Insuring against political risks
Anti-Libyan Leader Moammar Gadhafi rebels prepare to leave their position in front of the oil refinery complex, in Ras Lanouf town, eastern Libya. Government forces drove hundreds of rebels from a strategic oil port with a withering rain of rockets and tank shells.
(AP Photo/Hussein Malla)
Companies operating in countries with a history of instability and civil unrest may want to consider political risk insurance to protect their investments.
EDITOR'S NOTE: From roughly 1986 to about 2004, Libya was considered a rogue nation by most of the world. It had been implicated in several acts of international terrorism, including the 1988 bombing of Pan Am Flight 103 over the town of Lockerbie, Scotland, which killed all 259 people aboard. Starting around 2003, Libya's dictator, Moammar Gadhafi, began to make amends by compensating relatives of the victims of these attacks and the economic embargo that had been imposed by the UN began to lift. As of 2010, many international oil companies had resumed operations in Libya, including such US firms as ConocoPhillips, Marathon Oil, Hess, Chevron, ExxonMobil, and Occidental Petroleum. This article discusses how businesses can protect themselves against economic losses due to political turmoil and war in countries such as Libya.
Sandra Smith Thayer and Kirk Pasich, Dickstein Shapiro LLP, Los Angeles
As the recent widespread anti-government protests and civil unrest in the Middle East moved into the North African nation of Libya, an OPEC country and the 17th largest oil producer in the world, oil companies operating, or considering doing business, in foreign countries, particularly in the Middle East, have focused on an often over-looked type of insurance—political risk insurance.
Political risk insurance can protect a company's assets, investments, or contractual rights in a foreign country from losses caused by "political" events in that foreign country, including civil unrest, riots, wars, terrorism, expropriation, or confiscation of assets, and the enactment of new laws.
Types of political risk insurance
There are several common forms of political risk insurance:
- Contract Frustration insurance protects a company's trade or sales contract with a foreign company from an action (or inaction) of a foreign government (including confiscation, nationalization, expropriation, or a change in the foreign country's law) that results in the termination of the foreign contract or prevents the foreign company from performing under the contract.
- Currency Inconvertibility insurance protects a company doing business in a foreign country in the event that the foreign government enacts new currency restrictions or prevents the conversion or transfer of a company's investment returns from local currency to U.S. dollars.
- Expropriation insurance protects a company's investment or assets in a foreign country from the foreign government's unlawful confiscation, nationalization, or expropriation of the assets or investment.
- Political Violence insurance—perhaps the most relevant coverage for companies doing business in the Middle East—protects a company 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.
- Terrorism insurance protects a company against violent acts, including acts involving chemical, biological, or other weapons of mass destruction, by individuals or groups. Terrorism coverage typically is much narrower than political violence coverage.
The political risk insurance market – 'official' v. private insurers
Political risk insurance can be obtained from so-called "official" insurers, including (1) the Overseas Private Investment Corporation (OPIC), a US Government agency that insures US companies' foreign investments or operations; (2) the Multilateral Investment Guarantee Agency (MIGA), an agency of the World Bank; and (3) the Export Credits Guarantee Department (ECGD) a United Kingdom government agency that insures UK companies' foreign investments and operations.
Political risk insurance also can be obtained from private market insurers, including the London market (often referred to as "Lloyd's of London"), ACE, Zurich North America, and the Chartis (formerly AIG) group of insurers. Official and private market insurers each have their advantages and disadvantages.
OPIC, MIGA, and ECGD political risk insurance provide longer policy terms (15 to 20 years). OPIC and ECGD insurance also have the added benefit of being backed by the US Government or the UK Government, which may deter a foreign government from interfering with a company's investment. Similarly, MIGA insurance is backed by the World Bank (of which the foreign government must be a member), which also may deter unlawful or harmful acts of the foreign government.
However, OPIC, MIGA, and ECGD have certain eligibility requirements that the private market insurers do not. For example, OPIC requires that a prospective insured must be a US company, the investment or project to be insured must be "registered" with OPIC before the company enters into the investment or project, and the company must obtain the foreign government's approval of the insurance.
