A PRI policyholder may make one or more unpleasant discoveries when a political risk loss occurs:

  • The policy doesn’t address what happened or doesn’t clearly do so
  • Policy exclusions or limitations bar or diminish compensation
  • Recovery under the policy is barred or impaired because the policyholder failed to comply with policy terms or cannot meet its obligations to the insurer in the event of a loss
  • The policy was not updated to reflect changes in the investment and its risks

Although the ranks of buyers of PRI that are simply ticking the box to satisfy a credit committee or regulator are probably diminished, it is still common to find executives and risk managers who treat a PRI policy as just another standard insurance product and therefore assume it will provide the coverage they need. PRI coverage, while referred to as insurance because it is provided through the insurance market, is in fact a financial instrument often custom-built for unique investments or to hedge financial risks associated with project or export loans, and should thus benefit from the same expertise and focus that specialized financial instruments require in other circumstances. Buyers often invest significant sums to purchase a PRI policy but make no great effort to assure that it will in fact work for them if the time comes to use it. PRI coverage isn’t cheap, and without the investment of time and effort to get it right, premium money may be down the drain, not to mention considerable embarrassment for responsible managers.

We believe that investment and risk managers need to apply simple principles to acquire effective coverage for potential complex claims scenarios, but doing it takes determination and expert focus:

  • Assure that the underwriter has been given complete and accurate information upon which to base its underwriting decision and set the premium rate
  • Negotiate policy terms that correspond to project vulnerabilities and management’s concerns
  • Stress-test the policy terms and conditions to determine that they are effective to cover specific project vulnerabilities and management’s concerns and needs
  • Understand the entire policy (this can be a real challenge)
  • Have a process in place to keep in compliance with policy terms and to amend or replace the policy if changed circumstances warrant
  • Be prepared to act appropriately if a loss threatens and when a claim is made

Negotiating the Policy.

Investors or lenders run a very high risk that things won’t work right if the team familiar with the covered transaction or loan and its risks isn’t actively involved in the application process and the negotiation of “manuscripting” changes. But since few investors or lenders—including in-house company lawyers—have multiple opportunities to gain understanding of the specialized world of political risk insurance, outside experts—specialty brokers, lawyers and other advisers, need to work with them. Neither company officials nor outside experts can properly do the job alone. They have to work together— and with the right underwriter.

It is tempting for investors or lenders to enter negotiations with the insurer who throws out the lowest “non-binding indication.” The lowest rate may come from the underwriter whose policies and practices are least favorable and appropriate to buyers’ needs, so those issues ought to be explored before entering into detailed negotiations with one particular underwriter. Midway through negotiations is not a good time to discover, for example, that the underwriter fixes the exchange rate for compensating an inconvertibility claim at the end of a long transfer delay waiting period, while other underwriters take a more insured-friendly approach.

Although in theory the policy form is the only basis for determining the validity and outcome of a claim, the policyholder’s application for the coverage is typically incorporated by reference, and all communications leading up to (and even after) the policy comes into effect will come into the discussion if there are differences over a claim. The application has to be accurate and thorough, and since the application form is invariably supplemented with email exchanges and conversations, it is essential to keep good and accessible records. Lenders have to rely on sponsors or borrowers for much of the information the underwriter requires—hence the importance of having confidence in that source of information and the desirability of policy wording that puts reasonable limits on the lender’s responsibility for accuracy and completeness. Shortly before the policy is finalized, someone needs to do a final review and make sure that the supporting records are there and that the representations are correct. An insurer can deny coverage if information on which it acted to offer insurance proves significantly wrong.

If PRI policy wordings were unambiguous or had settled meanings, and if underwriters were willing to part with cherished and sometimes murky language, life would be much simpler, but it is not often so. Unfortunately, underwriters are reluctant to provide written explanations of what their policy wordings mean. But oral understandings will not do. Some insurers may be able to point to case examples to demonstrate how their wordings work, but not many can. If the buyer can’t initially get what is needed in terms of clarity and responsiveness to its concerns, it and its advisers should press firmly for improvement, or even look for a more cooperative underwriter. If those efforts fail, the investor or lender may decide the value of the policy doesn’t warrant its cost. That’s a hard decision for most people to make once they have entered into negotiations with an insurer, but in some cases it could be the right one.

Somewhere along the line—not at the last minute but around the time that the buyer thinks it is getting the wording and coverage it wants—reality or stress testing with a claims exercise can have great benefits. This isn’t just to see if a likely loss scenario would yield coverage, but also to be sure the policyholder will be in a position to meet the policy requirements to perfect a claim. A “mock” claim may reveal discrepancies between what compensation can be achieved, and the value of the policyholder’s exposure plus the costs of a claim. Because no PRI policy covers every political risk, this exercise can also raise awareness of the risks that will need to be managed in some other way.

