Political risk insurance and the Russia-Ukraine conflict

Businesses around the world are facing substantial financial impact from Russia's invasion of -- or war against -- Ukraine. The destruction of property, withdrawal of people, cessation of business agreements, and disruption of the supply chain all present significant financial challenges. The impact on the energy market alone -- particularly on the oil supply and resulting oil and gas price hikes -- already is proving significant.

In the face of disasters, businesses often turn to their property and business interruption policies. However, many of those policies will provide little comfort here. While those policies often cover economic losses flowing from the orders of civil or military authority that prevent access to insured premises, many losses arising from the Russia-Ukraine conflict do not directly arise from such orders.

These policies typically contain a "war" exclusion. One long-used version states that the policy does not cover "(1) War, including undeclared or civil war; (2) Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign or other authority using military personnel or other agents; or (3) Insurrection, rebellion, revolution, usurped power, or action taken by governmental authority in hindering or defending against any of these." Standard Property Policy Section B.1.f (ISO Properties, Inc. 2007).

However, many businesses have political risk insurance policies. These policies insure businesses against losses in their foreign operations or projects resulting from certain political events and government acts. The coverages vary -- but several may apply in the current situation.

Political Violence: Protects the insured against losses incurred in the wake of wars, revolution, insurrection and other events intended to achieve a particular objective, including actions by armed forces and sabotage. This insurance typically covers loss of or damage to tangible assets and property and any resulting lost profits and earnings.

Forced Abandonment: Protects an insured against losses from political violence when that violence renders it unreasonably hazardous or impossible for the insured to operate without risk to physical harm to essential personnel.

Expropriation: Protects against the risk that the host government will take action that interferes with the insured's ownership rights in a project. It typically insures losses from a host country's direct interference in the insured's ownership rights through confiscation or nationalization of assets. It also may insure against indirect interference in the insured's ownership rights through discriminatory legislation or other discrete acts.

The financial protection provided by political risk insurance should not be undervalued. One estimate suggests that political risk insurers face a potential exposure of $2 billion. Pete Carvill, "Insurers face exposure to Ukraine invasion in multiple areas: analysts," Reinsurance News (Feb. 25, 2022). Other estimates show that the amount of exposure to insurers (and thus coverage for insureds) may be substantially greater. See, e.g., Michel Leonard, "Ukraine: How Exposed Are Insurers?" Insurance Thought Leadership.com (March 1, 2022) ("PRI carriers issued $19 billion of new coverage globally in 2022, of which ... $1.6 billion [is] to cover risks in Russia. ... [W]e estimate that PRI insurers have insured between $1 billion and $7 billion in Ukraine risks over the last five years.").

With this much insurance potentially available the question for most businesses is: How do we collect for our losses?

Because political risk policy forms vary, some being issued by private insurers, some by government-based entities, and some via forms prepared by insurance brokers, there is no one simple answer. But there are some steps that a business can, and should, take:

1. Check immediately to determine whether you have any form of political risk insurance.

2. Contact your insurance broker for assistance, and consider whether the broker obtained the right political risk coverage. Many insurance brokers state that they have expertise on political risk insurance. An insured generally is entitled to rely on that expertise. See, e.g., Murray v. UPS Capital Ins. Agency, Inc., 54 Cal. App. 5th 628 (2020) ("evidence of specialization at a minimum creates a reasonable inference the agent/broker anticipates their clients will rely on their acknowledged expertise and supports courts imposing an extended duty," including to advise clients of coverage appropriate to meet their needs); Sempra Energy v. Marsh USA, Inc., 90 F. App'x 754 (9th Cir. 2010) (affirming $48.5 million judgment against insurance broker for failure to obtain political risk coverage that would have protect insured).

3. Carefully review any policy, remembering that ambiguities typically are resolved in favor of coverage. See, e.g., AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 822, 825 & n.9 (1990) ("In the insurance context, we generally resolve ambiguities in favor of coverage," even if the insured is deemed to be a "sophisticated" party and participated in negotiating the policy language). Furthermore, if there is a potentially applicable exclusion or limitation on coverage, remember that "even if [an insurer's] interpretation is considered reasonable, it would still not prevail, for in order to do so it would have to establish that its interpretation is the only reasonable one." MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 655 (2003).

4. Check the policy for a provision stating when notice of a claim or loss must be given. It is not unusual for notice to be required in very short period -- for example, within 30 days after an event that could give rise to a claim. California law usually will bar an insurer from prevailing on a "late notice" defense unless the insurer proves that it was actually and substantially prejudiced by the delay. See, e.g., Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 761 (1993) ("[t]he insurer must show actual prejudice, not the mere possibility of prejudice"). But political risk policies often have less favorable choice-of-law clauses and usually have arbitration clauses. These may lead to the application of New York or English law and may call for any legal action to take place in New York or London. However, to the extent that these clauses contravene California public policy, they may be unenforceable. See Pitzer College v. Indian Harbor Ins. Co., 8 Cal. 5th 93 (2019) (while a choice-of-law clause typically is enforced, it will not be it conflicts with a California fundamental public policy, such as California's notice-prejudice rule, and California has a greater interest in its law applying than does the chosen jurisdiction).

5. Check the policy for other procedural requirements and time traps. Political risk policies may call for the insured to submit a proof of loss with detailed information and to do so within a specified time. As with notice provisions, how strictly these conditions are enforced may depend on the governing law.

6. Check the policy to determine when a legal action must be commenced. Many jurisdictions have lengthy periods for commencing a breach of written contract action (such as California's four-year statute, Code of Civil Procedure Section 337). But political risk policies usually provide shorter periods, typically one or two years from the date of the loss, the loss inception, or the insurer's coverage decision. These conditions usually are enforceable, although the running of the limitations period might be tolled based on the controlling jurisdiction's law.

Political risk insurance may be an extremely valuable asset. An insured should consider all coverage possibilities. Given some severe time limitations in policies, any consideration should be done immediately to best preserve a right to collect and to minimize future coverage battles. 