Political Risk Insurance May Cover Business Losses Resulting From Russia's Invasion of Ukraine
Political risk insurance ("PRI") policies may provide corporate policyholders experiencing business losses in Ukraine or Russia with coverage potentially excluded under traditional property insurance policies.
Russia's invasion of Ukraine has caused unimaginable human suffering and untold loss of life. It has also resulted in devastating destruction of property throughout Ukraine and significant disruption to commercial activities in both Ukraine and Russia. Corporate policyholders doing business in Ukraine or Russia should not overlook potential recoveries available under their insurance assets, including PRI policies. PRI policies may provide unique coverage for such business losses that are potentially excluded under other types of insurance policies and are specifically marketed to address these kinds of political risks.
PRI policies provide coverage to corporate policyholders for losses resulting from certain types of political events. Covered events may range from significant changes in governmental policies, laws, or regulations to government unrest, instability, revolution, coups, and war. Losses covered by PRI policies typically include compensation for the value of lost or damaged property, assets, or investments, as well as certain business interruption losses such as lost profits.
Coverage provided by PRI policies is particularly valuable because it may cover losses that are potentially excluded under traditional property insurance policies. For example, many insurance policies contain exclusions for losses caused by adverse government actions, such as nationalization, expropriation, seizure, or other takings by governmental entities. They also may exclude losses arising out of violent acts of state, including war, insurrection, state-sponsored terrorism, revolution, or rebellion. Such excluded events, however, are likely covered under a PRI policy, thereby providing business continuity and security to corporate policyholders operating in volatile foreign environments. In fact, insurers often market PRI policies as being designed to fill the coverage gaps that may result from certain exclusions in traditional property policies.
Recent developments in Ukraine and Russia may trigger insurance coverage under corporate policyholders' PRI policies. For example, PRI policies might provide coverage for the following types of incidents:
- Physical damage to or destruction of the insured's property or assets due to acts of war, including lost profits resulting from same.
- Expropriation or nationalization of the insured's factories and machinery.
- Forced divestiture or abandonment of the insured's property or assets.
- Selective discrimination by government authorities against the insured's businesses.
- Cancellation of permits or licenses needed to operate the insured's business.
- Blocking or limiting of the insured's imports and exports.
- Seizure or other restrictions on movement of the insured's foreign currency.
These are just a few illustrations of losses that might be covered under a PRI policy. Actual coverage for such incidents, of course, depends on the terms and conditions of each policy, and may be subject to other exclusions or limitations. For example, after the Russian annexation of Crimea in 2014, some insurers limited the coverage available for Ukraine exposures. Corporate policyholders should also keep in mind that such policies may impose certain shared costs on the insured, such as deductibles and/or a percentage share of any covered loss amounts. Policyholders that have potentially incurred covered losses under a PRI policy should carefully document losses as they are incurred and provide timely notice to their insurers to avoid other insurance recovery pitfalls. Finally, policyholders should carefully analyze how to best present their claim to maximize their coverage rights and anticipate potential attempts by their insurers to avoid or limit the coverage provided by PRI policies.
In the event that you do not have political risk insurance in place, you may be able to obtain similar protection through investment treaties. See our Commentary on this topic, Companies With Investments and Businesses in Ukraine and Russia: The Importance of Investment Treaties, for further details.