OFAC Issues Necessary and Long-Awaited Updated Guidance for (Re)Insurance Industry

On November 13, 2024, the U.S. Department of the Treasury’s (“Treasury’s”) Office of Foreign Assets Control (“OFAC”) updated its FAQs for insurers in a long-awaited move to modernize its published sanctions compliance guidance for the insurance industry.  None of the industry-specific FAQs had been updated since January 2015, and many had not been amended in more than 20 years, so these updates represent an important step by OFAC to ensure that its public guidance reflects the industry as it is today. 

In total, OFAC issued 10 amendments to its FAQs, as well as issuing two new FAQs.  The full text can be found in the link above, but we highlight the following as key takeaways for the industry:

• • Clarified Guidance on Use of Sanctions Clauses: Since 2004, OFAC’s guidance had specifically endorsed the use of sanctions clauses for (re)insurers to mitigate sanctions risk. OFAC has reiterated, but modernized, that guidance in its new updates.  Previously, OFAC had highlighted one specific clause that was no longer in widespread use around the industry.  In its update, OFAC broadened the scope of its guidance by stating that it was not seeking to endorse a specific clause or wording, noting that “the exact wording of such clauses may vary.”  Instead, OFAC identified what an effective sanctions clause needed to do to ensure compliance with OFAC’s requirements, namely that (1) the “legal effect” of such a clause should be to “prevent the extension of a prohibited service (g., insurance coverage or indemnification) to sanctioned persons or jurisdictions, or for prohibited activities,” and (2) that it should not “create future economic benefit” for such persons or jurisdictions by allowing for indemnification.  The original FAQ had the same statement that the “legal effect” of the clause should be to prevent a prohibited service, but the updated FAQ supplements this, noting that, in the event of a loss, there should be no coverage if, at the time of the loss, “such coverage would have violated U.S. sanctions.”
  • Confirmed Requirement to Block Only a Portion of a Policy: In two of its updated FAQs, OFAC confirmed industry’s understanding that (re)insurers were only required to block a portion of a policy if the policy applied more broadly than one sanctioned party. Specifically, in FAQ 63, OFAC confirmed that if a (re)insurer maintained a group health plan and one of the beneficiaries became sanctioned, only the portion of the policy relating to that individual was required to be blocked, with any associated funds placed in a blocked interest-bearing account at a U.S. financial institution, and the required blocking report submitted. 
  • Suggests Expectation to Block Arises Upon Knowledge: In updated FAQ 64, OFAC suggests that, in contexts where a (re)insurer is not aware of a sanctioned party being covered by the policy (g., in a group policy where a (re)insurer does not know the names of those covered), OFAC’s expectation that a (re)insurer will block arises upon filing of a claim by a blocked person that gives the (re)insurer “reason to know of their requirement to block that individual’s coverage pursuant to the policy and any other property of that person, such as unearned premium payments.”
  • Unearned Premiums: OFAC also newly addressed an issue that often faces (re)insurers, namely how to treat “unearned premiums.” Confirming standard guidance, OFAC noted in both FAQs 64 and 69 that any unearned premiums in which an SDN has an interest should be blocked.
  • Recommendation for Regular Recurring Screening: OFAC broadly revised its existing FAQ (No. 65) with respect to (re)insurer screening obligations. When addressing “how frequently is an insurer expected to screen” for OFAC risks, OFAC said that (re)insurers are expected to use a risk-based approach consistent with OFAC’s Framework of Compliance Commitments.  However, OFAC noted that not only should all policies, policyholders, beneficiaries, and other relevant counterparties be screened upon policy issuance, but that insurers “should also consider screening against OFAC sanctions at policy renewal, policy amendment (including, but not limited to, the addition of insured parties or beneficiaries to the policy), claim submission, claim payment, updates by OFAC to its sanctions or sanctions lists, and at any other time when an insurer may be exposed to sanctions risks.”  While OFAC does not specifically say as much, the latter two recommendations effectively require routine ongoing screening (so-called “delta” screening) of changes to OFAC’s lists against changes to a (re)insurer’s portfolio.
  • Communications with Sanctioned Parties: In updating its existing guidance that permitted certain types of notifications to sanctioned parties (g., notifying the policyholder that a policy is blocked (FAQ 68) and instructing them that any premiums subsequently paid will be blocked (FAQ 69)), OFAC added that a (re)insurer is permitted to notify a policyholder that it has blocked any funds (e.g., unearned premium) and the corresponding sanctions program.
  • Payments to Innocent Third Parties: New FAQ 1199 advises insurers to contact OFAC for guidance relating to claim payment to innocent third parties (g., insured is in an automobile accident) under policies issued to a blocked party. The FAQ emphasizes that the policy held by the blocked party is itself a blocked contract, meaning that OFAC authorization is required for any otherwise-prohibited actions pertaining to the policy at hand.
  • Terrorism-Related Subrogation Rights: FAQ 1200 endeavors to resolve a question that had lingered about the extent to which (re)insurers were allowed to pay claims associated with losses caused by sanctioned persons. OFAC confirmed that the “mere fact that a blocked person has caused a loss does not in and of itself create a blocked interest in the policy or any claim or payment under the policy” and that, therefore, a U.S. (re)insurer can pay a claim “to non-sanctioned recipients” that is caused by a sanctioned persons.  OFAC confirmed that this is true even if the insurance policy contains subrogation rights, which provide the (re)insurer a legal right to “pursue reimbursement from the liable third party for payment of the claim.”  If, however, the claim payment was contingent on successful pursuit of a subrogated claim, then it would be blocked.