Sanctions, or the covered loss nobody is allowed to pay

Insurance has always reasoned in two states: the loss is covered, or it is not. International sanctions regimes have introduced a third, which contracts model badly because it does not resemble them: the loss that is covered and unpayable. The cover responds, the loss is established, the insurer disputes nothing, and payment is prohibited. This is not an exclusion in the ordinary sense, where one finds that no debt ever arose. Here the debt exists, it is acknowledged, and it is its performance that is forbidden. The difference looks theoretical and it decides what remains to the insured once the regime is lifted.

In political risk, this question takes a particularly hard form, because sanctions there often play two roles at once. When a country is placed under a sanctions regime, the targeted state frequently responds with retaliatory measures against foreign interests on its soil: seizing control of assets, prohibiting transfers, appointing administrators. The sanction is then the cause of the loss, and it is at the same time the rule preventing that loss from being indemnified. The insured suffers a loss from an event and is deprived of its indemnity by the same event. This must be said plainly because it changes the arithmetic of patience: waiting for the regime to lift is not neutral waiting, it is waiting for the disappearance of what created the claim and of what stops it being paid, both at once.

Then comes the question always asked too late: which regimes actually apply to this payment? Intuition looks at the nationality of the parties, and it is wrong. What governs payability is the chain: the insurer's domicile, that of its reinsurers, the settlement currency, and the bank executing the transfer. A settlement in dollars brings in United States jurisdiction through correspondent banking, whatever the passports of insured and insurer. A European insurer whose reinsurance panel is largely American must reckon with regimes its contract never mentions. The result disconcerts everyone: an indemnity can be blocked without either party to the contract being sanctioned, because a necessary intermediary is, or depends on one who is.

Contracts handle this with a sanctions exclusion clause, and one must know its structural defect before arguing about its scope. That clause makes the existence or the performance of the cover depend on a later administrative act, taken by an authority that is not party to the contract, sometimes after the loss. It further asks the insured, at the moment of notification, to know whether a beneficiary is designated, which nobody knows, designation being the product of intelligence work that takes months. It therefore transfers an unanswerable question to the insured, and that is what makes it so hard to invoke cleanly.

Not all such clauses are equal, however, and the distinction rests on a single verb. Some wordings say the cover does not apply to the extent that payment would expose the insurer to a sanction: the cover is destroyed, and if the regime is lifted three years later, there is nothing left to claim. Others say that performance of the cover is suspended for as long as payment is prohibited: the debt survives, and becomes due again on lifting. Between those two wordings, the difference in value to the insured is the entire indemnity. It is the heaviest line in the contract on this subject, it fits in half a sentence, and it is read before the loss because afterward it is no longer negotiable.

There is almost always a workable route, and it is administrative rather than contentious. Most regimes provide for specific licenses authorizing a defined transaction, and payment of an insurance indemnity to a European victim of an expropriation is exactly the kind of file that gets processed. That route has two features to internalize. It is slow, counted in months, which means filing early and assembling a record only the insured can document. And its outcome, a refusal included, is a dated fact that fixes everyone's position, which is better than prolonged uncertainty. During processing, a trap closes quietly: the limitation period on the action against the insurer keeps running. A claim can become time-barred while both parties wait in good faith for an administrative answer, and it falls to the insured to interrupt it rather than to rely on the prevailing good faith.

One last mechanism deserves attention, because it closely resembles what we saw with non-transfer. Some regimes do not prohibit payment but require it to be made into a frozen account. The insurer performs, the insured is paid on paper and has access to nothing. Whether that payment discharges the insurer's obligation is a contractual question, rarely addressed in advance, and the answer determines who bears the wait and the risk of depreciation. To this must be added the mismatch between the policy's clause and those of the reinsurance treaties, which are not drafted by the same hand: when they diverge, the direct insurer may have to pay without being reimbursed, or the reverse. For the insured, understanding that the resistance it meets sometimes comes from the reinsurance layer rather than from the merits of its file changes how it negotiates.