The cornerstone of that proposal is to demand tolls from vessel owners for safe passage of the vessel through the Strait via the creation of the Iranian Persian Gulf Strait Authority, something which the US and its allies vehemently oppose. Such payments would in any event contravene existing sanctions regimes, including OFAC and the provisions of the Terrorism Act 2000.
In response to the ongoing impasse, the Lloyd's Market Association (LMA) has published a new model clause, LMA5708 – Strait of Hormuz Transit Fee Condition, for use primarily in the marine hull and hull war market.
Lloyd’s have made clear previously that ‘toll’ payments to Iran for safe passage through the Strait of Hormuz create significant sanctions exposure. This new wording makes the position abundantly clear to insureds and regulators alike that underwriters will not tolerate such activity and are taking additional steps to comply with OFAC requirements. Further, as the explanatory notes make clear, payments for transiting an international waterway are illegal under UNCLOS and it is right that Insurers steadfastly oppose regimes which threaten safe passage of vessels.
Effect of the Clause and the Insurance Act gap
In light of the situation in the Strait, the London Market had started to incorporate express warranties to the effect that any payment or financial incentive made to any entity owned, controlled, or associated with the Government of Iran and/or the Islamic Revolutionary Guard Corps (IRGC) in order to secure or facilitate safe passage through the Strait of Hormuz, would render the policy null and void ab-initio.
The difficulty with such warranties under the Insurance Act 2015 is that breach of warranty now suspends rather than discharges liability. Further, an insurer cannot rely on a breach of a term designed to reduce a particular risk if the non-compliance could not have increased the risk of the loss that actually occurred. The possibility therefore of a payment to Iranian authorities followed by a subsequent peril resulting in a claim on the Policy may not have been sufficiently protected merely by inclusion of such a warranty.
The LMA5708 wording closes any such gap. It appears deliberately drafted to avoid the Insurance Act's warranty regime and suggests that a prohibited transit payment could result in a complete discharge of insurers' obligations and to create an independent contractual basis on which underwriters may cease to have obligations in respect of the vessel.
The principal effects of the clause are:
- No indemnity for transit fee payments. Insurers will not be liable to reimburse or indemnify any transit fee, toll or similar charge paid in connection with passage. The suggestion that such a payment would amount to a sue and labour expense to avert physical damage is resoundingly rejected in the wording.
- Discharge of insurer obligations. Where such a payment is made, insurers are discharged from their obligations in respect of the relevant vessel irrespective of whether or not such payment has any bearing on potential or future claims arising during the transit.
- Limited carve-back. The clause preserves cover for payments that are genuinely levied in exchange for specific maritime or navigational services rendered to the vessel, provided those services are permissible under UNCLOS and any applicable sanctions provisions.
Comment
LMA5708 is a clear indication of the Market’s concern regarding any payments made to facilitate transit through the Strait of Hormuz and the expectation to carry out enhanced due diligence in relation to the same.
While framed as a model clause for hull underwriters, its implications extend to owners, managers and brokers, who would be advised to consider carefully whether any transit-related charges are legitimate navigational service fees or payments that could trigger sanctions-related concerns or result in a loss of cover in a volatile region. The sanction for non-compliance with the provisions is therefore severe and shipowners ought to heed caution.
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