UK: Legal Issues in Political Risk Insurance Claims & Recoveries

Last Updated: 22 April 2010
Article by Tony George, Brian Boahene and Carol Searle

This article was written for and first published in The Brief. An abridged version was printed in the 24 February 2010 edition.


Commercial, as opposed to state-sponsored or multilateral, political risk insurance (PRI) as placed in the London Insurance Market in its wider definition comprises cover for losses caused to investments and projects by government confiscation, expropriation and nationalisation etc (CEND or 'PRI' strictly so-called); insurance against contract frustration or repudiation by government obligors (CF); and more recently structured trade credit has been insured against political risks as well as straightforward counterparty default (CR or TCI). Cover may also be provided for losses caused by political violence (PV) including terrorism.

The PRI market has been through a number of claims cycles since it started about 40 years ago. The Middle East petrodollar boom and the Iranian revolution in the 70s; the 1980s debt crisis; then in the 1990s, Kuwait; the last recession; the collapse of the USSR; the Balkans crisis; and later Asia, Russia, Cuba. In 2001-2002 Argentina came to the fore. Since 2007, we have seen the resurgence of 'resource nationalism', particularly in South America.

How has the PRI market been affected by the current recession and what claims issues have arisen as a result? Most banks were not affected by the first phase of the credit crunch in August 2007. In September 2008, however, with the collapse of Lehmann Brothers, there was a massive crisis of confidence throughout the World with the real economy being affected by November 2008 when global trade virtually stopped. In the commercial PRI sector the Market is facing what has been described as a "tsunami" of claims. Estimates vary as to the total number of notifications to the Market to date, but the top end of the scale is US$4 billion. Many of these will not ultimately turn into claims. Most of those that do are straightforward trade credit insurance claims of the simple 'obligor can't pay variety', and have been or will be paid in full and promptly so the services of our profession will not be needed. The sheer size, number and complexity of some, however, mean that lawyers will need to be involved – usually initially by the insurers, and thereafter, should problems be perceived, also by the insured.

In this article we examine this PRI claims environment from the perspective of the London Market and some of the legal issues that arise.

What legal issues arise in PRI claims?

The principal forum for dispute resolution in PRI placed in the London Market is arbitration – usually the London Court of International Arbitration – rather than the London Commercial Court. Whatever the setting, however, the legal issues which have traditionally arisen again and again are the performance of policy preconditions, conditions precedent and warranties; the extent of the coverage provided; misrepresentation and non-disclosure. But what about the claims the Market now faces? Are the legal issues arising the same? Is there anything new?

Claims today

The scale of the problem is undoubtedly bigger – not localised to any one particular country. This recession is a global issue and everyone and every country is affected. Nevertheless, we are still seeing the same legal issues – just, often, the focus has changed.

This time the bulk of the claims arise out of trade credit insurance, and the majority of the claimant insureds are banks. This, we believe, is having a major impact on the claims environment and the issues which are arising.

Banks, we suggest, have a different philosophical approach to doing business from either that of the Underwriter or indeed the traditional commodity trader insured. Banks have a 'cash against documents' mentality. Bankers are used to financial instruments that respond on presentation of compliant documents or first demand such as letters of credit. They are not used to the 'conditionality', whether express or implied, of long insurance policy wordings.

Another feature of banks – in some countries more than others – is their employment instability. Employees leave; they are posted to different departments and countries. Their companies are restructured. This can give rise to a lack of continuity with projects and deals that is not always encountered with other types of insured.

Also having an impact is the width of a bank's interests, so that responding to an insured default can have unwonted (and unwanted) results from a bank's perspective: reputational damage in an emerging, competitive market; more concretely, triggering cross-defaults on other instruments.

How do these features translate into claims issues?

Current claims issues

With trade credit insurance and its basic cover for counterparties that can't or won't pay, issues with coverage are likely to be rare. However, the following issues continue to arise.

Arguments about what was and should have been told to the Underwriter on placement of the risk will always be with us, but an increased feature is with policy renewals and amendments. In a recession, underlying contracts are often re-negotiated and payments rescheduled. Possibly because they are used to operational risks and the need to keep their Underwriters in the picture with regard to changes in circumstances, in our experience this has not been a huge problem with insured traders and contractors. With an insured bank, however, perhaps because it has not seen the need or because the policy has been metaphorically placed in the bottom drawer by an account handler who may have moved on, there seems to be a greater risk that Underwriters are not advised or fully or accurately advised of the amendment. If not advised this could be a breach of warranty. If not fully or accurately advised to Underwriters this could be non-disclosure or misrepresentation undermining the validity of any policy endorsement or renewal.

We have seen problems in the preparation and presentation of claims documentation to Underwriters. It may be a product of our age of electronic communication, and the employment instability mentioned, but particularly with banks there seems to be a lack of appreciation as to what Underwriters require in support of a claim and what they may want to satisfy themselves of its legitimacy. Linked with the perennial uncertainty an insured has as to the role of the Loss Adjusters who Underwriters appoint to investigate claims on their behalf, at best it delays settlement and at worst it creates suspicion in the minds of Underwriters, leading them to instruct lawyers.

There also seems to be a lack of understanding amongst insureds about the purpose of the 'Waiting Period', a policy fundamental for CF, CR and trade credit insurance policies. One feels that an insured bank is under the impression that it simply has 'to wait' to get its claim paid, not that under the terms of its policy it is under any continuing duty to avoid or minimise the loss in the exercise of 'due diligence': a concept that means something else in the world of finance anyway.

Perceived shortcomings in claims preparation may also have led to what we see as a change of practice on the part of some Underwriters: an insistence on detailed settlement agreements upon payment of the claim. Sometimes even with straightforward claims being paid in full, the insured is asked to sign a lengthy document requiring it to agree to terms that go further than required by the policy wording.

The impact of the current claims environment

We are confident that the private sector market will survive – with an enhanced reputation as a result of its response to the wave of claims, and will seek to take advantage in the medium term of the loss of creditability of the collateralised debt obligation and, more particularly, the credit default swap as a means to lay off risk. Indeed, we are told, as often happens after a period of intense claims activity, that there are going to be new entrants and new capacity, and this despite what we imagine will be a contraction in reinsurance availability at one end of the spectrum and at least a short-term losing of 'liquid appetite' on the part of trade finance banks. There must, however, be a question mark as to whether this is the time for marketing new insurance products, with reduced demand and many parts of the world virtually off risk. We have already been involved in requests to consider the implications of tighter (if you are an insurer)/less favourable (if you are an insured) wordings.

Finally, but importantly, we are not sure how far the Market has considered the issue of recoveries as the claims tidal wave recedes. Traditionally, the profitability of the Market is supported by the high rate of return on recoveries – in a strict PRI/CEND context following the attachment of the counterparty's assets, the favourable bilateral investment treaty award; the use of specialists in unorthodox recovery processes. We hear of anticipated recovery rates of the order of a third. With the exercise of trade credit insurance subrogation rights by Underwriters, however, there needs to be realism. Most of the claims are of the 'can't pay', not the 'won't pay' variety. When pursuing recoveries Underwriters may come to find themselves competing with other creditors, often legitimately with greater priority, but perhaps also in debtor-skewed winding-up processes in foreign-bank loathing jurisdictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.