Political Risk Coverage: Options and Opportunities

April 03, 2019

Political turmoil across the globe has led to unprecedented risks for U.S. companies doing business abroad. A surge in nationalism and increasing influence by far-right political leaders worldwide have left even traditionally-stable nations subject to civil unrest, attacks on democratic institutions, and discrimination against foreign interests.

In light of such uncertainty, U.S. companies are increasingly turning to political risk coverage to protect their foreign investments. Once viewed as a risk mitigation tool necessary only in emerging markets, political risk policies have surged in popularity as companies search for stability in an increasingly turbulent global political climate.

Political risk policies potentially cover a broad range of losses, including:

• governmental expropriation and confiscation of assets;
• political violence (such as riots, terrorism, or war) causing loss of assets or business income; and
• inconvertibility of foreign currency.

While political risk policies can provide valuable protection against certain risks of foreign investment, they are not a cure-all. For example, such policies typically do not cover losses arising from standard commercial defaults by a foreign borrower. They also commonly exclude legitimate regulatory actions taken by governments in their sovereign capacity. An onerous new public health regulation that effectively puts a foreign branch of a U.S. medical device company out of business, for instance, may not constitute a covered “expropriation” if the regulation is one of legitimate public necessity. Such a loss may be covered, however, if it can be shown that the regulation is simply a pretext to target foreign industry or that it otherwise violates international law.

In addition, not all political risk policies are created equal. There is no standard policy form, and U.S. jurisprudence interpreting such coverage is extremely limited. This means that the scope of a policy’s coverage may be dictated almost entirely by its language. As a result, companies must evaluate their needs carefully and take an active role in the drafting process to maximize potential coverage and avoid hidden pitfalls.

In particular, companies should seek to draft policies that account for new trends in expropriation of foreign assets. While the term “expropriation” traditionally has been understood to encompass a government’s outright taking of private property (for example, Cuba’s widespread nationalization of private business in the late 1950s and early 1960s), governments have increasingly engaged in “creeping expropriation”—i.e., a series of measures such as discriminatory taxes, denial of permits and licenses, or other acts that collectively result in the loss of a foreign entity’s investment. Even minor differences in policy language may substantially limit coverage for more subtle forms of expropriation. For example:

Covered Acts: Insurers may seek to define expropriation to cover losses arising only from formal laws or decrees (i.e., an official decree from a government announcing its intent to nationalize an insured’s business). As noted above, however, many forms of expropriation may arise from discriminatory acts not formally promulgated by law. Companies should seek to define a covered “expropriation” to include the broadest possible array of government conduct.

Covered Actors: Similarly, governments may attempt to avoid accusations of overt expropriation by carrying out their activities via agents or instrumentalities. A nation’s port authority, for example, may not have power to issue rules or regulations targeting foreign businesses, but a government may direct its port officials to engage in discriminatory conduct against such businesses that rises to the level of expropriation. Companies should seek to define “government” conduct to include the broadest possible range of actors; not just those with lawmaking powers.

Covered Time Periods: Unlike outright nationalization or confiscation, creeping expropriation occurs incrementally over time. Companies should seek to define a covered event to include all losses occurring during the policy period, even if some of the events giving rise to the loss occurred before the policy period.

Political risk policies are not a “magic bullet” against all risks in the international marketplace. With careful drafting, however, they can provide much-needed protection to U.S. companies in increasingly uncertain times.

Reprinted with permission from the April 2, 2019 issue of Corporate Counsel. © 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.