New EU sanctions FAQS give Group Clubs a potential reinsurance problem

Just published EU FAQs have given Group Clubs no notice of “clarification” of April sanctions rules, which have an August 10th deadline for full implementation.

An update from the EU published on August 10th has led the International Group to publish an urgent circular relating to sanctions against Russia in the field of certain cargoes, including coal and other solid fossil fuels, plus certain types of fertilizer.

The IG noted that the EU clarifications will have a significant impact on the carriage of these commodities by EU entities and the provision of insurance for carriage to any entity, regardless of its domicile.

The technical nature of this is complex. They relate to Articles 3i and 3j, published on April 8th this year in Council regulation 2022/576.

Certain types of fertilizers were included in the list of commodities and subject to prohibitions in Article 3i.

The EU issued FAQs on April 17th and June 14th. Unfortunately, because of insufficiently exact phrasing, these FAQs look to have done more harm than good. They clarified only that EU entities were prohibited from purchasing such Russian cargoes intended for delivery both into and outside the EU but not otherwise being involved in their carriage.

The International Group said that “it seemed clear to Clubs and their advisors that on a plain reading of both Articles 3i and 3j the prohibitions around the carriage of Russian fertilizers and coal and other solid fossil fuels related only to their import into the EU and not to carriage to non-EU destinations”. The August 10th clarification asserts that this interpretation was not the EU’s intention.

These provisions were subject to a wind-down period until July 10th 2022 and August 10th 2022 respectively for sale contracts concluded before April 9th.

Right on the deadline of the second wind-down period the EU issued a further set of FAQs “which cast significant doubt on the previous interpretation industry had placed on the wording of Articles 3i and 3j”.

The text of these latest FAQs appear to suggest that the prohibitions in these Articles were in fact intended to have wider impact than just carriage into the EU. They could therefore impact of the carriage of such cargoes from Russia to any other country.

IG said that it sought immediate clarification from the EU Commission regarding the meaning of these latest FAQs, the scope of the EU prohibitions and potential impacts on both Members and Clubs.

In response the EU told the IG that, while the reference to “import” in the Articles is indeed just limited to import into the EU, the other restrictions on direct or indirect transfers were intended to equally apply to non-EU destinations.

“It is therefore now the case that the involvement of an EU entity in the carriage of Russian fertilizers and coal or other solid fossil fuels to any destination whatsoever and whether inside or outside the EU would be in breach of EU sanctions” said the IG.

Furthermore, the EU Commission has told the IG that the prohibition on the provision of “financial assistance” in sections (2)(b) of both Article 3i and 3j, (which includes insurance and reinsurance services), prevents any entity subject to the jurisdiction of the EU from providing insurance and reinsurance for the carriage of Russian fertilizers and coal and other solid fossil fuel cargoes regardless of destination.

As the IG observed, most of the Clubs that make up the IG are subject to the jurisdiction of the EU. All IG Clubs, including those that are domiciled outside the territory of the EU, rely on a reinsurance programme that is heavily dependent on the participation of reinsurers that are domiciled within the EU. If any of the IG Clubs are prohibited under these sanctions from contributing their share of any Pool claim, the individual Member will bear the shortfall in accordance with their Club’s sanctions rules. The same principle will apply for claims above $100m if any EU-domiciled reinsurers on the IG reinsurance programme are prohibited under these sanctions from paying the claim.

The implications of the rather tardy EU “clarification” were therefore stark for all Group clubs, not just those domiciled in the EU, as a Club could find itself, if subject to a claim that would hit IG’s reinsurance limit of $100m, unable to reclaim the cash from reinsurers.

“With no suggestion of the EU being willing to grant a further wind-down period to allow the consequences of these latest FAQs to be absorbed by industry, the impacts as set out above for Members involved in these trades have immediate effect. Any Members with questions are strongly encouraged to contact their Club|”, IG concluded.

Single-page set of August 10th FAQs from EU.

https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/faqs-sanctions-russia-listed-goods_en.pdf

Council regulation 2022/576 is at:

https://eur-lex.europa.eu/legal-content/EN/TXT/?toc=OJ%3AL%3A2022%3A111%3ATOC&uri=uriserv%3AOJ.L_.2022.111.01.0001.01.ENG

IG statement at https://www.piclub.or.jp/en/news/35959 and on all other Group Club web sites.