The Russian invasion of Ukraine and the resulting sanctions Western countries have imposed on Russia have already caused potentially catastrophic losses for businesses with assets and investments in Ukraine, Russia and neighboring countries impacted by the attack. These losses could accelerate, based on a March 9, 2022, announcement by Russia’s ruling party.
According to that announcement, a Russian government commission has begun the approval process toward Russia nationalizing the assets of foreign businesses that leave Russia in light of the economic sanctions. This could create dire economic consequences for foreign businesses that leave Russia.
While some policy exclusions for losses caused by war and government action may, depending upon the specific language, preclude recovery for such losses under some traditional insurance policies, political risk insurance (PRI) policies are specifically designed to cover such losses and provide a potential source of recovery. Critically, PRI policies not only cover expropriation by a “host country” (here, Russia) of a policyholder’s investments, they also cover forced divestiture from actions of the “insured’s country” government (potentially the United States, Canada, the United Kingdom or other countries) that, for example, require the insured to divest some or all of its shareholdings in the host country or prevent the insured from participating in all or part of the benefits of its shareholding in an asset in Russia.
Accordingly, the scope of most traditional PRI policies in the market today are quite broad and may be triggered not only by actions of the Russian government, but by actions of various other countries in relation to the Russian government’s invasion of Ukraine. This can include the country of the named insured, the investee, the borrower (if credit investment is insured) and other related parties to the foreign investment.
Stepping back, PRI policies generally cover losses a foreign investor might suffer as a result of adverse action or inaction by the host country’s government that result in the complete or partial deprivation of the investor’s assets in the foreign country including: partial taking of assets of the insured enterprise before a complete taking (expropriation); legislative or regulatory actions or inactions that disproportionately affect foreign investors (selective discrimination); the damage or destruction of property for political purposes (political violence); an inability to convert, transfer or repatriate funds related to an investment (currency inconvertibility); a prohibition on exports or imports; and contract frustration. Further, as illustrated above and relevant to the current situation with the Russian government’s actions, PRI policies almost always provide cover for government actions in the country where the insured is domiciled/obtains the cover when such actions expressly — or in effect — deprive the insured of part or all of its investment in the foreign country (forced divestiture).
By way of example, PRI policies might extend coverage for losses incurred when assets in Ukraine or Russia are: (1) damaged or destroyed due to military action, looting or riots; (2) requisitioned by the government of Russia or Ukraine to support the war effort; (3) rendered inaccessible due to ongoing military action or martial law; (4) nationalized by Russia in retaliation for the Western-imposed sanctions; or (5) not accessible and/or prevented from operating as a result of actions by the insured’s government (e.g., United States, Canada, United Kingdom, France, Spain, other countries). Moreover, depending on the terms of the PRI policy, more indirect losses due to supply chain disruptions arising out of sanctions, trade restrictions or currency volatility might also trigger PRI coverage.
PRI policies often include provisions requiring a policyholder to timely notify the insurer of a loss and to take reasonable steps to mitigate losses. Accordingly, it is important for PRI policyholders with investments in countries impacted by the actions of the Russian government and resulting economic disruption to review their policies and to engage experienced coverage counsel to maximize a potential recovery.
McGuireWoods’ insurance recovery litigators have helped global companies recover billions of dollars of insurance coverage through U.S. federal and state court litigation, international arbitrations and negotiations directly with domestic and international insurers, including most of the Lloyd’s of London syndicates. McGuireWoods recently obtained an almost $100 million award in an international arbitration under a PRI policy for a metals mining company arising from expropriation of an investment in the Eastern Europe/Western Asia region.