When a vessel allides with a fixed object — a jetty, pipeline, or terminal — liability is typically straightforward: the shipowner is responsible for the damage and is indemnified by its insurer. But what happens when the damaged property belongs to a sanctioned entity?
In recent years, this question has shifted from theory to reality. Economic sanctions, particularly those targeting state-owned or military-linked enterprises, have introduced new complexities for marine insurers and shipowners alike. In a world where many ports, terminals, and service providers are state-associated, the chance of an innocent allision involving a facility with connections with sanctioned entities is no longer remote.
A collision of liabilities and compliance
Under ordinary marine liability principles, the vessel owner is responsible for property damage caused by negligent navigation, and the ship’s protection and indemnity (P&I) insurer indemnifies that loss. However, where the damaged jetty or berth is owned or operated by a sanctioned entity, any payment of compensation — even to settle a legitimate civil claim — may be prohibited where the transaction has a sanctions nexus. It is a question of law and fact whether a transaction breaches sanctions. The mere fact there is a “sanction” element or a suggestion of such an element in connection with the damaged facility may not be a good basis for refusing to make payment or put up security. Much also depends on the terms of cover and the rights of the insurer to refuse or withhold actions.
Insurers making or facilitating such payment could trigger sanctions laws or be treated as a prohibited transaction involving a sanctioned entity. Even issuing a letter of undertaking (LOU) as security for a claim may, depending on the facts, be viewed as providing an impermissible benefit to a sanctioned party. Insurers often find themselves in a difficult position — willing to indemnify a legitimate third-party claim but constrained by the risk that doing so would breach sanctions. This creates a situation where liability exists in law but cannot be discharged without breaching sanctions, leaving shipowners caught between their legal obligations and insurers’ compliance restraints.
Operational stalemate
Shipowners and insurers may try to apply for a license from the relevant authorities in relation to the transaction in question. If the shipowners or insurers are subject to multiple sanctions regimes, it may mean various applications to different authorities in different jurisdictions. The process becomes even longer and more complex. These applications take time, often months, during which the vessel may remain detained, accruing port charges, crew costs, bunkers, and other provisions. Sometimes, the crew or the senior officers may also be detained together with the vessel. Prolonged detention of the crew puts their physical health and mental well-being at risk. Shipowners may also struggle to find new crew for purposes of crew change, as they would effectively be stuck on board until the matter is resolved. There is also obviously the financial loss to the shipowners. The result is an operational stalemate: shipowners face mounting liabilities while insurers hesitate to act, paralysed by compliance uncertainty.
Sometimes, tensions or disputes may arise between an insured shipowner and an insurer – where the shipowner contends that an insurer has taken an unreasonably conservative position by refusing to make payment or put up security or by insisting on licenses being obtained before effecting payment or putting up security. Each case must be considered on its own facts with reference to the applicable sanctions regime(s). But one can certainly expect such disputes or tensions to arise in such cases.
The key is that overcoming sanctions restrictions should be treated as part of casualty management. Clear procedures, early legal input, and coordination between shipowners, insurers, and regulators are essential to prevent an operational incident from turning into a compliance crisis.
