OFAC Releases New and Amended Insurance Industry FAQs | Locke Lord LLP

On November 13, 2024, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) amended various insurance-related Frequently Asked Questions (“FAQs”) (61, 62, 63, 64, 65, 68, 69, 102, 103 and 104) has announced two new insurance FAQs as part of its ongoing process to publish updated guidance for the industry.1199 And 1200).

Changed FAQ

FAQ 61 – In some cases, in order to comply with OFAC regulations, insurance industry participants (e.g., insurers and insurance producers) must ostensibly violate government insurance regulations. In FAQ 61, OFAC explains that OFAC regulations preempt state insurance laws when OFAC enforcement conflicts with state laws. OFAC’s regulations are derived from presidential proclamations under the Trading with the Enemy Act (TWEA) and the International Emergency Economic Powers Act (IEEPA), which preempt government insurance regulations.

The Supremacy Clause of the U.S. Constitution ensures that federal law takes precedence over state law when there is a conflict. While direct litigation is limited, particularly regarding insurers legally withholding payment of insurance claims to comply with OFAC sanctions, broader preemption principles are well established. Courts have generally held that state laws that conflict with federal law are ineffective; To see Gade / Nat’l Solid Waste Management. Assn., 505 US 88, 108 (1992) and Altria Group, Inc. -Good, 555 US 70 (2008). Specifically, courts have held that federal law will take precedence over state law if it is physically impossible to comply with both laws; To see 3 Fla. Lime & Avocado Growers, Inc. v. Paul, 373 US 132, 142-43 (1963). Based on this, courts are likely to support the view that where state laws require payment or litigation of insurance claims that conflict with OFAC sanctions, federal regulations generally administered by OFAC will prevail. In 2014, the Second Circuit ruled that OFAC’s blocking order barred the New York state law claims. The court held that funds held in a blocked account by a financial institution regulated by NYDFS could not be released to the plaintiff even though New York state law required payment in the absence of OFAC sanctions.

FAQ 62 – Insurance industry participants are responsible for complying with OFAC sanctions throughout the lifecycle of their relationship with an insurance policy or other product or service. If an insurance industry participant determines that an applicant, policyholder, or beneficiary is or has been subject to OFAC sanctions (e.g., on OFAC’s Specially Designated Nationals and Denied Persons List (“SDN List”)), the insurer may not issue a policy or cannot sustain. Unless licensed by OFAC, because doing so would provide a service (e.g., coverage) to the person being blocked. If the blocked person sends a deposit or pays an insurance premium, the payment must be blocked and reported to OFAC within 10 business days. If an insurance industry participant receives an application from a party on OFAC’s other sanctions lists, it should carefully review the relevant prohibitions before taking any action.

FAQ 63 – If the insurer determines that a policyholder or beneficiary is subject to OFAC’s SDN List or is located in a jurisdiction subject to U.S. sanctions, the insurer must block the policy or relevant policy portion, notify OFAC of the block within 10 business days, and collect any unearned premiums or refunds from the date of the block. Then deposit the received premiums into a blocked account. To continue the policy or pay claims under the policy, the insurer must obtain a special license from OFAC. Additionally, insurers must cease providing coverage to individuals or entities in sanctioned areas unless permitted or exempted by OFAC.

FAQ 64 – If the insurer has knowledge that a group policy (e.g., workers’ compensation) issued by an employer covers an individual who is blocked due to OFAC sanctions, the insurer must block the policy with respect to the blocked individual. In the event of a claim for a blocked person, the insurer must obtain authorization from OFAC to pay the claim. All premium payments made by or on behalf of the blocked person must be blocked and deposited in a blocked interest bearing account at a U.S. financial institution.

In some cases, such as group travel policies, the insurer may not know the names of individuals covered until a claim is made. In this case, when a claim is made by the blocked person, the insurer will be deemed to have known about the person’s sanction status and the need to block that person’s collateral and other property of that person, such as unearned premiums. Different restrictions may apply if the individual is subject to other OFAC sanctions or is located in a sanctioned jurisdiction.

FAQ 65 – OFAC reminds insurance industry participants that it may impose civil penalties based on strict liability. This means that a person subject to U.S. jurisdiction can be held civilly liable even if he or she had no knowledge that he or she was engaging in a prohibited act under sanctions laws and regulations. Considering the above, OFAC recommends that insurers take a risk-based approach to compliance, regularly scanning their databases to ensure they are not engaging in prohibited transactions. Because OFAC reporting must be made within 10 business days of interaction with a specially designated national (“SDN”), including OFAC’s addition of a name to the SDN List, OFAC requires insurance industry participants to notify all interested parties, such as policyholders and insureds. Recommends regular screening. Beneficiaries for timely reporting to help reduce the risk of sanctions violations and exposure to penalties.