MIGA requires that the company making the investment be in a MIGA "member country" and the investment be made in a MIGA "member country." MIGA also requires that proposed investment projects "be financially and economically viable, environmentally sound, and consistent with the labor standards and other development objectives of the country hosting the investment."
ECGD requires that the insured be "carrying on business in the United Kingdom" and "the investment must be made in an enterprise outside the United Kingdom."
Although not backed by the power of the US Government, the UK Government, or the World Bank, there are some advantages of obtaining political risk insurance from the private market. The private market generally can provide political risk insurance faster than the official insurers.
The private market also is generally considered to be more flexible than official insurers because private market companies are not constrained by the public policy concerns of the official insurers and do not have the same residency requirements as the official insurers—that is, there is no requirement that the investor company be a US company, a company doing business in the UK, or be investing in a member country of MIGA.
This flexibility also is reflected in the policy terms. Prospective insureds often can negotiate many of the terms of their coverage, thus to some degree tailoring the coverage to their particular needs and situations. Another advantage of obtaining coverage from the private market is that the policies often are confidential. The private market insurers, however, generally limit the policy term to five to seven years.
Companies that want the best of both worlds may have the option of combining official and private market political risk insurance policies to protect their foreign investments.
Coverage for potential losses arising out of the civil unrest in Libya under Political Violence Insurance
Oil companies operating or investing in Libya have suffered, and likely will continue to suffer, a variety of losses as a result of the unrest in Libya These losses include physical damage to property, disruption of regular business activities, increased security expenses, and evacuation expenses. Political violence insurance can cover these losses.
For example, some forms of political violence insurance can cover the evacuation costs that many companies incurred when they were forced to charter jets and evacuate their employees from Libya as a result of the civil unrest.
However, political risk policies typically contain varying conditions and requirements that an insured must address in order to secure coverage. For example, companies operating in Libya (or in another foreign country) with political violence coverage that suffer a loss should be aware of the restrictive notice provisions included in some political risk insurance policies.
Some political risk insurance policies require an insured to give notice of "any occurrence likely to give rise to a claim" to the insurer within days or weeks of the insured's knowledge of an occurrence. What this means—in connection with the claims arising out of the Libyan unrest—is that an insurer may argue that its insured was required to give notice of an "occurrence" within days of February 15, 2011—the first day of the Libyan unrest—even if it had not suffered a loss.
Moreover, if an insured does not suffer any actual loss until a few weeks later and immediately notifies its insurer, the insurer might argue that notice—a precondition to coverage under some political risk insurance policies—is untimely and thus there is no coverage. While a purported delay in notice might not be a bar to coverage under the law of most US jurisdictions (where notice is an excuse only if the insurer is actually and substantially prejudiced by the delay), this might not be true under political risk policies.
Many of those policies have choice-of-law clauses and the controlling law may have a different standard for evaluating the effect of a purported delay in notice. However, many political risk polices, such as OPIC political violence policies, do not contain this onerous notice provision. OPIC policies require notice within six months of a loss.
Insureds also should be aware that many political risk policies contain a "due diligence" clause that requires the insured to do everything "reasonably practicable" to protect or remove the insured property and to avoid or diminish any potential loss in the event of a political situation, such as the Libyan unrest. Other policies may require the insured to take steps to mitigate its loss.
Because of the room for debate about whether an insured did everything "reasonably practicable" under the circumstances and whether the "mitigation" was appropriate, an insured may need to document what it did, and why.
Finally, an insured always should carefully review the policy language. This is true when the insurance is being considered (in order to ensure that the coverage is, to the extent possible, tailored to the insured's specific needs) and when a loss occurs or a claim for coverage is being made (in order to ensure that procedural and timing requirements are satisfied). By doing so, an insured can maximize the possibility of coverage for any losses. OGFJ
About the authors
Sandra Smith Thayer and Kirk Pasich are partners with Dickstein Shapiro LLP. Thayer is a co-leader of the firm's Insurance Coverage Initiatives and leader of the firm's Political Risk Insurance Coverage Initiative. Pasich is the leader of the firm's Insurance Coverage Group. They represent insureds in complex coverage matters.
More Oil & Gas Financial Journal Current Issue Articles
More Oil & Gas Financial Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com