Sanctions drive insurers to tighten risk coverage
Companies buying insurance are encountering more clauses that exclude risks related to international sanctions. Insurers are also offering less capacity for industries and regions deemed vulnerable, experts warn. Buyers should be prepared to face higher scrutiny from insurers and pay attention to reinsurance arrangements linked to their policies. Failing to do so may result in claims being denied because of a sanctions breach.
Sanctions expand beyond borders and entities
International sanctions are becoming more common. The US, EU, UK, China, and other nations use them to achieve geopolitical goals. Even Argentina has joined the trend. President Javier Milei announced a bill in September to sanction firms that drill for oil in the Falkland Islands.
A database maintained by the International Underwriting Association lists more than 40 countries where individuals or organizations face sanctions from the US, UK, EU, or UN. The speed at which regimes are created, expanded, or relaxed makes it difficult for companies to keep up.
Regimes have grown beyond covering specific countries. They now target non-state actors, such as Jewish settler groups and individuals suspected of links to criminal groups. The US government also announced a plan in September to impose sanctions against the Hague-based International Criminal Court.
“Sanctions are undoubtedly becoming more complex, fast moving and far reaching,” said Laura Segger, director of global risks at DWF Law.
Supply chains and ownership structures face review
Insurers do not need to provide coverage directly to a designated entity to end up in breach. Regulators such as the US’s OFAC and the FCDO apply expansive interpretations of sanction rules. If a breach occurs in the supply chain of an insured, underwriters can be held liable.
As a result, underwriters focus on jurisdictions, industries, and trades subject to sanctions or considered at higher risk. These include energy, shipping, aviation, and international trade. They examine supply chains, intermediaries, service providers, and payment routes to identify indirect risks.
Insurers also look closely at ownership structures. Designated entities in Russia and Iran have learned to use opaque capital arrangements to bypass sanctions regimes.
Underwriters have created internal teams dedicated to compliance. The number of people in these roles has grown significantly. Arabella Ramage, legal and regulatory director at the Lloyd’s Market Association, said that “Teams in international insurance companies have gone from one person to ten or 12, and they have a significant infrastructure in terms of running sanctions checks, which need to be done every 24 hour”.
Standard clauses and stricter wording
Very often, only a firm exclusion clause will ensure insurers are comfortable working with clients in exposed sectors. These clauses allow insurers to decline cover, withhold payment, or terminate obligations where performance would breach applicable sanctions laws.
The London market introduced two standard wordings for sanctions clauses, known as LMA 3100A and LMA 3200, with some variation in markets like the US and Germany.
However, the rapid change in sanctions regimes since the Ukraine war began is leading underwriters to seek more restrictive wordings. US-facing insurers and reinsurers are asking for language that goes beyond the traditional formulation.
They want wording that addresses not only whether payment would breach sanctions law, but whether the insurer could become exposed to OFAC enforcement or designation risk. This has led to more subtle language regarding the provision of cover, claims handling, and payment obligations.
Insurance Standard Clauses and Rising Penalties
Standard sanctions clauses have become common features in insurance contracts. These provisions allow insurers to reject coverage, stop payments, or end obligations if performance would violate sanctions laws.
