Political Risk Insurance

I. Definition
1.
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

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 

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:

a. It provides compensation in case the conditions of the policy are

fulfilled;
b. It helps investors access finance, as political risk insurance is often a
requirement for financing from banks; and
c. It facilitates access to best practices in environmental and social
standards.4

II. Political risk insurance's scope

4.
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.

5.
MIGA provides coverage against four categories of risk:5

a. Transfer risk resulting from restrictions on currency conversion and

transfer;
b. Expropriation;
c. Repudiation or breach of government contracts; and
d. War and civil disturbance.
6.
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)). 

7.
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

8.
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 

9.
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 ·       Sabotage

regulations
·       Kidnappings
·       “Creeping” expropriation
·       Firm-specific boycotts
·       Breach of contract

Country-Level Risks ·       Mass nationalizations ·       Mass labor strikes

·       Regulatory changes ·       Urban rioting
·       Currency inconvertibility ·       Civil wars

Source: Robbert Egge

10.
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.

11.
The following descriptions have been generally accepted by various providers: 10 

A. Coverage for expropriation

12.
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

13.
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

14.
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
15.
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

16.
Political risk insurance providers can be classified in three broad categories: 21

a. Public State-sponsored providers, such as DFC and China Export &

Credit Insurance Corporation (hereinafter “Sinosure”);
b. Multilateral providers, such as MIGA; and
c. Private providers, such as the Lloyds. 

17.
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
18.
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:

a. legal standing of the investor in case the investor had already received
a sum of money from the insurer;
b. legal standing of the insurer (in case the insurer is a public, State-
sponsored provider, it may lead to a State-to-State arbitration);
c. 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;
d. allocation of damages between the investor and the insurer;
e. failure of political risk insurance’s disclosure and potential
enforcement issues; and
f. 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
19.
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.

20.
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

21.
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?
22.
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 

23.
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
24.
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. 

25.
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

26.
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
27.
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

28.
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?
29.
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
30.
CalEnergy Company Inc. (now MidAmerican Energy Holdings Company) developed two
geothermal power projects in Indonesia (Patuha 45 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

31.
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.

32.
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
33.
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

34.
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
35.
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

36.
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.