On Monday, the Office of Foreign Assets Control (“OFAC”) announced that insurance giant AIG had agreed to pay $148,698 to settle charges that it had insured 555 shipments involving Sudan, Iran and Cuba. Although some of the apparent violations involved single shipment policies to the sanctioned destinations or paying claims under global policies on shipments to those destinations, others involved simply accepting premiums under global insurance policies that were later used to cover shipments on which no claims were made to sanctioned destinations.

In November of last year, OFAC provided guidance on how global insurance policies should deal with U.S. economic sanctions

The best and most reliable approach for insuring global risks without violating U.S. sanctions law is to insert in global insurance policies an explicit exclusion for risks that would violate U.S. sanctions law. For example, the following standard exclusion clause is often used in open marine cargo policies to avoid OFAC compliance problems: “whenever coverage provided by this policy would be in violation of any U.S. economic or trade sanctions, such coverage shall be null and void.” The legal effect of this exclusion is to prevent the extension of a prohibited service (insurance or risk assumption) to sanctioned countries, entities or individuals. It essentially shifts the risk of loss for the underlying transaction back to the insured – the person more likely to have direct control over the economic activity giving rise to the contact with a sanctioned country, entity or individual. [11-16-07]

This is a sensible and reasonable policy with respect to global insurance policies. So, you must be assuming, AIG must have left the language cited above out of its global policies and that led to the fines. But you would be wrong. OFAC said this about the AIG global policies:

While a majority of the policies were issued with exclusionary clauses, most were too narrow in their scope and application to be effective.

And how were they “too narrow in their scope and application”? OFAC is not saying. Apparently, OFAC thinks it will be easier to fine other insurance companies later if it keeps secret the drafting errors in the global policies that made the exclusionary clauses in the AIG global policies “too narrow in their scope and application.” And what about those clauses other than most clauses that were too narrow?  Why was AIG being fined for shipments under policies where the exclusionary clauses were acceptable?

Worse yet, after staying mum on what was wrong with “most” of AIG’s exclusionary clauses beyond being “too narrow,” OFAC has the nerve to say this in its announcement:

This enforcement action highlights the important role that properly executed exclusionary clauses play in the global insurance industry’s efforts to comply with U.S. economic sanctions programs.

If “properly executed exclusionary clauses” are so gosh-darned important, then why on earth does OFAC refuse to give the insurance industry a single clue as to what exactly are  “properly executed exclusionary clauses” and what was wrong with “most” of the clauses in the AIG global policies? Did they leave out the word “void” from the recommended language? Did they just say “U.S. economic sanctions” instead of “U.S.economic or trade sanctions”?  How hard would it have been for the agency to say precisely and specifically what was wrong with AIG’s exclusionary clauses?  This just underscores the perception that OFAC is more interested in terrifying than regulating U.S. businesses.

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