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Docteur Artemis Malliaropoulou

Lecturer - Université de la Haye

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Political Risk Insurance

I. Definition


Political risk refers to the possibility that investments will be impaired by certain types of government measures. To be more specific, the United States’ Overseas Private Investment Corporation1 (hereinafter “OPIC”) defines political risk as “the possibility that political decisions or political or social events in a country will affect the business climate in such a way that investors lose a portion of their investment or expected return.”2


The Multilateral Investment Guarantee Agency (hereinafter “MIGA”), which is a member of the World Bank Group, defines political risks as “risks associated with government actions which deny or restrict the right of an investor/owner (i) to use or benefit from his/her assets; or (ii) which reduce the value of the firm.”3 


Political risk insurance is one of the tools used to mitigate political risks and its relationship with investment treaty arbitration needs to be explored. The purpose of political risk insurance is threefold:

  1. It provides compensation in case the conditions of the policy are fulfilled;
  2. It helps investors access finance, as political risk insurance is often a requirement for financing from banks; and
  3. It facilitates access to best practices in environmental and social standards.4

II. Political risk insurance's scope


Political risk insurance covers a large number of risks of political, non-commercial nature, but not all of them. Therefore, each investor should balance the pros and cons of each political risk insurance policy in casu.


MIGA provides coverage against four categories of risk:5

  1. Transfer risk resulting from restrictions on currency conversion and transfer;
  2. Expropriation;
  3. Repudiation or breach of government contracts; and
  4. War and civil disturbance.

Eligible investors for MIGA political risk insurance must be nationals of a MIGA member-State or nationals of the host country if the assets to be invested are obtained from abroad.6 Eligible investments must be new investments, of developmental nature, capable of respecting the laws of the host State (MIGA Convention, Article 12(d)). 


OPIC (now DFC) provides coverage against three broad categories of risk and adds one stand-alone type of policy for a specific aspect of what could be considered as part of political violence lato sensu:

  1. Currency inconvertibility;
  2. Expropriation;
  3. Political violence;
  4. Stand-alone terrorism insurance for equity investments and investments of property.7

Eligible investors for OPIC’s (now DFC’s) insurance must be U.S. Citizens; or Corporations established in the U.S. and more than 50% owned by U.S. citizens or corporations; or not-for-profits established in the U.S.; or corporations established outside the U.S. and more than 95% owned by U.S. citizens or corporations; or entities other than corporations established outside the U.S. and are 100% owned by U.S. citizens or corporations and they must seek insurance for an investment into an eligible country.8 


Robert Egge’s9 categorization below provides a panorama of what can be covered by political risk insurance:


Government Risks

Instability Risks

Firm-Specific Risks

·       Discriminatory regulations

·       “Creeping” expropriation

·       Breach of contract

·       Sabotage

·       Kidnappings

·       Firm-specific boycotts

Country-Level Risks

·       Mass nationalizations

·       Regulatory changes

·       Currency inconvertibility

·       Mass labor strikes

·       Urban rioting

·       Civil wars

Source: Robbert Egge


It is worth noting that these terms are usually not elaborated on and, thus, what is exactly covered by these concepts is a matter of interpretation on an ad-hoc basis.


The following descriptions have been generally accepted by various providers:10 

A. Coverage for expropriation


This coverage protects investors against governmental acts that deprive the investor of ownership or control rights to its investment.11 Coverage may also be available for “creeping expropriation”, which is a series of governmental acts that have an effect similar to the one described above.12 In the case of “creeping expropriation”, the date of loss is of crucial importance and there seems to be no one-size fits all timeframe in the arbitral practice.13 See further Valuation Date.

