More than 2,000 Bilateral Investment Treaties (“BITs”) among 175 signatory states, and a growing number of multilateral treaties, such as NAFTA and the Energy Charter Treaty (“ECT”), enhance the international legal rights of cross-border investors and their ability to enforce them. These beefed-up recovery possibilities may improve the environment for political risk insurance underwriters and insureds.

The BITs typically assure eligible nationals of the signatory states specific protection of certain investment rights and direct access to a forum for resolving investment disputes with the state in which their investment was made. Although industrial nations tend to have their own models for a BIT and multilateral treaties have core provisions, in the end the terms are negotiated country by country and special reservations, conditions, and interpretations apply in each case. Before taking comfort in and relying on the existence of such treaties, investors and their political risk insurers need to be alert to those terms and to circumstances in which the treaties might not prove effective.

Key Provisions of BITs and Multilateral Investment Treaties

The substantive provisions of BITs and multilateral treaties typically promise that eligible investments will be afforded national and most favored nation (MFN) treatment, fair and equitable treatment (which usually means the minimum standard of treatment under customary international law) and certain transparency commitments. Specific assurances are typically offered with respect to expropriation, transfer risk, and sometimes compensation for political violence damage, as well as relief from “performance requirements” and barriers to entry and employment of aliens. Important variations, however, can be found in BITs and multilateral treaties particularly in the way in which investment remedies are expressed in the text of the treaty. For example, both NAFTA and the ECT require that compensation for expropriation be paid at “fair market value” while BITs from countries such as France, Italy and the United Kingdom require compensation at “real,” “market” or “genuine” value. Even though several treaties may enunciate national and MFN rights in the same manner, the standard of treatment under a particular treaty will reflect the treatment the host government affords to its national investors (in the case of national treatment) and to the most favored foreign investor (in the case of MFN treatment).

If an investor believes the sovereign has violated these treaty promises to the investor’s disadvantage, it can, after some period for negotiations to resolve the issues, pursue recourse through dispute resolution mechanisms. The treaties commonly offer the investor a choice of fora – local courts, or arbitration under ICSID, UNCITRAL, or some other mutually agreed body and rules.

But neither the substantive rights nor the avenues of relief will have value unless the particular investor and investment are qualified under the terms of the treaty. Typically, an “investor” is defined as a national or an enterprise (private and often state-owned enterprises also) of a signatory state, but an enterprise might not be eligible for the treaty’s benefits if it is headquartered elsewhere or controlled by non-nationals (especially of a country with which the country receiving the investment is on bad terms), or if it has no substantive business activities in its “home” signatory country.

The eligible “investment” will cover a gamut of resource transfers: debt and equity-like instruments, physical property, contractual commitments such as concessions, intellectual property, guaranties, etc. but not all treaties embrace the same things or describe them similarly. In the case of the ECT, the investment must be associated with an economic activity in the energy sector. Countries typically exclude certain economic activities or industrial sectors from promised national or MFN treatment, such as NAFTA’s reservations on oil, gas, petroleum products and atomic energy or the ECT’s inapplicability to charcoal and “fuel wood materials”.

The Benefits to Political Risk Insurers

A sovereign’s treaty obligation to respect investor rights improves the climate for investment generally. The prospect that an aggrieved investor may pursue arbitration to enforce the sovereign’s promises, and also enlist its government’s support for that purpose, may well constrain the host sovereign’s behavior. If not, political risk insurers may still benefit from BIT or multilateral treaty rights that pertain to a particular transaction. Arbitration has a value to investors and possibly their insurers as subrogees of the insured investor. It presents a forum to resolve whether a compensable loss under the treaty has really occurred and to establish the sovereign’s liability for that loss. Arbitration therefore can establish a path to recovery, which is central to most political risk insurance underwriting.

Close examination of treaty provisions is therefore essential to determine if treaty benefits will be available to a particular investor and investment and for the insurers who may be subrogated. In cases of ambiguity about that availability it may be worth seeking formal clarification from the appropriate government agencies of the state in which the investment is to be made.

The utility of the treaty provisions to insurers may also depend on their own policy terms regarding subrogation, assignment of interests, and the policy- holder’s obligations to act on the insurer’s behalf. Public and private political risk insurers’ standard policy forms give them general rights of subrogation or assignment relating to the interests and claims of the insured. Most policies for lenders and some for equity investors require policyholders to take reasonable actions to aid the insurer’s recovery efforts. Several insurers’ policies provide that instead of assigning title, rights, or currency, the insured may be required to transfer a beneficial interest. But what if such a transfer or even assignment of a beneficial interest would result in the investor or the insurer being ineligible to take advantage of the benefits of the relevant BIT or multilateral treaty?

If the treaty is silent with respect to the foregoing, it is likely that the question would be resolved through the application of customary international law rules which could require that an investor maintain its national identity from the date of the events giving rise to the claim through the date of resolution of the claim. An assignment or transfer to an insurer whose country is not a party to the relevant treaty could preclude the insurer and the investor from obtaining the treaty’s investment and arbitration rights.

While many of the treaties contain specific provisions recognizing the subroga- tion rights which have been acquired by “designated agencies” of a signatory country, they will not necessarily confer similar rights on private insurers.

Even when the investor or its insurer concludes that treaty and insurance policy terms provide good comfort for the case at hand, there is still a danger that the treaty may not survive the period of investment or coverage, as a result of its abrogation, or that the enforcement of a treaty arbitral award would be resisted by host governments (as recent reports from Argentina seem to suggest with respect to ICSID awards). In an extreme case the insurer might provide for the termination of coverage in the event the treaty is not still in force on the date of loss.


BITs and multilateral investment treaties generally reflect and help to reinforce a signatory government’s favorable disposition toward foreign investment. Knowing whether the terms of such agreements are binding with respect to a particular investment and investor – and whether they accrue through subrogation or assignment to its political risk insurer – may require transaction specific research. However, for investments of considerable scale or sensitivity, the results of that research may be well worth the efforts of investors and their insurers.