The Russian-Ukrainian crisis raises the profile of political risk insurance
The Russian invasion of Ukraine resulted in devastating human casualties, a humanitarian crisis not seen since World War II, and potentially hundreds of billions of dollars in property damage and casualties, including over $63 billion in damage to Ukrainian infrastructure.
It is too early to tell to what extent property damage and catastrophic loss will be covered by insurance. Traditional property insurance policies often contain “war” exclusions, which exclude coverage for damages or losses related to “war” or “warlike actions”. However, political risk insurance can cover some of these losses.
Political risk insurance insures a company’s assets or investments in a foreign country against certain risks, including, but not limited to, (i) confiscation or expropriation of the company’s assets or investments by foreign government, (ii) contract failure – foreign government interference in a company’s private or government contract, or (iii) political violence, including civil unrest, war, and terrorism.
The concept of political risk insurance dates back to 1948, when the US government created a program to encourage US equity investment to rebuild post-war Europe. Other countries, including Britain, China, and Japan, have created similar programs offering political risk insurance to protect domestic business investments in foreign countries (including the United States).
In the mid-1970s, several syndicates of Lloyd’s of London and American International Group (AIG) created the private market for political risk insurance. Today, companies can either obtain political risk insurance through the public sector, through government agencies such as the US 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 difficult to say exactly how many companies around the world obtain political risk insurance to protect their overseas assets or investments, since many of these types of policies contain strict confidentiality provisions requiring 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, taken out 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 a claim it paid to Seaboard Overseas Ltd., an American corporation, under a policy of political violence for the loss of its grain silo equipment and various food items that were destroyed or taken during the post-election riots in Zambia.
In 2013, OPIC paid another claim under a political violence policy for loss of income, including evacuation costs, resulting from political violence in the West African country Mali. This demand involved the forced closure of the American International School of Bamako in Mali and the evacuation of school officials after a group of Malian soldiers seized power.
MIGA, the other main provider of political risk in the public sector, generally refers to claims it has paid under its political risk insurance program. According to a June 30, 2021 report by MIGA, it has paid 10 claims under the political risk insurance program, including eight under its war and civil unrest coverage and two under its expropriation coverage.
AIG paid a debt to a major 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 part of the loss, AIG helped the company recover its assets, allowing the company to resume operations and avoid a larger loss.
Political risk insurance in the Russian-Ukrainian crisis
What role will political risk insurance play in the Russian-Ukrainian crisis? It is unclear.
Some felt that political risk insurance market exposure in Ukraine and Russia could reach $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 may also be claims brought by companies with assets or investments in Russia, arising from the confiscation or expropriation of their assets by the Russian government.
According to the insurance broker Marsh, “the risk of expropriation remains high in Russia, including in its territorial waters”. The crisis may also have a ripple effect, creating potential political risks in other countries that depend on Russia or Ukraine for grain supplies.
Soaring “prices across the spectrum of politically charged commodities [like grain] could trigger…abrupt policy changes by governments, triggering contractual frustrations and expropriation-type events,” according to Marsh.
Companies with political risk insurance policies covering investments or assets in Ukraine or Russia should consult their policy or contact their insurance broker for advice to understand the extent of cover and whether any exclusions apply. There may be a short time to give notice of a claim or loss, and detailed information surrounding proof of loss may also be required.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Sandra Smith Thayer is a partner at Pasich LLP in the firm’s Los Angeles office. She represents clients in high-stakes litigation against insurers and insurance brokers, as well as advising on post-loss and post-loss insurance matters, including participating in negotiations with insurers.