B. Coverage for currency inconvertibility


This coverage protects investors against losses arising out of an investor's inability to legally convert local currency into hard currency, or to transfer hard currency outside the host country where that inability results from a government action or failure to act.14 It is generally held that this form of risk does not include depreciation or devaluation of host country currency,15 as they are considered to be commercial and not political risks.16 

C. Coverage for political violence


This coverage protects investors against losses arising out of declared or undeclared war, hostile actions by national or international forces, civil war, revolution, insurrection, civil strife, including politically motivated terrorism (when it is not a separate category)17 and sabotage.18 Actions undertaken primarily to achieve labor or student objectives are not covered.19 

D. Coverage for breach of contract by the host government


This coverage protects investors against losses arising out of lack or limited access to a competent judicial or arbitral forum, or unreasonable delays or inability of enforcement of a judicial or arbitral decision issued in their favor.20 

III. Types of political risk insurance providers


Political risk insurance providers can be classified in three broad categories:21

  1. Public State-sponsored providers, such as DFC and China Export & Credit Insurance Corporation (hereinafter “Sinosure”);
  2. Multilateral providers, such as MIGA; and
  3. Private providers, such as the Lloyds. 

It is worth highlighting that in the Berne Union, which is a leading association for the global export credit and investment insurance industry with 84 members [including OPIC (now DFC), Sinosure and MIGA], it was stated that public providers’ insurance issuance corresponded to the 57% of the overall Berne Union issuance in 2013.22 

IV. Political risk insurance in investment arbitration cases


Tribunals came across several issues in relation to the impact of political risk insurance in an arbitral award. To be more specific, the issues that arise in an investment treaty arbitration out of the political risk insurance are the following ones:

  1. legal standing of the investor in case the investor had already received a sum of money from the insurer;
  2. legal standing of the insurer (in case the insurer is a public, State-sponsored provider, it may lead to a State-to-State arbitration);
  3. calculation of compensation that includes potential deduction of the sum received by the insured from the potential damages awarded in the context of the compensation;
  4. allocation of damages between the investor and the insurer;
  5. failure of political risk insurance’s disclosure and potential enforcement issues; and
  6. other considerations related to the pros of political risk insurance, the insurance-related material that may need to be submitted before the arbitral tribunal and the non-binding nature of the insurer’s determinations for the arbitration proceedings.

A. Legal standing of the investor who had already been compensated by the insurer


In the Phelps Dodge Copr. & OPIC vs. the Islamic Republic of Iran case,23 OPIC (now DFC) had the status of one of the Claimants by virtue of a political risk insurance contract covering Phelps Dodge's specific investment at stake. The legal standing of OPIC was not disputed, whereas the Respondent argued that Phelps Dodge lost its legal standing.24 The Tribunal noted that the US law that created OPIC required it to limit its insurance so that at least ten percent of the risk of loss is borne by the insured. As a result, Phelps Dodge retained ownership of at least part of the claims and had not lost its legal standing.25 The Tribunal held that it had jurisdiction over the claims presented and the Respondent was found liable.


In Hochtief AG vs. the Argentine Republic,26 the Claimant had received political risk insurance payment prior to the investment treaty arbitration award on the same grounds. Besides other grounds, Argentina objected to the admissibility of Hochtief’s claims on the basis that the German government had agreed to pay Hochtief under a political risk insurance policy a sum of money that covered the Claimant’s losses. As a result, Germany was subrogated to Hochtief’s rights by virtue of article 6 of the Germany-Argentina Bilateral Investment Treaty (hereinafter “BIT”) and Hochtief had, therefore, lost its standing to pursue a treaty claim. The objection was dismissed by the Tribunal based on grammatical interpretation of the BIT’s Article 6.27


In CSOB vs. Slovakia case, the Respondent argued that an agreement similar in effect to an insurance pay-out between the Claimant and the Czech Republic had made the Czech Republic the interested party.28 Based on Article 25(1) of the ICSID Convention, which states that the dispute must be “between a Contracting State and a national of another Contracting State,” the Respondent argued that the Czech Republic was disqualified from stepping into the CSOB’s shoes. The Tribunal stated that standing is “a jurisdictional matter determined by reference to the date the proceedings are instituted”, and, as the proceedings were initiated prior the conclusion of the assignments, the Tribunal had jurisdiction to hear the case.29 It is worth mentioning that the Tribunal confirmed its jurisdiction, while it did not clarify if the assignments might have had any legal effect on Claimant’s standing in case they had taken place before the filing of the case.30

