certain classes of business that had not previously included these clauses are now working towards factoring them in. “There is a lot of work ongoing around sanctions clauses at present,” Mr. Farley said. They are on the agenda of many committees. This is because the adoption of sanctions as a political tool has become more widespread.
“There is probably more reliance on sanctions now than in any time in history,” said Mr. O’Connell, one of the world’s leading insurance and reinsurance lawyers, in a telephone interview. “The reason is that they are a means of effectively exercising political control over parts of the world where military intervention is not appropriate or possible.”
These sanctions are being enforced largely through financial services such as banks and insurance. And global reinsurers are a key tool. All leading insurers in Sri Lanka have “reinsured” some of their risks with global reinsurers for a premium. This means that, in the event of large claims, their dues will be shared by these international firms.
“About four or five years ago, reinsurance companies imposed clauses on their primary insurers saying no cover will be given if payment of a claim would be a breach of sanctions,” said Mr. O’Connell.
Thus, Sri Lankan insurers — like the one mentioned above — are probably adding sanctions clauses into their contracts because the global reinsurers they share their risks with insist on it. This practice will only grow in future. And, while all contracts are open to negotiation, fighting it could lead to other complications.
If sanction clauses are repeatedly turned down, only those insurers who are not reinsured by large global or other Western reinsurers would be able to write the business, Mr. O’Connell said. “This would have the effect of concentrating risk in a geographic area and make it more susceptible to accumulations.”
“Ultimately, it could expose Sri Lanka to significant peril from a natural catastrophe or other disaster,” he explained. “The risk would not be spread around the world but focused on a number of more local reinsurers.” In the event of a tsunami, for instance, Sri Lanka’s local insurers could be faced with massive payouts that will not be shared by global reinsurers.
Experts pointed out that the inclusion of sanction clauses did not necessarily mean that such penalties were expected or anticipated. “It is not necessarily the case that the use of such clauses indicates a belief that there is a danger of sanctions being imposed on a particular country,” Mr. Farley asserted.
Sanction clauses will crop up in future export credit insurance agreements that the Government hopes to sign. “I would be very surprised to see contracts like that without sanction clauses,” Mr. O’Connell admitted.
However, it may be possible for the Sri Lankan Government to demonstrate that an insurance contract has no likelihood of running afoul of sanctions. Sanctions clauses might also be avoided if an insurer had no reinsurance with reinsurers bound by sanctions, said Mr. O’Connell. In the case of export credit insurance, the second option seems unviable.
It is not known what tools the Government had used to avoid sanction clauses in its export credit insurance agreements. Whether it will continue to adopt the same strategies — and how successful these will be — remains to be seen. What the private sector will do remains an entirely different story.