Legal Issues in Political Risk Insurance Claims & Recoveries

This article was written for and first published in The Brief. An abridged version was printed in the 24 February 2010 edition.

Introduction

Commercial, as opposed to state-sponsored or multilateral, political risk insurance (PRI) as placed in the London Insurance Market in its wider definition comprises cover for losses caused to investments and projects by government confiscation, expropriation and nationalisation etc (CEND or 'PRI' strictly so-called); insurance against contract frustration or repudiation by government obligors (CF); and more recently structured trade credit has been insured against political risks as well as straightforward counterparty default (CR or TCI). Cover may also be provided for losses caused by political violence (PV) including terrorism.

The PRI market has been through a number of claims cycles since it started about 40 years ago. The Middle East petrodollar boom and the Iranian revolution in the 70s; the 1980s debt crisis; then in the 1990s, Kuwait; the last recession; the collapse of the USSR; the Balkans crisis; and later Asia, Russia, Cuba. In 2001-2002 Argentina came to the fore. Since 2007, we have seen the resurgence of 'resource nationalism', particularly in South America.

How has the PRI market been affected by the current recession and what claims issues have arisen as a result? Most banks were not affected by the first phase of the credit crunch in August 2007. In September 2008, however, with the collapse of Lehmann Brothers, there was a massive crisis of confidence throughout the World with the real economy being affected by November 2008 when global trade virtually stopped. In the commercial PRI sector the Market is facing what has been described as a "tsunami" of claims. Estimates vary as to the total number of notifications to the Market to date, but the top end of the scale is US$4 billion. Many of these will not ultimately turn into claims. Most of those that do are straightforward trade credit insurance claims of the simple 'obligor can't pay variety', and have been or will be paid in full and promptly so the services of our profession will not be needed. The sheer size, number and complexity of some, however, mean that lawyers will need to be involved – usually initially by the insurers, and thereafter, should problems be perceived, also by the insured.

In this article we examine this PRI claims environment from the perspective of the London Market and some of the legal issues that arise.

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