In a concerted action with the G7 states and Australia, also known as the Oil Price Cap Coalition, the European Union has imposed new sanctions on Russia recently. This has set commercially into force a price cap for Russian crude oil and petroleum products by an amendment of EU Council Regulation 833/2014 (link).
It is not a new development that sanctions extend to the insurance industry The Iran sanctions added to this a far-reaching prohibition of insurance in favour of Iranian interests. The latest amendments to Regulation 833/2014 have added to this another tool. Insurance is neither prohibited generally nor in respect of certain goods, but only if Russian crude oil or petroleum products are traded with third countries - these are countries other than the Oil Price Cap Coalition states - and above a value which is from time to time fixed by the EU in US Dollars. Initially, this value was set at USD60 for crude oil per barrel. On 4 February 2023, the EU Council fixed it at USD 45 per barrel for crude oil and USD 100 per barrel for petroleum products.
The Regulation deals with the oil price cap in Art. 3n, which consists of 11 sub-paragraphs. However, these already detailed provisions must be read together with a Guidance on the oil price cap as contained in Chapter E Section 5 of the Commission Consolidated FAQs on the implementation of Council Regulation No 833/2014 (the “Guidance”), provided by the EU Commission, last updated on 07.02.2023.
The Commission raises and answers 48 questions concerning the oil price cap in the well-known FAQ structure. It is noteworthy that the Guidance is much more detailed than the Regulation itself. This leads to the question of whether some parts of the Guidance are Guidance only, which may originate from the Commission as part of the Executive, or whether they better had been part of the Regulation itself.
Structurally, Art 3n (1) of the Regulation prohibits all insurance of seaborne Russian crude oil traded to third countries. Art. 3n (6) provides for an exemption of the prohibition of insurance if the oil is sold at a price equal to or above the price cap fixed by the Regulation. The Guidance defines a 3-tiersystem, with the demands for documentation decreasing from tier to tier. Insurers are placed in the third tier, with the lowest requirements. “Tier 3 actors should obtain and retain customer attestations in which the customer commits to not purchase seaborne Russian oil above the price cap, for example, as part of their annual insurance policy or ordinary business operations.”
The Guidelines leave open whether such attestation is to be made once for all transport during the cover period or whether it is requested for each individual transport. The Guidelines even expressly concede that “an attestation may take the form of a sanction exclusion clause within an annual policy, or a clause stating a party will not have cover if they transport oil purchased above the price cap”.
In practice, however, it will be easier for insurers to proceed with attestations for all individual transports. The guidelines state: “The recordkeeping and attestation process is intended to provide assurances to EU operators that followed the appropriate due diligence to rely on such attestations reasonably. In cases when an EU operator without direct access to price information reasonably relies on an attestation after performing appropriate due diligence and such an attestation was falsified or provided by illegitimate actors, the EU operator would not be considered in breach of the price cap provided it has acted in good faith.”
This indicates that only attestations can be a solid basis for good faith if oil is traded above the price cap. Insurers have realized the risks inherent to general attestations and sanctions clauses. Not only do the P&I Clubs organised in the International Group of P&I Associations demand from their members’ -attestations for each voyage, but the Price Cap Extension Clauses LMA5604 (cargo) and LMA 5605 (hull) do not only provide for general attestations, but also individual attestations for each transport.
With these steps, P&I Clubs, and cargo and hull & machinery insurers, immediately became active because insurance addressed by the Regulation includes not only cargo insurance but also P&I insurance and Hull & Machinery insurance.
Consequently, cargo insurers are prohibited from settling claims for damage to oil traded above the price cap. P&I insurers are not permitted to pay the liabilities of the carrying shipowner. Hull & Machinery insurers are prohibited from settling claims under the H&M policy regarding damage to the carrying vessel. It needs to be fully clear how causation operates in this context. In many jurisdictions, cover depends on the proximate cause of the damage being covered by the insurance policy.
This leads to the question of whether settlement of such a Hull and Machinery claim is prohibited, which was caused while the vessel carried oil trade above the price cap. Or whether it is not the moment causation, which is the relevant aspect, but the moment when damage occurs, or whether both scenarios are subject to the prohibition. In the first case, there would be no cover even if damage occurs long after the prohibited transport. In the second case, the cover would be prejudiced even though the vessel was still perfectly insured when the peril insured set the cause for the damage. In the last case, there would be no cover at all. Neither the Regulation nor the Guidance address this, so the EU Commission should provide clarification as soon as possible.
While art. 3n (6) allows insurance if the oil is traded below the oil price cap, Art. 3n (9) contains a further exception from the prohibition of insurance, which is not linked to the oil price cap. Instead, it applies even if the oil was traded above the oil price cap. The prohibition shall not apply “to the transport or provision of technical assistance, brokering services or financing or financial assistance, related to the transport necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment, or as a response to natural disasters”.
Unfortunately, this provision seems to be inappropriately worded. The exemption applied only when the oil transport as such was necessary to prevent an impact on human health and the environment. Obviously, in all practical cases, it is unnecessary to carry oil to prevent such effects. The UK provision contained in sec. 6 of Russia (Sanctions) (EU Exit) (Amendment) (No. 16) Regulations 2022 (link) is clearer, even clearer the OFAC OFAC Guidance on Implementation of the Price Cap Policy for Crude Oil of Russian Federation (link) and the OFAC General Licence No. 57, which stipulates that measures “that are ordinarily incident and necessary to addressing vessel emergencies related to the health or safety of the crew or environmental protection, including safe docking or anchoring, emergency repairs, or salvage operations, are authorized”.
It is as a result of this submitted that this is the intention also of Art. 3n (9) of the Regulation, and clarification by the EU Commission would be most welcome. This should include clarification that P&I Clubs are allowed to honour their obligations towards innocent third parties in respect of Blue Cards issued under certain IMO conventions, namely 1992 CLC, the Bunkers Convention and the Wreck Removal Convention.
This article only covers some aspects relevant for insurers under the oil price cap. For the detailed article in English, please contact the author at d.schwampe@asd-law.com.