B. Legal standing of the insurer – a path to State-to-State arbitration when the insurer is State-sponsored?


In the Phelps Dodge Copr. & OPIC vs. the Islamic Republic of Iran case,31 as mentioned above, OPIC (now DFC) had the status of one of the Claimants by virtue of a political risk insurance contract covering Phelps Dodge's specific investment at stake. The legal standing of OPIC was not disputed, whereas the Respondent argued that Phelps Dodge lost its legal standing.32 


In the Offshore Power Production C.V., Travamark Two B.V., EFS India-Energy B.V., Enron B.V., and Indian Power Investments B.V. vs. Republic of India case,33 the dispute over the Dabhol power plant between an American Company and the Government of India turned into a State-to-State dispute between the US and India, following subrogation.34 

C. Potential deduction of political risk insurance receipts from the amount of compensation awarded by the Tribunal


In Hochtief AG vs. the Argentine Republic,35 as mentioned above, the Claimant had received political risk insurance payment prior to the investment treaty arbitration award on the same grounds. Argentina argued in favour of deduction of the sum of money received by the Claimant in the context of its political risk insurance. The Tribunal dismissed this claim and stated that the Respondent’s liability shouldn’t be affected by an agreement between the Claimant and a third party, for which the Claimant had paid a relevant amount. 


In Ickale Insaat vs. Turkmenistan,36 the Tribunal’s reasoning led to a prima facie different outcome, which is, nevertheless, justified on the facts following a not very different line of reasoning. The Tribunal decided to deduct the Claimant’s political risk insurance receipts in calculating the compensation based on the argument that the compensation should in total cover the value of the expropriated investment. It needs to be highlighted that the Claimant did not rebut the Respondent’s request for deduction and this “silence” is obvious in the Claimant’s request for rectification of the award.37


In the Glencore Finance (Bermuda) Ltd vs. the Plurinational State of Bolivia case,38 the Respondent argued in favour of deduction, based on the fact that the Claimant had cashed out a political risk insurance policy held by several international financial institutions on the same grounds. The award will shed light on this issue and the Tribunal will need to adopt a clear attitude on the conditions for potential deduction when the Claimant has already received compensation from its political risk insurance provider.

D. Allocation of damages between the investor and the insurer


In the Phelps Dodge Copr. & OPIC vs. the Islamic Republic of Iran case,39 as mentioned above, the Respondent was found liable by the Tribunal. The Tribunal stated that it was “uninformed as to how the two Claimants would divide the compensation” and, thus, the payment was made to Phelps Dodge, “on the understanding that the law of subrogation would protect the interests of both insured and insurer.”40


In Hochtief AG vs. the Argentine Republic,41 as mentioned above, the Tribunal dismissed Argentina’s claim for deduction. However, it stated that based on insurance policies, the Claimant might be obliged to pay some part of the compensation to the insurer.42 This conclusion makes it clear that it is not part of the Tribunal’s role to intervene in the allocation of sums arising out of the insurance policy.

E. Not disclosure of political risk insurance – a public policy ground for non-enforcement?


Lastly, it is worth highlighting the issue of whether failure to disclose the political risk insurance policy during the arbitration may be an obstacle towards the enforcement of the award based on public policy considerations. An example of this question is found in KBC vs. Pertamina,43 where the District Court rightfully refused to deny enforcement of the award on the basis of a public policy violation, as there was no evidence that KBC deliberately misled the Tribunal and, furthermore, when the issue arose the Respondent did not ask further questions or proceeded to a relevant discovery request.44

