There is disconnect between stakeholders in London’s political risk and trade credit insurance market over the proposed language for a new standardised “sanctions clause” the market is considering including in policy wordings.
GTR can exclusively reveal that brokers and underwriters are at odds over the language, which was proposed during a meeting between market representatives and a Lloyd’s Market Association (LMA) business panel on July 15.
One underwriter close to the matter tells GTR that the language is ambiguous, and that conflict has arisen because it is unclear whether or not the new clause would invalidate a policy’s irrevocability and unconditionally if a counterparty is found to have been in breach of sanctions.
“The proposed wording implies that if it is found out mid-way through a policy period that that policy is in breach of sanctions law, then essentially that policy is torn up and the insured doesn’t get paid,” the source says.
“Brokers are saying that it’s not acceptable because the underwriters should do their own due diligence before insuring a transaction. It’s not the insured’s problem, and in any case, these are supposed to be unconditional and irrevocable payment protection policies.”
One broker GTR spoke to thinks that the debate surrounding the newly proposed sanctions clause has so far been very one-sided. “The proposed wording isn’t a win-win at the moment for brokers and underwriters,” the source says.
“Underwriters drafted the language without much input from clients. It is very wordy and doesn’t cater for clients’ position and the payment risks they want to use our product for.”
The principle concern for brokers is their ability to sell policies to clients which include a sanctions clause that could invalidate that policy, and see any claim go unpaid, if the insured transaction itself is found to have been illegal.
But underwriters feel it is unfair for them to be expected to indemnify an illegal transaction, or pay a claim to a sanctions-breaching counterparty, because due diligence wasn’t carried out when the transaction was originally agreed.
“It is utterly unreasonable to expect an insurer to pay out a claim under those circumstances,” says the underwriter, arguing that it should be the responsibility of banks to conduct the necessary due diligence when entering into a transaction.
“They [the banks] invariably have more stringent know-you-customer and compliance procedures, and they are the ones actually financing transactions, so why shouldn’t insurers be able to deny liability or freeze a policy if it breaches sanctions?”