 |
| Micah Skidmore |
Compensation for loss and damage to real and personal property is among the coverages afforded by political risk insurance.
While terms and conditions vary by policy, political risk insurance can cover the value of the insured's investment in a country like Ukraine — subject to policy limits — that has been lost due to political violence aimed at achieving political, religious or ideological objectives, among other things.
Political risk coverage for investments in Ukraine has fluctuated over time, with a low ebb in 2014 following Russia's incursion in the Crimean Peninsula. The Insurance Information Institute estimates that underwriters have placed more than $3.5 billion in political risk coverage for investments in Europe and Russia in 2021.[2]
Companies placing this coverage will undoubtedly review the terms of their policies, give notice and pursue claims for compensation relating to property damage as appropriate.
But beyond physical loss and damage to property in Ukraine, U.S. companies have lost and will continue to lose additional billions of dollars by discontinuing operations in Russia as a result of its aggression in Ukraine.
The U.S. Department of State has already urged U.S. citizens residing in or traveling to Russia to leave immediately,[3] and many U.S. businesses have done just that.
Domestic and international banks are withdrawing from Russia,[4] and from aggregate credit exposure totaling more than $121 billion.[5]
Multinational energy companies have discontinued projects with Russian counterparts, again at significant cost.[6]
A host of other companies, including automakers, consumer products manufacturers, retailers, food companies and media/entertainment brands, among others, are also suspending operations in Russia and with Russian suppliers.[7]
Collectively, if not individually, these companies stand to lose billions of dollars in revenue as operations in Russia are ended.[8]
Moreover, Russian government officials have recently discussed legislation that would impose external management over the operations and assets of foreign businesses leaving Russia.[9] Are these losses also covered by political risk insurance?
In addition to coverage for property damage from political violence, political risk insurance may provide compensation for economic losses arising out of the war in Ukraine through coverage grants for expropriation, forced abandonment, forced divestiture and deprivation.
Expropriation Coverage
Among other events triggering coverage, many political risk policies insure loss caused by government expropriation, which includes confiscation, nationalization, requisition, sequestration, seizure, willful destruction or damage, or other similar measures effected by law, order, decree or administrative action of the host government, subject to conditions.
Depending on the nature and duration of any expropriation of assets by the Russian government, including revenues from the external administration of foreign enterprise, such losses may be compensable under political risk insurance.
Forced Abandonment Coverage
Forced abandonment is another common triggering event under political risk insurance policies.
Here, foreign business enterprise and operations must be completely abandoned for a minimum period of time — e.g., 180 days — as a result of war, civil commotion or other similar conditions, after which the insured's government directs all citizens to evacuate the host country.
Given the State Department's recent directive urging all American citizens to leave, forced abandonment coverage may be available to businesses suspending operations in Russia.
However, companies wishing to pursue this coverage should ensure that public and private communications regarding the decision to suspend Russian operations are consistent with the terms of coverage.
Internal or external communications crediting the cessation of Russian business operations to reputational, public relations or similar considerations may complicate attempts to pursue forced abandonment coverage.
Forced Divestiture Coverage
Similar to forced abandonment coverage, forced divestiture coverage insures loss caused by the imposition of law, regulations or similar directives from the insured's government (1) requiring the insured to divest its interest in a foreign enterprise; (2) preventing the insured from obtaining the benefits of its interest in the foreign enterprise; or (3) otherwise restricting the operation of the foreign enterprise, resulting in its cessation.
Here, President Joe Biden announced last week that in coordination with the European Union and the G-7, Russia's most favored nation trade status will be revoked, paving the way for the U.S. to ban imports of Russian seafood, alcohol and diamonds.[10] This is in addition to prior sanctions limiting the importation of Russian oil and natural gas.
To the extent that these or other sanctions deprive American companies of the benefits of business operations conducted in Russia, such companies may have a claim for forced divestiture coverage.
