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The Actuary The magazine of the Institute & Faculty of Actuaries
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Political risk insurance claims

In recent years, various countries have taken drastic steps to save their faltering economies, including devaluing their currencies. An extreme example of this was in 2001 and 2002, when Argentina enacted a series of measures, the ‘emergency laws’.
Although these measures purported to be applicable to everyone, they hit foreign investors particularly hard. Tariffs for many gas, water, and electricity public concessions, which were previously calculated in US dollars and converted at the point of billing into Argentine pesos at a rate of 1:1, were now calculated in pesos without reference to the dollar. The removal of the dollarpeso pegging led to these concessions being unable to pay their dollar-denominated debt, and therefore they defaulted on loans. Further, US dollar-denominated loans and other debts were forcibly converted into peso-denominated debts at the rate of 1:1, and major losses were sustained as the peso depreciated considerably in subsequent months.
It is estimated that investors and banks lost over US$20bn as a result of the enactment of the emergency laws in Argentina.

The legal aftermath
The Argentine courts have already declared that the forced ‘pesification’ of US-dollar debt is unconstitutional. However, foreign investors have sought additional (and more valuable) remedies on the international plane. Some 20 or so cases have been brought by foreign investors against Argentina on the basis of bilateral investment treaties, which allow investors from states that have signed such treaties with Argentina to bring claims before international arbitral tribunals. The claims have to arise out of specific acts of a government that are expropriatory in nature, or which otherwise discriminate against foreign investors.
The principal arbitral tribunal, to which the above claims have been submitted, is the International Centre for the Settlement of Investment Disputes (ICSID) in Washington, which is part of the World Bank. The ICSID cases will be heard by tribunals, each consisting of three distinguished international lawyers or experts in the field of international law and investment. Most of the cases are still in preliminary stages. The first case to be heard by ICSID is not likely to result in a final decision until 2005.
The ICSID cases referred to above will only involve a foreign investor on the one hand and the Argentine state on the other. While this may allow, say, a Spanish company that made a direct investment in Argentina pursuant to a bilateral investment treaty between Spain and Argentina to seek compensation from the tribunal, there are several other classes of person that may miss out.
Political risk insurance claims
A number of banks lent money to investors in Argentina. As a result of the enactment of the emergency laws, numerous investors have defaulted on their loan repayments to these banks. In many instances, the banks, or other institutions with financial interests in Argentina, sought to protect those interests by taking out political risk insurance policies. Following the collapse of the Argentine economy, some policyholders have already made claims under their political risk insurance policies and others are considering making claims on one or both of two bases:
– First, claims may be made in respect of coverage for currency inconvertibility. The success of these claims is entirely dependent on the wording of the specific policy. On the whole, however, they are unlikely to be successful in relation to Argentina as the emergency laws did not, per se, prevent currency conversion, but rather affected the conversion rate.
– Second, and more commonly, claims may be made under policies that provide cover for expropriatory acts. We examine below the basis for making a claim and explain what further action policyholders may take to progress their claim.

Are the events in question expropriatory acts?
Most policies continue to define ‘expropriatory act’ by reference to ‘confiscation’, ‘nationalisation’, ‘requisition’, and ‘sequestration’. These are relatively old-fashioned views of expropriation, involving a direct taking by the host state of assets owned by the investor. However, such a restricted view of expropriation fails to take into account the fact that international law has developed considerably in the past 10 to 15 years, and that expropriation is now defined much more widely. This is important to note, as any disputes under the policies are generally to be resolved by international arbitration, where arguments will be formulated as a matter of international law. This is considered later in this article.
In 2000, in an arbitration brought by a foreign investor against Mexico following the imposition of environmental levies, taxes, and other requirements that effectively stifled the investment made, the arbitral tribunal held that ‘expropriation includes not only open, deliberate and acknowledged takings of property, such as outright seizure but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host state’. This decision has been supported in subsequent arbitration claims in relation to expropriatory acts. In a claim brought by a Dutch investor against the Czech Republic in 2001, the tribunal held that the forced deprivation of exclusive rights held by a provider of broadcasting services took away the ‘safety net’ of the investor and was an act tantamount to expropriation. Finally, in the past year, in another arbitration against Mexico, a tribunal has supported a wider, effects-based, definition of expropriation.
In the numerous ICSID arbitrations pending against Argentina, the investors are arguing that the emergency laws were an act ‘tantamount to expropriation’.

Are host states allowed to enact ‘policing’ measures?
It is generally accepted that host states are allowed to implement non-discriminatory measures in the pursuance of legitimate economic, environmental or security-related aims. Some insurers may seek to deny political risk insurance coverage, arguing the emergency laws represent such a legitimate measure. However, two problems arise with this. First, such measures, in order to be lawful, require that appropriate compensation should be offered to foreign investors, which did not happen with Argentina. Second, tribunals appear to be taking a wide approach as to what amounts to a measure ‘tantamount to expropriation’. For example, Mexico argued in the recent arbitrations referred to above that its measures were aimed at environmental protection. However the tribunals concluded that, even if that were true, such measures were still capable of being ‘tantamount to expropriation’.
Therefore, it seems as though the modern concept of ‘expropriation’ embraces many types of acts of a host state and that, in any given case, it is necessary to consider the effect of the act on the investment-backed expectation of the investor, as opposed to the characterisation of the act by the host state.

Can insurers avoid liability by relying on exclusion clauses in the policy?
The most common exclusion of liability in political risk insurance policies relates to losses caused by currency devaluation. Insurers may argue that any loss suffered by policyholders was caused as a result of devaluation. However, the expropriatory acts in question are, inter alia, the removal of the dollar pegging or else the enforced conversion of dollars to pesos at an artificial rate. Neither of these measures in itself is a devaluation. But for these measures, the policyholders would suffer no loss. If the peso had devalued, that would not affect policyholders retaining dollar-denominated debt; and, in the case of those companies that were allowed to calculate dollar-
denominated tariffs and convert them to pesos at the point of billing, they would simply end up with more pesos. Hence, it is strongly arguable that the exclusion for devaluation should not apply.

Bringing a claim under the policy
Assuming that claims submitted under political risk policies have been rejected by insurers, the policyholders may have recourse to the dispute resolution procedures in the policy. In many cases, the policies provide for international arbitration before institutions such as the London Court of International Arbitration. Claims will usually be heard by three arbitrators, one nominated by each party and then the third elected by the other two nominees or by the arbitral institution. In some instances, the dispute can be heard by one arbitrator. Parties will have to file formal written pleadings within two or three months of the tribunal being constituted, and the tribunal will be the master of the procedure and timetable. The tribunal’s decision will be final and not subject to any appeal. The fees of the arbitral institution and of the arbitrators will normally be shared by the parties. In the arbitration, the policyholder will have to prove that the emergency laws constitute an expropriatory act. Conversely, the insurer will have to prove any loss was suffered by devaluation, in order to rely on the policy exclusions.

Renewing political risk insurance policies
Companies whose political risk insurance policies are coming up for renewal would be well advised to give careful thought to the scope of coverage. In particular they should look at the definitions of ‘expropriatory act’ when negotiating future policies, and checking the small print to ensure that the exclusion clauses inserted by insurers do not result in the policy having little or no value.

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