(April 22, 2022) - In this Q&A, Kirk Pasich and Sandra Smith Thayer of Pasich LLP discuss political risk insurance — what it is, how it works and how it might come into play in relation to the war in Ukraine.

Thomson Reuters: Please describe political risk insurance — what it covers and what it doesn't.

Kirk Pasich and Sandra Smith Thayer: Political risk insurance helps protect investors, companies, and financial institutions doing business in foreign lands from losses resulting from political acts or instability, including the following:

• Arbitration award default: Losses resulting from a foreign government's failure to honor or pay an arbitration award against it.

• Confiscation, expropriation, or nationalization: Losses resulting from a foreign government's confiscation, expropriation or nationalization of an insured's property, ownership interest in property, or assets or other acts by the foreign government that effectively deprive the insured of its property, ownership interest in the property or assets, without compensation.

• Contract frustration: Losses resulting from a breach of contract or cancellation of a contract with either a foreign government or a private company as a result of a political risk event (e.g., political violence, embargo).

• Currency inconvertibility: Losses arising from the insured's inability to convert local currency into foreign currency.

• Kidnap and ransom: Expenses related to extortion, illegal detention, kidnapping or ransom demands.

• License cancellation: Losses resulting from the foreign government's cancellation of the insured company's operating licenses.

• Political violence/war: Losses from (i) damage to, or destruction of, physical assets as a result of political violence; (ii) losses resulting from forced abandonment of assets or the foreign enterprise or abandonment of operations in a foreign country as a result of political violence or unrest.

• Selective discrimination: Losses caused by a foreign government's actions or inactions that selectively discriminate against the insured company.

• Terrorism: Losses from terrorism, including nuclear, biological or chemical terrorist attacks.

Political risk insurance policies, like other policies, have various exclusions. For example, most policies exclude coverage for losses caused solely and directly by the insured's failure to comply with the laws of the foreign country or by the insured's fraudulent or willful misconduct.

Also, expropriation policies may not cover an insured's losses that result from nondiscriminatory actions — i.e., actions that affect all companies doing business in the foreign country — by the foreign government taken in the public interest in order to ensure public health and safety or to protect the environment, which are not accompanied by adequate compensation.

TR: How does political risk insurance differ from other types of coverage?

KP and SST: There are a number of differences between political risk insurance policies and other types of coverage. For example, political risk insurance policies cover risks like war or terrorism that are often excluded under other types of coverage.

Political risk policies also differ from other types of policies because most political risk insurance policies, unlike standard form general liability or property policies, vary from insurer to insurer and often are specifically worded to consider the insured's specific investment or business and the political circumstances.

Political risk insurance policies, especially ones issued by the government agencies (such as the U.S. International Development Finance Corp.) can have lengthy policy periods — up to 20 years.

Another difference between political risk insurance policies and most other types of policies is that many political risk insurance policies contain strict confidentiality provisions, mandating that even the existence of the policy is confidential and cannot be disclosed.

TR: How would a business go about obtaining this coverage?

KP and SST: Companies interested in political risk insurance should work closely with an insurance broker experienced in placing political risk insurance. It is important to ensure that the broker understands (i) the insured's business or investment, (ii) the risks that the insured is most concerned about or which are most likely to occur in the particular foreign country, (iii) the pros and cons in obtaining coverage through the private political risk insurance market (e.g., AIG, Chubb, Lloyd's, and Zurich American Insurance) or the government-backed political risk insurers (e.g., the DFC or the Multilateral Investment Guarantee Agency, and (iv) the nature of the specialized coverage provided by these types of policies. Companies should also consider consulting with a coverage attorney specializing in political risk insurance.

Obtaining political risk insurance — either through one of the government agencies or through the private market — can be a lengthy process. It is important to begin the process early in order to ensure that the coverage is in place when or if you need it.

TR: Can you cite some examples of political risk insurance claims that were paid?

KP and SST: Because the vast majority of political risk policies are confidential and often contain mandatory arbitration provisions, it is difficult to say how many and what types of claims were paid under these types of policies.

On AIG's website, AIG refers to a claim brought by "[a] large oil and gas services company [that] was forcibly taken over by a South American country."¹

According to AIG, "[t]he company was able to draw down on a $50 million limit provided by AIG's Political Risk policy" and "AIG's claims experts assisted the client to recover their assets."² AIG also touts on its website that it has paid "over $520M in global claims ... over 40+ years" in the political risk insurance market.³

The DFC issues an annual report that discusses claims incurred or paid under its political risk insurance policies. According to the DFC 2020 Annual Report, the "DFC did not have any Claims incurred or paid ... during FY 2020."⁴ According to the 2020 [DCF] Public Annual Claims Report, "[s]ince 1971, DFC [and its predecessor, the Overseas Private Investment Corporation] have made 303 insurance claim settlements totaling $998.2 million."

According to MIGA's June 30, 2021, Management Discussion and Analysis and Financial Statements:

Since its inception, [MIGA] has paid 10 claims for a total of $26.5 million on a gross basis and $10.2 million, net of recoveries. Of the 10 claims paid, eight were in relation to the War and Civil Disturbance cover and two related to Expropriation cover.⁵

MIGA's claim payment history may appear low, but one of the benefits of procuring coverage through MIGA is that "MIGA [as a member of the World Bank Group] provides an umbrella of deterrence against government actions that could disrupt insured investments and helps resolve potential disputes" before they become claims.⁶

TR: What kinds of claims are being or might be made with respect to events in Ukraine?

KP and SST: We are likely to see a number of claims for losses in the Ukraine under political violence, war, and civil unrest cover. We have seen estimates reported that up to $2 billion in political risk insurance was written for companies with investments or assets in the Ukraine and surrounding countries.

According to MIGA's website, MIGA has issued guarantees to over 20 companies doing business or having investment in the Ukraine, providing coverage for, among other risks, war and civil unrest.⁷

There also may be claims brought by companies who were forced to abandon their assets located in Russia, under the forced abandonment cover, or claims for expropriation or confiscation for those companies whose assets may have been seized by the Russian government.

TR: What else should attorneys and businesses know about this type of coverage?

KP and SST: Many of these types of policies have very strict notice provisions requiring notice of a claim or an event that could give rise to a claim within a very short time — oftentimes no more than 30 to 45 days after becoming aware of the claim or event that could give rise to a claim. It is important to review the policy carefully to ensure that notice is given within the specified period and that the company's risk manager or risk department is in close contact with the business people on the ground in the foreign country so that all claims or events are promptly reported.

1 https://bit.ly/38aJ7Q5

2 Id.

3 Id.

4 See https://bit.ly/3Ov62WI at 56.

5 See https://bit.ly/3MmHDRB at 20.

6 Id.

7 See https://bit.ly/3KZydek