The sanction regimes put in place following Russia’s invasion of Ukraine carry significant implications for the insurance and reinsurance sector, explains BonelliErede partner and leader of the shipping, transport & logistics focus team, Enrico Vergani
The sanctions target certain entities and individuals and directly prohibit providing insurance services to certain types of trade.
The Oil Price Cap Coalition – which includes the EU, the UK and the US – imposes restrictions on providing certain ancillary services – including insurance and reinsurance – to the maritime carriage to third countries of Russian petroleum and petroleum products purchased in excess of the established price cap.
The insurance market responded swiftly to the sanctions: hull and machinery, cargo insurers and P&I have adopted standard sanction clauses to avoid covering activities that violate applicable sanction regimes. The most widely adopted clause is the LMA3100 Sanction Limitation and Exclusion Clause.
The West’s sanctions on Russia’s oil trade have spurred the expansion of dark, or shadow, fleets, which were already active in North Korea, Venezuela and Iran.
The dark fleet, in the collective imagination, is a vast array of tankers that (among other things), lack proper insurance cover, including P&I; possess opaque ownership structures usually based in non-western countries; use open registers; are old and often not properly manned, equipped or maintained; and engage in illicitly trading sanctioned cargo such as circumvention of the Oil Price Cap Regime – including via STS transfers – and disguise their activities by turning off their AIS.
While the imagery of dark fleets haunting the seas like spectres may be overly evocative, there are indeed pressing concrete issues on the table. Serious incidents involving dark vessels can cause severe environmental damage, as seen with the recent incident in Denmark involving the Panama-flagged Aframax tanker Andromeda Star at the beginning of March 2024. And when the incident is within the territorial waters or exclusive economic zone of a particular country, that country may have to manage the situation without any financial contribution from the insurers.
In the more optimistic scenario, waivers may be granted to tugs, cleaners and salvors to enable them to engage with sanctioned entities and trades and provide them services – thereby helping protect the environment, life and safety at sea. But it can also encourage a free-ride attitude.
The following instruments may be useful in tackling the expansion of dark fleets:
UNCLOS, which sets out the rules regulating territorial limits, resources and the protection of the marine environment; SOLAS, for the safety of merchant ships; and Marpol, for the prevention of pollution from ships.
A paper by the House of Lords from March 2022 titled UNCLOS: the law of the seas in the 21st century, underlines the necessity of establishing a genuine link between a vessel and its flag state to prevent the misuse and abuse of the open registry system, which often turns into an overly wide flag of convenience.
In December 2023, IMO adopted a dark fleet resolution urging member states and stakeholders to take action to prevent illegal operations by dark fleets in the maritime sector.
The Oil Price Cap Coalition has issued several alerts warning maritime operators about the risks posed by the dark fleet and recommended measures to tackle the issue.
Admittedly, not all countries have sanction regimes in place against Russia, and the law of the sea is underpinned by the prerogative of a flag state’s exclusive jurisdiction over its vessels.
The current misalignment at an international level is enabling dark fleet operations rather than curbing them. International law calls for the effective and efficient enforcement when values such as marine environment and safety of life at sea are at risk.
Tanker legal and financial risks will be discussed at the forthcoming International Chemical & Product Tanker Conference 23-24 April 2024.
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