The recent and ongoing political upheaval in the Middle East is like to give rise to increased demand for political risk insurance as well as increased claims being filed seeking compensation for business losses having some relationship with the political upheaval. The fact that significant political change appears to have taken place in countries like Egypt without significant violence and with a general continuity of government is likely to give rise to disputes about whether business losses resulting from the political changes currently being implemented fall within the coverage of political risk insurance policies.
Political risk insurance policies vary in what they cover. Coverage typically available includes the following:
- Confiscation, expropriation, and nationalization coverage. This cover protects the insured if its assets are confiscated, expropriated, or nationalized by a foreign government. It also protects against unlawful of acts of the foreign government that deprive the insured fundamental rights in the insured project or investment. This cover typically does not protect from business disputes, legal difficulties, or reasonable regulatory actions. It usually only protects against politically motivated acts of the government that are contrary to international law.
- Currency inconvertibility and exchange transfer coverage. This cover protects against acts of the host government that restrict the transfer of currency. In order to trigger this cover, the debtor may be required to transfer payment to the insurer's local account in the country that has restricted the transfer of currency. The insurer then pays the insured in its country of residence.
- Contract frustration cover. This cover protects against foreign government obligors arbitrarily repudiating or disavowing their contractual obligations or frustrating contractual expectations. It also can cover breach of contract by a private entity that results from an arbitrary act by the foreign government, as well as the losses arising from the nonpayment of a guarantee.
- Political violence cover. This cover typically protects against loss caused by war civil disturbance, or terrorism. Usually the violence must be politically motivated in order the trigger cover.
There is usually a waiting period that must be exceeded before payments are made under confiscation, expropriation, and nationalization; contract frustration; and currency inconvertibility covers. One reason for a waiting period is that the insurance is not intended to pay if the confiscation or currency restrictions are temporary and cease within a reasonable period of time. Some form of political risk cover is sometimes included in trade credit insurance policies.
Political risk insurance is available from both private and from government-backed insurers, including the Overseas Private Investment Corporation (OPIC), an agency of the U.S. government, whose insurance is backed by the full faith and credit of the U.S. government. A disadvantage to government-backed insurance is that any disputes that arise may be governed by special rules that apply to bringing actions against government agencies, including limitations on the application of collateral estoppel to government entities that can make it more difficult for an insured (or reinsurer or reinsured) to prevail in a dispute with the government entity.
A side benefit of having political risk insurance is that foreign governments may be less inclined to improperly interfere with an insured transaction because of its relationship with the insurer. The foreign government might believe that it needs the insurer's cooperation in order to obtain financing for projects and foreign investments in the country. Disrupting this relationship by actions that trigger insurance coverage could have a detrimental impact on the insurer's willingness to insure projects in the country and on investors' willingness to invest in and finance projects. Many people believe that purchasing insurance can actually make adverse foreign government action less likely. This potential side benefit of purchasing insurance is probably even more likely where the insurer is an agency of the U.S. government.
The claims adjudication process for many types of political risk insurance involves subjective judgments. For example, foreign governments often do not expressly state that they are wrongfully expropriating a foreign company's property. Instead, they often provide legal justifications for their actions. An insured is likely to believe that the justifications given by the government entity are pretextual and the taking of their property is a politically motivated expropriation, while an insurer may be more likely to believe that the government's explanation of the basis for its action is reliable and establishes that no expropriation has taken place. Likewise, there can be issues arising from creeping expropriations, where the government takes a series of actions, each one of which standing alone does not constitute an expropriation, but when taken together may. Disputes often arise regarding whether the cumulative effect of the actions is sufficient to trigger political risk cover.
The ongoing developments in the Middle East are likely to give rise to coverage disputes. For example, the overthrow of Hosni Mubarak in Egypt has lead to the arrest of former government leaders on charges of corruption. It is likely that the government will seek to recover property that it believes was acquired by these individuals (and possibly of their business partners) through corrupt acts. Insureds are likely to believe that any property that is seized as a result of the corruption charges is politically motivated government expropriation of private property. The government is likely to claim that all it has done is properly enforcing anti-corruption laws and recover property that was illegally acquired as a result of bribery, misuse of power, or theft of government property. The insurer will have to decide who is correct.
Similar issues are likely to arise under contract frustration cover. This cover is only triggered when the action of the foreign government that interferes with the contractual rights is arbitrary. There are likely to be disputes regarding whether this requirement is met where government action adversely affects contract rights with third parties or where the government repudiates government contracts because of alleged corruption in previous administrations.
Additionally, there are exclusions in political risk insurance policies that may be applicable. One common exclusion is for situations where the preponderant cause of the loss is unreasonable or provocative attributable to the insured or the foreign enterprise, including corrupt action. This exclusion involves somewhat subjective judgments and is also likely to give rise to factual disputes as to the validity of the grounds for the adverse government actions.
In summary, the political upheaval in the middle east is likely to result in governmental actions that adversely impact foreign investors and foreign projects. It is likely that disputes will arise regarding whether these government actions trigger coverage under political risk insurance policies and whether any policy exclusions are applicable.