FAQ 68 – If the insured becomes blocked after the policy is issued, the insurer may notify the insured that the policy is now blocked without obtaining a special license from OFAC.

FAQ 69 – When notifying the insured that his policy has been “blocked” due to OFAC sanctions, the insurer may also notify the policyholder that (i) the insurer must deposit future premium payments into a blocked account and (ii) the relevant sanctions program The insurer then took action.

FAQ 102 – OFAC advises insurance industry participants in global insurance markets to avoid violating U.S. sanctions laws by including “savings clauses” in policies that expressly exclude coverage for risks in sanctioned countries or activities prohibited by U.S. sanctions laws. The exact wording of such provisions will vary depending on the type of policy. Insurance industry participants, including insurers and manufacturers, should ensure that such savings provisions extend to all industry participants in the sales chain and do not allow any future economic benefit to a sanctioned person or jurisdiction, such as the provision of compensation where relevant. bans no longer apply; Insurance should not be covered if coverage at the time of loss would violate U.S. sanctions law.

FAQ 103 – If a U.S. insurer is unable to include a specific exclusion clause in sanctions due to market conditions or local law, it must apply to OFAC for a specific license before issuing the global insurance policy. In determining whether to grant a license, OFAC will evaluate the facts and circumstances of the policy, including the insurer’s market position and the risk involved, to ensure that the policy does not conflict with U.S. foreign policy objectives. Settlement of claims under such a policy generally requires a separate license from OFAC.

FAQ 104 – Insurers can offer global travel insurance and assistance as long as the coverage relates to permitted or exempt travel. Generally, U.S. sanctions cannot prohibit travel to or from any country, including actions related to ordinary events such as arranging and providing travel-related insurance. Cuban Assets Control Regulationshowever, it specifically restricts travel insurance to Cuba and requires valid OFAC clearance. In addition, insurance companies must ensure that they do not provide services to individuals or entities on OFAC’s SDN List.

New Insurance Industry FAQs

FAQ 1199 – OFAC has not issued a general license allowing an insurance company to reimburse an innocent third party under a blocked policy. An insurer cannot bring a claim against an innocent third party (for example, a party injured by an obstructed person in a car accident) without first contacting OFAC for additional guidance. OFAC will work with the insurer parties on the details of the incident. Although allowing payments to blocked individuals is rarely consistent with the national security objectives of U.S. foreign policy and OFAC sanctions, circumstances may weigh in favor of allowing payments to innocent third parties.

FAQ 1200 – When a non-sanctioned party submits a claim to an insurance company for damage caused by a blocked party, the non-sanctioned party’s insurance company is generally permitted to pay the claim. The fact that the blocked person is responsible for the damage does not create a blocked interest in the insurance policy or the receivable itself. Therefore, U.S. insurers may pay non-sanctioned claimants unless certain other OFAC regulations prohibit doing so, such as if the recipient resides in a sanctioned country or jurisdiction.

We note that some insurance policies may contain subrogation rights, which provide the insurer with a legal right to seek compensation from the responsible third party. OFAC does not require U.S. persons to obtain a special license to take legal action against a blocked person. For example, a U.S. attorney, insurer, or other service provider is not required to obtain a specific license before initiating litigation against an SDN. However, under most OFAC programs, a license will generally be required to enter into a settlement agreement with a blocked person, accept payment from a blocked person, or execute an order or decision regarding the transfer of blocked property. Claims paid as described above and any other obligations of the insurer on behalf of the insured (or their non-enforceable beneficiaries) under a policy must not be contingent upon the successful pursuit of the insurer’s subrogation claim against a blocked person.

Solution

OFAC’s recent FAQs highlight the ongoing scrutiny of insurers’ compliance with U.S. sanctions, especially when providing global insurance services. Insurance industry participants should ensure that their compliance policies, procedures, and internal controls reflect the guidance outlined in OFAC’s recent FAQs. This includes reviewing insurance policies to include appropriate sanctions clauses and a thorough review of sanctions screening tools to ensure they effectively identify and block transactions involving persons subject to sanctions.