Fix It and Forget It? Definitely Not.

The temptation to put the hard-negotiated policy in the drawer or to consign it to a clerk may be great but it is potentially costly or even disastrous. Why? Because when circumstances change, the insured may need to change the policy to keep abreast of them. For example, suppose that the anticipated remittances from the project are markedly different from those initially contemplated. The insured may need to take a fresh look at its coverage needs or elections. Or suppose that there is a significant change in the ownership structure of the investment project, or the enterprise undertakes a different operation from that contemplated when coverage was initially applied for. If either of these changes is associated with a loss, the insurer might feel justified in denying a claim, because the basis on which he offered coverage has changed. The insured will need to keep the insurer informed and may need to modify the policy to reflect changed circumstances.

Lenders may have a harder time keeping themselves informed about the project and complying with insurance policy warranties and covenants because they are dependent on the borrower, and on its compliance with loan agreement terms, to do nothing that could trigger a policy exclusion. Lenders also have the burden of getting the insurer’s approval for material changes in loan terms and conditions.

A good way to avoid overlooking the policy holder’s obligations to keep the policy current and the insurer informed is to require executive-level attention to the policy at least annually, perhaps in connection with premium payment or coverage election cycles. At least one project executive, together with the political risk manager, should be required to review a checklist of items like these:

  • Have there been any significant changes to the investment project or its structure, in the host country’s economic or political environment, or with respect to information provided to the insurer at the time of application?
  • Do coverage elections make sense in light of changed circumstances?
  • Is the policyholder doing what it needs to have done if a loss situation arises? (E.g., are financial statements for the project being maintained as required; is the project being monitored to be sure that licenses are maintained and local laws are being observed; are employees aware of policy nondisclosure obligations; and are responsible employees aware of their responsibilities for loss avoidance?)

When Losses Loom.

Of course it is better to have a plan in place so that parties know what they need to do if a loss threatens, rather than having to scramble to figure out how to respond. The first requirement is to get the attention of senior management, and make sure that timely notice goes out to the insurer (in exactly the manner prescribed in the policy) and to the broker, attorney or other advisers. This is a good time for all concerned to re-read the policy carefully in order to evaluate the prospect of coverage of the potential loss and also to know what the policy requires of the insured at this stage. A claims strategy that can be supported by facts and fits the coverage should be developed early because it may be hard to change later on. Legal advice should be available to confirm or modify the claims strategy. Information will need to be gathered to deal with the situation, to provide prompt and accurate information to the insurer and, if need be, to prepare for a claim. While policyholders may think the obligatory claims “waiting period” before a loss is ripe for a claim is too long, the time can be put to good use in consulting with insurers and preparing for a claim if the loss can’t be avoided.

The insurer should be approached in a businesslike manner. This is not the time to argue about coverage but rather to give the insurer the information it requests about the situation and to give it an opportunity to weigh in on decisions, or at least to object to any proposed course of action for loss avoidance or mitigation. Whether lawyers or brokers or the claimant itself should present the matter to the insurer initially or at later stages will have to be determined on a case-by-case basis, but there should be a plan that keeps all of these parties informed and involved.

The insurer, especially if it is an official agency, may have influence that it can bring to bear to help overcome the problems that could give rise to a claim. It will certainly want to if it can. Indeed, some private PRI insurers boast of their claims avoidance or mitigation capabilities. Also, they may have valuable experience in managing political risk loss situations, so it is worth getting their advice.

All this said, interacting with the insurer when a loss threatens can be a tricky business. The insured’s and the insurer’s interests are not identical. If the insurer is a public agency, it will view the situation, at least in part, in a political rather than a merely commercial context, and while it may have helpful abilities to resolve the problem, it may also have other concerns about its relationship with the sovereign that is causing the trouble. And insurers generally may be focused on loss avoidance and recovery more than they are on paying the claim. The policy usually requires the claimant to take all reasonable steps to avoid or minimize a loss and to obtain the insurer’s written consent before entering into any agreement concerning a loss or potential loss. However, the guidance given by the insurer for loss avoidance may be more advantageous for the insurer than for the claimant and might even imperil the claimant’s larger interests in the country where the covered investment resides. This may be especially problematic for a lender with multiple exposures and interests in the host country. Once more, the importance of specialist legal and insurance advice can be critical to the insured’s interests.

Submitting a Claim.

It is difficult to generalize about the claims process because every claim situation is different. Each type of coverage has its particular requirements for presenting and perfecting a claim and every insurer will have its own expectations. Some insurers will suggest a format for claims and some will not. Drawing on experienced professionals to assist in preparing a claim will save time and may help avoid damaging mistakes.

