102. How can an insurer or reinsurer participate in worldwide insurance markets through global insurance policies if, by definition, coverage extends to potential risks in sanctioned countries?
The best and most reliable approach for issuing policies with global risk coverage without violating U.S. sanctions law is to include a clause ensuring there is no coverage for risks that violate U.S. sanctions law. The exact wording of such clauses may vary depending on the type of policy (e.g., open marine cargo policies versus personal accident policies), but the legal effect of the clause should prevent the extension of a prohibited service (e.g., insurance coverage or indemnification) to sanctioned persons or jurisdictions, or for prohibited activities. Insurers should also ensure such clauses do not create future economic benefit for a sanctioned person or jurisdiction by allowing for indemnification if or when relevant prohibitions no longer apply; there should be no coverage at the time of loss if, at that time, such coverage would have violated U.S. sanctions law.
In the event of a loss occurring, and there is a question of whether a counterparty to the loss (e.g., the insured) was in violation of U.S. sanctions, the insurer should contact OFAC directly.
Date Updated: November 13, 2024
Date Released
November 16, 2007
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102. How can an insurer participate in worldwide insurance markets through global insurance policies if, by definition, coverage extends to potential risks in sanctioned countries?
The best and most reliable approach for insuring global risks without violating U.S. sanctions law is to insert in global insurance policies an explicit exclusion for risks that would violate U.S. sanctions law. For example, the following standard exclusion clause is often used in open marine cargo policies to avoid OFAC compliance problems: "whenever coverage provided by this policy would be in violation of any U.S. economic or trade sanctions, such coverage shall be null and void." The legal effect of this exclusion is to prevent the extension of a prohibited service (insurance or risk assumption) to sanctioned countries, entities or individuals. It essentially shifts the risk of loss for the underlying transaction back to the insured - the person more likely to have direct control over the economic activity giving rise to the contact with a sanctioned country, entity or individual. [11-16-2007]
1) FAQ # 102 and FAQ # 103 deal with sanctions exclusion clauses.
2) For an example of an enforcement action dealing with the issue of too-narrow exclusion clauses to global insurance products, see Civil Enforcement Information - American International Group, Inc. (2nd action) (2017). Consult the research system generally for enforcement actions dealing with commercial insurance. From 2006 through at least 12/2020, OFAC appears to have not yet issued a penalty for the mere issuance of global insurance without a sanctions exclusion in a situation in which i) no claim was made arising from sanctions related conduct; ii) the insurer did not have actual knowledge that the insured would be engaging in sanctions related activities, and iii) there was no evidence that the insured actually did so. Here, OFAC stops short of saying that a situation in which all three of those criteria are met would violate any sanctions prohibition, but clearly the broad exclusions are the recommended best practice.
3) Relevant enforcement actions are: Liberty International Holdings Inc. (2009); Aon International Energy, Inc. (2011); McGriff, Seibels & Williams of Texas, Inc (2011); HCC Insurance Holdings, Inc. (2011); Civil Enforcement Information - Gen Re (2011); The American Steamship Owners Mutual Protection and Indemnity Association, Inc. (2013); Civil Enforcement Information - American International Group, Inc. (1st action) (2014); Navigators Insurance Company (2015); Civil Enforcement Information - American International Group, Inc. (2nd action) (2017), Civil Enforcement Information - Generali Global Assistance, Inc., Chubb Limited, Allianz Global Risks US Insurance Company.
4) Note that OFAC considers travel insurance to be "ordinarily incident" to travel, and therefore exempt from IEEPA-based embargoes. See FAQ 104 and JCPOA FAQ D.7. Travel to Cuba is not subject to the travel exemptions of the Berman Amendment, but the CACR contain general licenses for authorized and third-country person travel to Cuba.
5) The following paragraph, and in particular the bolded portion, is notable for the implication that the threshold question of whether a “service” is provided can depend on the existence or non-existence of a sanctions exclusion clause which would nullify otherwise sanctions-implicating coverage language.
“The best and most reliable approach for issuing policies with global risk coverage without violating U.S. sanctions law is to include a clause ensuring there is no coverage for risks that violate U.S. sanctions law. The exact wording of such clauses may vary depending on the type of policy (e.g., open marine cargo policies versus personal accident policies), but the legal effect of the clause should prevent the extension of a prohibited service (e.g., insurance coverage or indemnification) to sanctioned persons or jurisdictions, or for prohibited activities. Insurers should also ensure such clauses do not create future economic benefit for a sanctioned person or jurisdiction by allowing for indemnification if or when relevant prohibitions no longer apply; there should be no coverage at the time of loss if, at that time, such coverage would have violated U.S. sanctions law.”
6) Note that the original version of FAQ # 102 articulated the concept of “risk assumption” constituting a “service”.
7) FAQ # 102 was amended on 11-13-24 to, among other things, specify that the guidance applicable to insurers applied to “reinsurers” as well.
8) FAQ # 102 was amended on 11-13-24 to remove the example of an acceptable exclusion clause, i.e. "whenever coverage provided by this policy would be in violation of any U.S. economic or trade sanctions, such coverage shall be null and void." Query whether the removal of the example means that OFAC no longer endorses it.
9) FAQ # 102 was amended on 11-13-24 to add specify that insurance for “prohibited activities” is prohibited, in addition to insurance provided to sanctioned countries, entities or individuals. This affirms that the provision of insurance with respect to prohibited activities constitutes the “facilitation” of such prohibited activities. See Selected Examples Illustrating the Operation of the Facilitation Concept.
10) FAQ # 102 was amended on 11-13-24 to add the following language:
"Insurers should also ensure such clauses do not create future economic benefit for a sanctioned person or jurisdiction by allowing for indemnification if or when relevant prohibitions no longer apply; there should be no coverage at the time of loss if, at that time, such coverage would have violated U.S. sanctions law. In the event of a loss occurring, and there is a question of whether a counterparty to the loss (e.g., the insured) was in violation of U.S. sanctions, the insurer should contact OFAC directly."
The first sentence of this paragraph introduces the notion of “indemnification if or when relevant prohibitions no longer apply” constituting a “future economic benefit for a sanctioned person or jurisdiction,” implying that this would constitute the provision of a “service” to a blocked person or embargoed jurisdiction. The scope of the guidance is a bit unclear. On one hand, OFAC encourages sanctions exclusion clauses that relate to what is and is not currently prohibited to ensure, on the other, it is prohibited to allow for “indemnification if or when relevant prohibitions no longer apply”. This appears to mean that it is prohibited to (say) insure Syria-related risks now where there is a clause that provides that Syria-related payments will only be made if and when Syria-related prohibitions are removed. If, however, there is a clause that says that Syria-related risks will be insured if and when Syria-related prohibitions are removed, this is different, because there is no actual Syria-related insurance provided (or obligations accruing) while the Syria-related prohibitions are in effect.
With respect to “there should be no coverage at the time of loss if, at that time, such coverage would have violated U.S. sanctions law,” the term “would have violated U.S. sanctions law” presumably means that one must look at the activity from which the loss arises and determine whether the provision of insurance with respect to that activity facilitates sanctions-implicating conduct. It doesn’t necessarily mean that the actual insured person violated U.S. law (notwithstanding the following paragraph).