Buying Political Risk Insurance

Kirk Pasich , Sandra Smith Thayer


June 1, 2011

When regimes fall as they have throughout the Middle East and Northern Africa since the start of the Arab Spring, major business disruption results. Enter political risk insurance. The types and terms of political risk policies can vary, however, often significantly. The following are common elements of coverage that risk managers should consider.

Contract frustration insurance protects an insured's trade or sales contract with a foreign company from an action (or inaction) of the foreign government. The insured risks may include confiscation, nationalization, expropriation or changes in the foreign country's law. The policies typically require that the government's action or inaction result in the termination of the contract, prevent the performance of the contract or result in the foreign company having a valid discharge of its duties under the contract. Contract frustration insurance may also protect against losses from an embargo or license cancellation from war, political violence, insurrection, actions by armed forces, strikes or riots.

Currency inconvertibility insurance protects an insured doing business in a foreign country if it cannot convert local currency into U.S. dollars. It typically applies when a foreign government enacts new currency restrictions.

Expropriation insurance protects an insured's investment or assets in a foreign country from the foreign government's unlawful confiscation, nationalization or expropriation.

Political violence insurance protects an insured 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.

Stand-alone terrorism insurance protects against losses from violent acts, including those involving chemical, biological or other weapons of mass destruction. Terrorism coverage typically is much narrower than political violence coverage, and policies can only be purchased from a limited number of suppliers. Political risk insurance can be obtained from "official" insurers, such as the Overseas Private Investment Corporation (a U.S. agency) and the Multilateral Investment Guarantee Agency (an agency of the World Bank) or from private market insurers (such as London market insurers, Zurich North America or Chartis).

Policy forms and terms vary between the markets. OPIC and MIGA coverage typically has longer policy periods than private market policies. OPIC also has the benefit of being backed by the U.S. government, while MIGA is backed by the World Bank. However, both OPIC and MIGA have certain eligibility requirements that private market insurers do not have. In order to qualify for 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 and the company must obtain the foreign government's approval of the insurance. In order to qualify for MIGA political risk insurance, a prospective insured must be making the investment in a MIGA member country and the projects involved must "be financially and economically viable, environmentally sound, and consistent with the labor standards and other development objectives of the country hosting the investment."
Kirk Pasich is a partner at Dickstein Shapiro.
Sandra Smith Thayer is a partner at Dickstein Shapiro.