In general, a well-organized factual narrative and a presentation that addresses every relevant policy requirement, with the associated documents and other evidence attached, is the best beginning. Just as important as providing thorough and accurate information to the insurer is to conform the claim to the requirements of the policy. Here is where the claimant will be reminded that it has the burden of proof. That means going through the policy terms to see how the circumstances surrounding the loss match up against the policy provisions, that exclusions don’t apply, and that the claim falls within the policy limitations. This is what the insurer and its lawyers will do, and their requirements should be anticipated by the claimant and its lawyers. The PRI claims process is almost certain not to end with the formal claim application. The claimant can expect more questions and a potentially lengthy interactive process.

The Insurer Agrees to Pay. It’s Not Over Yet.

As a condition of compensation, the equity claimant will have to transfer to its insurer the interest corresponding to the compensated loss. For a political violence damage claim, that may be just title to damaged assets, or the assets themselves, if they have any residual value. For an inconvertibility claim, the insurer will insist that the claimant transfer over the blocked currency or perhaps the right to dispose of it, or the note in respect of which a payment was blocked. The claimant must be sure that the legal decks are cleared to have this done. For expropriation, the insurer will want to be subrogated to the claimant’s interests, which in the case of an equity investment usually means an unencumbered interest in the shares that correspond to the insured investment. If shares are pledged to a lender, the equity claimant may be unable to perfect the claim unless the insurer has previously agreed to accept pledged shares – which may prove to be very difficult (this problem, though, should have been anticipated at the policy negotiation stage).

In an equity expropriation case subrogation means not just that the claimant has to hand over the shares but also whatever rights it has in respect of them. The insurer will expect the claimant to pursue reasonable remedies, such as taking the issue to arbitration pursuant to a bilateral investment treaty the claimant’s government may have with the sovereign, so that it can secure its share of any award that might issue from that process. (Typically, the insured must bear the reasonable out-of-pocket expenses of loss avoidance or minimization until the claim is paid. Thereafter, the insurer is usually responsible for salvage expenses. PRI policies vary as to how these expenses are to be reimbursed out of loss recoveries.) An insured lender will normally have to rely on the sponsor or borrower to pursue such arbitration on the lender’s behalf. Another problem for lenders is that when the insurer succeeds to the note corresponding to a defaulted installment (or beneficial interest in it), the lender has a new co-lender, one who may have differing interests and approaches. This is yet another situation in which carefully negotiated policy and loan documentation might avoid later problems and issues involving voting rights and creditor actions.

If the claimant has uninsured as well as insured interests in the expropriated project, or other interests in the country, its situation will be rather complicated. The matter of subrogation and cooperation between the insured and the insurer is worthy of extended treatment. Suffice it to say here that when pursuing coverage it is well for the investor to consider how all of its interests could be affected by subrogation and the requirement for continuing cooperation when a claim is paid.

What if the Insurer Denies the Claim?

Before becoming indignant about an insurer’s claim denial, the claimant should listen carefully to what the insurer has to say. Does the insurer have a complete and correct understanding of the situation? If the claimant disagrees with the insurer’s determination (not just that it doesn’t like it), it should try making its case again with the insurer’s objections in mind.

In a case where there are ambiguities or where neither party seems to have an obviously winning case, there may be room for a settlement. Is the claimant amenable to that? If not, or if the insurer is unwilling to negotiate, it is time to weigh the costs and prospects of recourse to arbitration or the courts. The claimant should consult with legal and other experts experienced with PRI arbitrations again, and if the decision is to resort to a dispute settlement forum, to let those experts, and not just general litigation lawyers, help weigh the costs and prospects of that course and prepare the case.

Arbitration is the mode commonly stipulated for the settlement of disputes between PRI policyholders and insurers. It is thought to be faster and cheaper than the courts, and is likely to be definitive. Still, it can be a long and costly process so it should not be undertaken lightly. The insurer similarly has to consider its costs and the uncertainly of the outcome – especially before an arbitral panel, which is not bound by precedent, not likely to have its decision subject to review, and often prone to compromise. Hence the threat of dispute resolution may inspire insurers to consider a settlement.


A political risk insurance claim is unique in most firms’ business experience, and PRI policies are unlike their other insurance coverages. Getting the best coverage possible, understanding what it does and doesn’t do, and avoiding pitfalls that could vitiate or preclude loss compensation requires senior management attention and the involvement of experts at the early stages and continuing attention to the policy and what it covers. With that preparation and follow-through, the issues and problems that arise when losses loom and claims are to be presented will be much easier to handle, and the prospects for a successful outcome will be much enhanced with the ultimate cost of risk mitigation much lower. ■


robert wray PLLC provides expert assistance to investors in connection with the negotiation of political risk insurance, evaluation of coverage effectiveness, the pursuit of claims, and arbitration of disputed claims.