Deprivation Coverage
Deprivation coverage within a political risk insurance policy provides coverage for loss caused by the host government's implementation of laws or regulations, that, contrary to prior license or other authorizations, prevent the export of the insured's goods, equipment or other inputs from the host country.
In addition to threats to impose external administration over foreign assets and operations, Russian authorities have also announced export bans on a variety of products manufactured by foreign companies operating in Russia, including cars, shipping containers, railcars, timber, telecommunications, medical and agricultural products.[11]
For companies affected by Russia's retaliatory trade measures, deprivation coverage may provide some needed compensation.
Conclusion
More than two weeks into Russia's invasion of Ukraine, much of the economic fallout from this war remains to be seen.
Inside Ukraine, the extreme human suffering from Russian aggression has been compounded by devastating damage to property and infrastructure, which will require untold billions to rebuild.
Other billions will be lost in an escalating economic conflict as American companies close business operations within Russia; the U.S. and its allies impose sanctions; and Russia retaliates with asset seizures and export bans.
With so much at stake, companies that have paid a premium for political risk insurance covering operations in Russia or Ukraine should give careful consideration to applicable policy terms, take steps to comply with all relevant conditions, and ensure that public and private communications are consistent with the insured's pursuit of claims, so that all available coverage may be preserved and maximized.
Micah Skidmore is a partner at Haynes and Boone LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] David Lawder, Ukraine war damage tops $100 billion so far, economic adviser says, REUTERS (March 10, 2022), available at https://www.reuters.com/world/ukraine-economic-adviser-says-war-damage-tops-100-billion-so-far-2022-03-10/.
[2] Matthew Lerner, Political risk insurance market pulls back from East European exposures, BUSINESS INSURANCE (Mar. 7, 2022), available at https://www.businessinsurance.com/article/20220307/NEWS06/912348367/Political-risk-insurance-market-pulls-back-from-East-European-exposures.
[3] Elizabeth Faddis, State Department directs US citizens to leave Russia "immediately", Washington Examiner (Mar. 5, 2022), available at https://www.washingtonexaminer.com/news/state-department-directs-us-citizens-to-leave-russia-immediately.
[4] Matt Egan, Goldman Sachs and JPMorgan are getting out of Russia, CNN (Mar. 10, 2022), available at https://www.cnn.com/2022/03/10/investing/goldman-sachs-russia/index.html.
[5] Charles Riley, Russia owes Western banks $120 billion. They won't get it back, CNN (Mar. 11, 2022), available at https://www.cnn.com/2022/03/10/investing/banks-russia-exposure/index.html.
[6] Shea Donovan, Global Energy Market Scrambles As Big Oil Companies Pull Out of Russia, Newsweek (Mar. 11, 2022), available at https://www.newsweek.com/global-energy-market-scrambles-big-oil-companies-pull-out-russia-1684688.
[7] Here Are Some of the Companies That Have Pledged to Stop Business in Russia, The New York Times (Mar. 10, 2022), available at https://www.nytimes.com/article/russia-invasion-companies.html.
[8] Brad Moon, 128 Companies That Have Pulled Out of Russia, Kiplinger (Mar. 11, 2022), available at https://www.kiplinger.com/investing/stocks/604317/companies-pulled-out-of-russia.
[9] Mark Thompson, Russia says it could seize assets Western Companies leave behind, CNN (Mar. 10, 2022), available at https://www.cnn.com/2022/03/10/business/russia-nationalization-western-companies/index.html.
[10] Zeke Miller, et al., U.S. Revokes Russia's 'Favored Nation' Trade Status, Bans Its Alcohol and Diamonds, Time (Mar. 11, 2022), available at https://time.com/6156938/us-revokes-russia-trade-status/.
[11] Russia hits back at Western sanctions with export bans, BBC (Mar. 10, 2022), available at https://www.bbc.com/news/business-60689279.
For a reprint of this article, please contact reprints@law360.com.