India has given state-run insurers approval to provide cover to its ships transporting Iran's oil, allowing refiners to avoid any interruption in supplies because of the constraints of an Iranian fleet struggling with tough Western sanctions.

An oil embargo by the European Union took effect on July 1 and bans firms from insuring Iranian shipments, forcing China and India to ask Iran's oil shipper, NITC, to deliver crude in its vessels.

India's Insurance and Regulatory and Development Authority has agreed to allow state-run insurers to replace their European counterparts, enabling at least Shipping Corp Of India to resume transporting Iranian oil, officials said.

"This is a classic case of how three Indian industries -- insurance, shipping and oil -- are coming together for the nation and its energy security," Anil Devli, chief executive of the India National Shipowners' Association, told Reuters.

Domestic insurance firms are allowed to provide ship owners carrying Iranian oil $ 50 million in cover against pollution and personal injury claims, also known as protection and indemnity (P&I) insurance, Devli said. They will also provide hull and machinery cover of $ 50 million, to protect ships against physical damage.

General Insurance Corp of India will be the re-insurer and cover will be extended by any of four state-run non-life insurance firms: United India Insurance, New India Assurance Co. Ltd., National Insurance Co. Ltd. and the Oriental Insurance Co. Ltd.

"We have received a letter from the shipping ministry ... saying General Insurance Corp has provisionally been allowed to arrange cover," said a source at a state-run refiner.

The amount of P&I cover is a fraction of the typical $ 1 billion that a very large crude carrier (VLCC) carrying around 2 million barrels of crude would have from reinsurers against personal injury and pollution claims.

India's shipping companies will be responsible for paying any claims above $ 50 million, leaving them exposed to potentially billions of dollars in the event of an oil spill.

"$ 50 million is not enough. If you had wreck removal, you would burn through $ 50 million in just getting the ship out before going anywhere near coverage for the pollution itself," said Ian Teare, Singapore-based maritime insurance expert with legal firm Norton Rose.

In comparison, Japan's government took the unprecedented step of providing insurance of up to $ 7.6 billion for shipments to keep oil trade with Tehran going.

Despite the risks, the chairman of state-run Shipping Corp of India, the country's biggest, said his company would use the limited cover to transport Iranian crude.

S. Hajara said he hoped state-run Hindustan Petroleum Corp , Indian Oil Corp and MRPL would be able to use its fleet to import Iranian oil.

"HPCL, IOC and MRPL, any of the Indian companies can use our ships. We, as a vessels provider, have also provided vessels to MRPL, but they have a Contract of Affreightment with Great Eastern Shipping Co.," he said.

Great Eastern has yet to make a decision on the limited insurance cover. "We have informed MRPL that we will not be able to go to Iran. However, we are waiting for details of the new insurance plan offered by Indian insurers and will make a decision accordingly," said firm spokeswoman Anjali Kumar.

Refiner HPCL, which has already taken a suezmax vessel carrying 1 million barrels of oil from Iran on a delivered basis, may hire an SCI vessel for a cargo scheduled for lifting on July 25-27, said an official with the refiner, who asked not to be named because he was not authorized to speak to the media.

Only state refiners follow government rules on chartering vessels for crude imports, while private firms like Essar Oil , a Indian client of Iran, face no such restriction.

Indian refiners are scheduled to lift 9.32 million barrels or about 300,650 bpd of Iranian oil in July, an industry source told Reuters last week. MRPL this month is expected to load five aframax vessels of around 660,000 barrels each, with Tehran handling the insurance and freight for at least one shipment.