We invited David Neckar, Practice Leader, Political Risks and Credit Insurance, Global Markets of Willis Ltd. to comment on issues that have arisen out of recent political risk insurance claims in Argentina.
Two countries “separated by a common language” was Churchill’s comment on the United States and the United Kingdom. Some have maintained that it applies equally to the domains of banking and insurance, when it comes to political risk policies. Is it language or is it something else? Looking at banks’ recent experience of the Argentina crisis, we can try to answer that question and draw some practical conclusions.
Until the collapse of Argentina in 2002, banks had been buying significant amounts of political risk insurance (PRI) as risk mitigation for loans in countries that were at or close to country risk limits. The obligors were frequently private corporations involved in utilities (e.g. electricity) or in infrastructure projects (e.g. toll roads).
PRI was typically provided on the “Lender’s Form” which was based on Expropriation and Currency Inconvertibility as key insured perils. The structure of the policies required the insured perils to be identified as the direct cause of the non-payment of the sums due under the loan.
Argentina’s political and economic fabric collapsed at the end of 2001, leading to Emergency Laws being passed in early 2002. The peso, previously pegged at parity to the US dollar, was un-pegged and promptly fell to around 30 cents. Local dollar obligations were “pesofied”, tolls were frozen.
Impact on banks’ loans
Obligors were faced with a threefold increase in their debts and with a government that did not provide alleviation (e.g. by allowing increases in tariffs). They defaulted and sought to reschedule. Many were technically insolvent – it was hard to know what a “going concern” basis was in such circumstances.
Banks’ views on PRI policies
Banks considered that defaults had occurred and were directly caused by the government action, or in some cases inaction (in not permitting renegotiation of agreements). Claims were due and should be met promptly. Time was of the essence. Regulators were looking closely at the provisioning for non- performing assets.
Insurers felt that close examination of the policy language was required to identify the proximate cause of the losses: were the obligors unable to pay because they were insolvent, prior to the government action? Information provided at the time of underwriting was re-examined. Supported by a clause that laid the onus of proof on the Insured to prove their loss (known as the “reverse onus of proof”), some insurers moved slowly, declining to make even preliminary judgements on liability.
Although brokers were keen to promote dialogue to resolve claims, they were placed in a difficult position when lawyers were appointed, for example over issues of legal privilege. Taking a proactive role required close coordination with the lawyers, which was not easy.
Banks sought to make things move faster by commencing arbitration procedures – only to discover that this process had the opposite effect. Eventually, compromise settlements were made. In many cases banks actually made reasonable recoveries from insurers – although at a serious cost of time, stress and bad feeling.
It is important to note that timely claims payments were made. Policies that covered obligor non-payment as the insured peril were simpler to manage. The first claim payment for an Argentine loss was on one such policy in London, settled promptly on the day the claims waiting period expired. On Lenders’ Forms, some insurers engaged in claims negotiations at an early stage and avoided lengthy legal process.
Was it a question of language?
At one level, the disputes arose over different interpretations of policy language. But, it was not so much language that marked the separation of views, as differences of procedures, expectations and corporate culture.
Banks wanted a simple speedy process, based on their practice of rapid settlements under counter-indemnities. They had not appreciated the procedural nature of the insurance contract, especially the need to establish the cause of the loss. They were intensely frustrated by the grinding process of insurers’ requests for information.
Insurers were generally defensive, but they pointed out that the policy terms supported their position. They appeared to be unhappy about banks appointing external legal counsel at an early stage and to believe that banks were not providing full information at all stages.