A survey of companies with extensive international operations indicates nearly three-quarters had experienced a political risk loss in 2022, a dramatic rise from 35% in 2020. Sandra Smith Thayer, a partner at Pasich LLP, discusses political risk insurance, which is designed to protect a company’s foreign assets or investment from such risks, and whether the policies may be useful in the Russia-Ukraine crisis.

The Russian invasion of Ukraine has resulted in devastating loss of life, a humanitarian crisis not seen since World War II, and potentially hundreds of billions of dollarsin property damage and loss, including over $63 billion in damage to Ukraine’s infrastructure.

It is too early to tell how much of the catastrophic property damage and losses will be covered by insurance. Traditional property insurance policies often contain “war” exclusions, which exclude coverage for damages or loss related to “war” or “warlike actions.” However, political risk insurance may cover some of these losses.

Political risk insurance insures a company’s assets or investments in a foreign country from certain risks, including, among others, (i) confiscation or expropriation of the company’s assets or investment by the foreign government, (ii) contract frustration—the foreign government’s interference with a company’s private or governmental contract, or (iii) political violence, including civil unrest, war, and terrorism.

The concept of political risk insurance dates back to 1948, when the U.S. government created a program to encourage American equity investments to rebuild post-war Europe. Other countries—including Britain, China, and Japan—created similar programs offering political risk insurance to protect domestic companies’ investments in foreign countries (including in the U.S.).

In the mid-1970s, several Lloyd’s of London syndicates and American International Group (AIG) created the private political risk insurance market. Today, companies can either obtain political risk insurance through the public sector, through government agencies such as the U.S. International Development Finance Corp. (DFC) or the Multilateral Investment Guarantee Agency (MIGA), or through the private insurance market, including AIG, Chubb, Lloyd’s, among others.

It is hard to say exactly how many companies throughout the world obtain political risk insurance to protect their foreign assets or investments, given that many of these types of policies contain strict confidentiality provisions mandating that even the existence of the policy is confidential.

According to the WTW (formerly Willis Towers Watson) survey of 44 respondents representing companies with extensive international operations, however, “political risk insurance appears to have grown in popularity, purchased by 25% of respondents in 2019 but 48% in 2022.”

Types of Political Risk Insurance Claims Paid

Many of these policies are confidential and contain mandatory arbitration provisions, so there is not an abundance of information in the public record about the types of political risk insurance claims that have been paid by insurers.

DFC’s predecessor, the Overseas Private Investment Corp. (OPIC), identified one claim it paid to Seaboard Overseas Ltd., a U.S. company, under a political violence policy for the loss of its grain silo equipment and various food products that were destroyed or taken during post-election riots in Zambia.

In 2013, OPIC paid another claim under a political violence policy for loss of income, including evacuation expenses, arising from political violence in the West African nation of Mali. That claim involved the forced closure of the American International School of Bamako in Mali, and evacuation of school officials, after a group of Malian soldiers seized power.

MIGA, the other leading political risk provider in the public sector, refers generally to claims it has paid under its political risk insurance program. According to a June 30, 2021, report from MIGA, it has paid 10 claims under the political risk insurance program, with eight being under its war and civil disturbance cover and two under its expropriation cover.

AIG paid a claim to a large oil and gas company to cover its losses when it was forcibly taken over by a South American country, according to AIG’s website. In addition to paying for a portion of the loss, AIG helped the company to recover its assets, allowing the company to resume its operations and avoid a larger loss.

Political Risk Insurance in Russia-Ukraine Crisis

What role will political risk insurance play in the Russian-Ukraine crisis? It is unclear.

Some have estimated that the political risk insurance market’s exposure in Ukraine and Russia could be as high as $2 billion.

What claims might we see under political risk insurance policies? Companies with investments or assets in Ukraine may have claims for loss or damage resulting from political violence or war.

There also may be claims brought by companies with assets or investments in Russia, arising from the Russian government’s confiscation or expropriation of their assets.

According to insurance broker Marsh, “the risk of expropriation remains high in Russia, including in its territorial waters.” The crisis also may have a ripple effect, creating potential political risk events in other countries that depend on Russia or Ukraine for their grain supplies.

Soaring “prices across the spectrum of politically charged commodities [like grain] could spark … abrupt policy changes by governments, triggering contract frustration and expropriation-like events,” according to Marsh.

Companies with political risk insurance policies covering investments or assets in the Ukraine or Russia should consult their policy or contact their insurance broker for guidance to understand the extent of coverage and if any exclusions apply. There may be a short window of time to give notice of a claim or loss, and detailed information surrounding the proof of loss may also be required.

Thailand Insurance Service is always happy to answer and questions on these policy issues and steer buyers towards making informed insurance purchase decisions.

SOURCE: bloomberglaw.com