INSURING AGAINST POLITICAL RISKS
By Sandra Smith Thayer and Kirk Pasich of Dickstein Shapiro LLP
Many businesses around the world are being affected because of the violence and unrest in Egypt and now Libya. As the violence continues and the fear grows that it may escalate or spread to neighboring countries, businesses are considering how their operations are affected—not only “on the ground” in those countries but also to the extent they are involved in shipping goods to or from those countries or they purchase or sell goods to others in those countries.
As the problems and concerns spread, more attention is being paid now to what has been regarded as a “specialty” insurance designed to protect against these kinds of losses in foreign countries—political risk insurance.
Political risk insurance can protect a company’s assets, investments, or contractual rights in a foreign country from losses caused by political events in that foreign country, including civil unrest, riots, wars, terrorism, expropriation or confiscation of assets, and the enactment of new laws. This insurance can be a supplement to other insurance, such as property and business interruption insurance, war risks insurance, and marine and cargo insurance.
Types of Political Risk Insurance
There are several common forms of political risk insurance:
• Contract Frustration insurance protects a company’s trade or sales contract with a foreign company from an action (or inaction) of the foreign government (including confiscation, nationalization, expropriation or a change in the foreign country’s law) that results in the termination of the foreign contract or prevents the foreign company from performing under the contract.
• Currency Inconvertibility insurance is designed to protect a company doing business in a foreign country in the event that the foreign government enacts new currency restrictions or prevents the conversion or transfer of a company’s investment returns from local currency to U.S. dollars.
• Expropriation insurance protects a company’s investment or assets in a foreign country from the foreign government’s unlawful confiscation, nationalization, or expropriation of the assets or investment.
• Political Violence insurance protects a company against property and income losses incurred as a result of politically charged events in the foreign country including war, civil unrest, revolution, riots, and politically motivated terrorism.
• Terrorism insurance protects a company against violent acts, including acts involving chemical, biological, or other weapons of mass destruction, by individuals or groups. Terrorism coverage typically is much narrower than political violence coverage.
The Political Risk Insurance Market—“Official” v. Private Insurers
Political risk insurance can be obtained from “official” insurers, including the Multilateral Investment Guarantee Agency (“MIGA”), an agency of the World Bank and, in the case of U.S. businesses, from the Overseas Private Investment Corporation (“OPIC”), a United States Government agency. Political risk insurance also can be obtained from private market insurers, including the London market. There often are significant differences between the “official” and private market insurers, and, indeed, among the policy forms and language offered by each insurer.
MIGA and OPIC often provide longer policy terms than do private market insurers—up to 20 years as compared with five to seven years or less. However, MIGA and OPIC have eligibility requirements that the private market insurers do not. For example, in order to obtain MIGA political risk insurance, the company making the investment must be in a MIGA “member country” and the investment must be made in a MIGA “member country.” In order to obtain OPIC political risk insurance, a prospective insured must be a U.S. company, the investment or project to be insured must be “registered” with OPIC before the company enters into the investment or project, and the company must obtain the foreign government’s approval of the insurance.
Private market insurers generally can provide political risk insurance faster than the official insurers. Private market insurers also generally are more flexible with respect to their policy terms. Insureds often can negotiate (or “manuscript”) many of the policy terms, thereby obtaining a policy that is more specific to their anticipated needs.
Overcoming Potential Hurdles to Coverage
Political risk policies contain conditions that an insured must address in order to secure coverage. Some political risk policies, such as OPIC political violence polices, permit notice up to six months after a loss. However, many political risk insurance policies specify that an insured is to give notice of “any occurrence likely to give rise to a claim” within days or weeks of learning of an occurrence. Thus, an insurer could argue that the insured has a duty to give notice before an insured even suffers a loss. For example, in connection with the claims arising out of the Egyptian unrest, an insurer might argue that an insured had to give notice of an “occurrence” within days of the January 25, 2011, “Day of Revolt,” even if it had not suffered a loss. While an insured may have strong arguments in response, it is better to avoid the argument in the first instance by understanding a policy’s notice provision and attempt to honor it. Furthermore, because many political risk policies have choice of law clauses and the designated law, the standard governing notice may vary substantially. Thus, an insured’s rights may be affected not only by the wording of the notice provision, but also by the governing law.
Insureds also should be aware that many political risk policies contain a “Due Diligence” clause that requires the insured to do everything “reasonably practicable” to protect or remove the insured property and to avoid or diminish any potential loss in the event of a political event. Other policies may require the insured to take steps to mitigate its loss. Because an insurer may challenge whether an insured did everything “reasonably practicable” under the circumstances and whether the “mitigation” was appropriate, an insured may need to document what it did, and why. Furthermore, some political risk policies may require the insurer’s approval or consent, for example, to any settlements with a third party that may have contributed to the loss.
Given the variations in policy language, it is critical that insureds carefully review and assess the policy language, whether it is during the process of procuring political risk insurance or in the face of a potential or actual loss. By doing so, insureds will best be able to assure that they are obtaining the full value of this insurance.