F. Other considerations


CalEnergy Company Inc. (now MidAmerican Energy Holdings Company) developed two geothermal power projects in Indonesia (Patuha45 and Himpurna projects) and acquired political risk insurance for them. OPIC’s (now DFC’s) political risk insurance included an interesting clause according to which insurance covered not only expropriation, but also non-payment of final arbitral awards.46 The Claimants focused on their political risk insurance for recovery rather than enforcement actions against assets of the Respondents. That choice was also indicative of a case where the choice of arbitral seat did not have a practical impact on recovery, as no enforcement to local courts was sought at the end of the day.47


The Tribunal in the Generation Ukraine Inc. vs. Ukraine case48 analysed the material that were generated by the Claimant to qualify for continued OPIC (now DFC) coverage and noted the ones that were withheld from it. This case shows that the procedural and substantive requirements of political risk insurance can be taken into consideration by investment arbitration tribunals in various contexts and inferences of the tribunal can be based on them or on lack of them.


In the Enron Corporation and Ponderosa Assets vs. Argentina case,49 the Claimant relied on a prior determination by OPIC (now DFC) establishing that an expropriation had taken place. The Tribunal, however, did not accept the OPIC determination as a persuasive authority on the question of whether an expropriation had occurred, noting that the OPIC determination “responds to a different kind of procedure and context that cannot influence or be taken into account in this arbitration.”50 The Enron Tribunal, nevertheless, held that Argentina had violated its obligations to provide Enron fair and equitable treatment.51 It should be highlighted that the Tribunal did not clarify whether it considered the OPIC expropriation standard in the context of the fair and equitable treatment standard, as defined in US treaty practice, nor did it provide any analysis of the distinctions between the procedures and standards involved.52

V. Screening-risk insurance


Investment screening can be defined as an administrative procedure allowing a host State to “assess, investigate, authorise, condition, prohibit or unwind foreign direct investments” on grounds of national security or public order.53 For example, in the U.S., investment screening is based on the Foreign Investment Risk Review Modernization Act (hereinafter “FIRRMA”), which amends the 1950 Defense Production Act. In the EU, the Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union will begin to apply on 11 October 2020.54


Screening-risk insurance steps in to compensate foreign investors for costs incurred due to non-success in this administrative procedure. It is worth highlighting that an important difference from political risk insurance is the limited scope and lower level of compensation. However, screening-risk insurance increases the bargaining power of foreign investors. Besides its various forms, it is overall considered to be an alternative tool for managing the political risk inherent in investment screening.55

VI. Conclusion


Political risk insurance and investment treaty arbitration are both methods of risk mitigation. The investor needs to pick the method that is more suitable to the specific investment, taking into consideration the cost of each method, the length of the processes, the scope of risks covered, etc. It is true that investment treaty tribunals do not view political risk insurance as an obstacle to the admissibility of investors claims or as an arrangement that necessarily affects the level of compensation.56 On the other hand, the wording of treaties and insurance policies and the principles of insurance law often include the concepts of “assignment”  and “subrogation”,  which lead to the conclusion that when a right is fully transferred from the insured to the insurer, then the same right ought not be exercised by the insured at an investment treaty arbitration.57 In addition, equity and moral hazard considerations do not favour the potentiality of “double compensation.”58


Bearing in mind the need for any type of risk mitigation mechanism created to not only do justice, but to be seen to be doing justice, the relation between the two regimes needs to be clarified through awards of investment Tribunals and/or a more elaborated wording of the relevant investment treaties and insurance policies. The main questions to be addressed include the legal standing of the investor and/or the insurer, the date of loss, the deduction or not of the insurance payment from the compensation awarded in an investment treaty arbitration and any potential link between non-disclosure of political risk insurance and public-policy considerations. Any attempt by policy makers (and later by adjudicators) to deviate from clear solutions already provided in similar cases should be accompanied by an expressis verbis justification of the rationale behind the deviation in order to safeguard the fundamental principles of transparency and legal certainty.


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