Nearly three months into the United States’ war with Iran, the Strait of Hormuz remains closed to normal shipping traffic. Some ships have gotten through thanks to negotiations between their affiliated governments and the government of Iran, while others have simply made a run for it under the cover of darkness. And some ships—if they don’t get tricked by scammers pretending to be the Iranian government—have gotten through by paying a “toll” to Iranian authorities for safe passage. Beyond the implications for shipowners, Iran’s “toll booth” has major sanctions implications for insurers and reinsurers providing cover for vessels moving through the Strait.
OFAC has made its position very clear regarding payments to the Government of Iran or the Islamic Revolutionary Guard Corps (IRGC), first in FAQ 1249, released on April 28, then in an alert on May 1. According to OFAC’s guidance, U.S. persons are not authorized to make any payments to Iran for safe passage through the Strait, and non-U.S. persons could face sanctions for paying these tolls. OFAC has also warned that non-U.S. financial institutions could face secondary sanctions risks for processing prohibited toll payments, which “may include several payment options, including fiat currency, digital assets, offsets, informal swaps, or other in-kind payments, such as nominally charitable donations made to the Iranian Red Crescent Society, Bonyad Mostazafan, or Iranian embassy accounts.” OFAC’s alert also included a strong warning for maritime service providers, noting that they “should ask counterparties for details on who they coordinated with to transit the Strait of Hormuz and if any safe passage fees were or will be paid to Iran.”
Thus, if OFAC uncovers evidence a shipowner paid a fee for safe passage to the Iranian government, then the shipowner may be sanctioned and his or her vessels blocked. This evidence may be hard to find—as OFAC’s alert warned and a recent Planet Money episode explored, Iran appears to be using crypto in at least some cases to receive toll payments, and Iran has access to a vast network of shell companies and shadow banking accounts. But the risk is still real.
For insurers and reinsurers providing cover for vessels trapped in the Strait, or perhaps boldly looking to enter, the question is less about whether the tolls are authorized and more about whether existing clauses and contractual provisions provide sufficient protection in the event a covered party does pay the prohibited toll.
Despite public reporting that insurance has been “unavailable” for vessels transiting the Strait, close to ninety percent of war market participants surveyed in the London market still have an appetite to underwrite hull war risks. Vessels seeking to transit the Strait will need to obtain additional war coverage, even under existing policies, given that the Strait is now considered a breach of warranty area. For insurers and managing general agents underwriting voyage-specific cover, it is important to confirm and condition cover on the basis that there have been and will not be tolls paid, directly or indirectly, for that voyage. The provision of insurance or reinsurance cover, underwriting services, or broking services for a voyage where tolls are paid to Iran or to the IRGC would be considered a prohibited service to Iran under OFAC sanctions regulations.
Under normal circumstances, sanctions exclusion clauses within policies would generally be sufficient to limit insurers’ liability if a vessel suffered a loss in Iranian waters or filed a claim that involved an Iranian service provider. However, given the extensive public reporting on toll payments, Iran’s own assertions that the toll is required for safe passage, and OFAC’s blunt guidance on the issue, any insurer receiving a request to underwrite cover related to transit through the Strait should reasonably assume payment is a possibility and take steps to protect themselves. This could mean including additional warranties that condition cover on no payment of Iranian tolls and no service to or from the Iranian government/IRGC, or obtaining assurances from clients that this is the case.
Insurers’ sanctions team should make sure their internal escalation protocols and procedures are ready to respond to incoming requests and ensure business lines are informed about the risks. For claims, of which there are likely to be thousands, enhanced due diligence and information collection should be required prior to processing. This could include attestations/evidence of voyage data, trade documentation, counterparty involvement, and dates of safe passage.