Insurance loopholes threaten major spill costs amid Russian oil sanctions

Insurance policies for ships transporting Russian oil can be easily contested due to the fine print in contracts that doesn't assure compensation for a potential spill when sanctions are involved, the Financial Times reports. This creates a significant risk.

Sanctions imposed by Western countries on Russian maritime transport have also impacted insurance, which is essential for shipowners to operate. These companies are hesitant to insure ships that cooperate with Russia, leveraging the fact that certification services are largely provided by foreign entities like the British Lloyd’s Register of Shipping or the Norwegian Det Norske Veritas. By the end of 2022, Japanese insurers had joined in on these sanctions.

A certificate of seaworthiness, necessary for insurance and permission to dock at ports, is required under maritime law. The absence of this insurance means transportation is automatically halted.

Nevertheless, Russia has been circumventing these restrictions by utilizing a so-called "shadow fleet," which involves ships registered under different flags and insured by minor foreign firms or those active within the Russian market.

Investigations by the Financial Times and Danish media group Danwatch have revealed that numerous Russian ships in the Baltic Sea are insured by policies that could be easily nullified in case of a disaster.

Specifically, the Moscow-based insurer, Ingosstrakh, offers policies with a "sanction exclusion clause" that could nullify claims for most tankers carrying Russian oil, potentially leaving coastal nations in Europe and Asia facing substantial cleanup costs after a spill.

Russia not only relies on the shadow fleet for transporting crude oil but also has Sovcomflot, a transportation company owning more than 120 tankers, which theoretically could be augmented by Chinese and Indian vessels.

Additionally, there exists a so-called "shadow armada", composed of ships flying flags different from those of the sanctioning countries. While this practice, which involves registering a ship under a flag with no connection to the shipowner, is not illegal and stems from free market opportunities and commercial law, it is frowned upon due to the potential for misuse. It affords anonymity to shipowners, obscures the identity of oil suppliers, and reduces costs, including taxes—particularly when the flag is from a country considered a tax haven. Hence, these vessels are often referred to as "cheap flags" or "flags of convenience."