The EU sanctions against insurance companies and the risk of environmental disasters

Alessandro Bertoldi, Executive Director of the Milton Friedman Institute, invites the EU to revise the sanctions regime against insurance companies to reduce the risks of environmental disaster in light of a recent naval incident and oil spill off Tobago.

On the 7th of February, a critical incident unfolded off the south shore of Tobago when the vessel named Gulfstream ran aground and capsized, leading to a significant oil spill into the surrounding sea. This event quickly escalated into the largest environmental disaster in the history of Trinidad and Tobago, with the spill impacting approximately 15 km of the island’s shoreline and causing extensive damage to its coral reefs. The severity of the situation prompted Prime Minister Keith Rowley to declare a state of emergency. Divers struggled for a week to contain the leak, highlighting the country’s lack of preparedness and technical capability to handle such disasters.

The situation was further complicated by the revelation that the Gulfstream was uninsured, leading to uncertainty about who would bear the financial burden for the cleanup and compensation for the damage caused. The absence of insurance stemmed from the vessel’s lack of official registration. This incident sheds light on the broader issue within the maritime industry where vessels, especially those transporting environmentally hazardous cargoes, are expected to carry insurance. Such insurance policies, typically Protection and Indemnity (P&I), are crucial as they cover liabilities including environmental pollution and the costs associated with salvaging a shipwreck. Insurance thus serves a critical role in protecting not only the interests of third parties but also the environment by ensuring the availability of funds to address any damages.

This environmental disaster off Tobago underscores the urgent need for all maritime vessels to be properly insured. The growing trend of uninsured vessels can be attributed to the international sanctions imposed by the United States and the European Union on the trade of oil from countries like Venezuela, Iran, and Russia. Despite these sanctions not being endorsed by the United Nations Security Council, they have led to a tightening of insurance provisions, with insurers being pressured to deny coverage on the basis of mere suspicions.

This has resulted in a paradoxical situation where shipowners find themselves obligated to secure insurance yet restricted from doing so due to the sanctions. The predicament is akin to a government requiring car owners to have insurance while simultaneously prohibiting insurance companies from offering policies to certain categories of drivers. This approach not only fails to penalize the intended targets but also adversely affects broader societal interests.

Despite these challenges, vessels continue to transport sanctioned cargoes by exploiting loopholes, such as registering in jurisdictions with lax regulations or using outdated documents to bypass restrictions. This has led to an increase in the so-called "shadow fleet" of vessels operating without proper insurance or under dubious policies, thereby putting the maritime industry, the environment, and global safety at risk.

Recent analyses, including a report by the Atlantic Council, estimate that there are around 1,400 vessels currently operating under minimal regulatory oversight, primarily oil tankers employing various tactics to obscure their location and cargo origins. The situation has resulted in a fleet of "ghost tankers," which, through practices like disabling their automatic identification systems (AIS), significantly elevate the risk of maritime accidents. These vessels not only evade safety protocols designed to prevent at-sea incidents but also contribute to the likelihood of environmental disasters similar to the one occurred off Trinidad and Tobago.

The growing incidence of "ghost tankers" and the corresponding environmental and safety risks highlight a systemic failure within the international shipping industry to effectively manage these challenges. The reluctance of insurers to cover vessels deemed "dubious" due to sanctions pressure does not deter these ships from transporting cargoes, often resulting in them sailing without any insurance. This scenario underscores the urgent need for a comprehensive overhaul of maritime trade regulations and insurance practices. Without significant changes, the maritime industry is poised for further environmental catastrophes, emphasizing the critical need for more responsible governance and oversight to safeguard both the environment and human interests.

The EU should delve into the issue and assess the possibility of changing its sanction regime against insurance companies. An oil spill into the Mediterranean would be an environmental disaster for which Europeans would have to take responsibility and bear the full costs.

Share this article: