Russia-Ukraine conflict – how insurance can help businesses
This is just one example of the immense global business challenges caused by the war in Ukraine. Organizations with physical assets on the ground in Russia, Ukraine, Belarus, or the surrounding areas are now having to make difficult decisions around if, how, and when to pull out of the area safely, and how to control their economic losses. But even companies not directly exposed to the conflict zone are feeling the sting of cancelled business agreements, disruption of the global supply chain, and the huge increase in oil and gas prices.
Companies who have, or might experience, losses connected to the invasion of Ukraine or the economic sanctions imposed on Russia may seek to recover losses on their property or business interruption policies, but Kirk Pasich, partner at Pasich LLP, said these policies “will provide little comfort” to businesses as they typically include ‘war exclusions’.
“Instead, companies should look to their political risk insurance policies, particularly any coverages that protect insureds against political violence, forced abandonment, confiscation, and expropriation,” he said. “These policies have paid substantial amounts in the past.”
Read next: Russia-Ukraine war set to impact insurance industry with huge losses
Political risk insurance policies can cover a broad range of exposures. For example, if a company has a facility or investments in Ukraine, and they have been damaged during the conflict, the insured could get coverage under a political violence policy.
“If a company has an investment in Russia – for example, they have leased planes to Russian carriers, or they have businesses operating there – you can’t normally just voluntarily pull out your business, but if there’s a threat of violence or an order from the Russian government that impacts their business or their contract, they can file a claim under their expropriation or contract frustration policy,” said Sandra Smith Thayer, partner at Pasich LLP.
There are certain steps that businesses must take if they want to get coverage for their losses via a political risk insurance policy, according to Smith Thayer. Many policies have strict time limitations and procedural requirements that must be met, and insureds need to “act quickly to preserve their right to collect”.
“Most political risk insurance policies have strict notice requirements […] that require notice upon becoming aware of an occurrence or something that could lead to a claim, as opposed to waiting until there’s an actual loss to give notice to the insurer,” she explained. “It could even be down to some rumblings that Russia is going to invade. At that point, it is the policyholder’s responsibility to provide notice.
“When you’re negotiating a political risk policy, it’s very important to work on the notice provision, to give yourself time […] because many coverage battles turn on whether notice was appropriate or not. You need to make sure that it specifies who has to have knowledge of an event, and to give yourself enough time to give notice.
“Often, there’s such turmoil going on, especially when there’s an invasion or something related to political violence, you’re so focused on getting either your people out of the country, or taking care of what’s really important, so it’s vital to give yourself time so that you can calm down and figure out who you have to give notice to.”
Smith Thayer said a good notice period would specify a set number of days – typically 30, but ideally 45 – in which the policyholder must alert their insurer of a situation. After a policyholder gives notice, they are usually then required to provide regular updates to the insurer about what’s going on.
“Usually, policies have requirements that you notify your insurer of certain things before you take certain actions,” Smith Thayer told Insurance Business. “You also have an obligation to mitigate your damages, so there’s an interplay there. You have to be able to keep your business and mitigate your losses, but you also need to make sure that you’re keeping your insurer notified of any developments in whatever event it is that you’re concerned about.”
Read more: Munich Re pauses new business in Russia and Belarus
There are some ambiguities in political risk insurance policies. For example, there can be disputes around what is considered an event that could give rise to a claim, as well as who is qualified to determine if an event could give rise to a claim. These instances highlight the benefit of the ‘choice of law’ provision, which can be found in some political risk policies.
Pasich LLP is based in California, and Smith Thayer said: “If you are lucky enough to get a choice of law provision where California law applies – which we recommend that our insureds do – California law says that if there’s any ambiguity in the policy, it’s resolved in favor of the insured. Making sure that you have the right choice of law is probably one of the top five most important things when you’re negotiating a political risk policy.”
Political risk insurance policies are mostly confidential. Smith Thayer predicted that almost 90% have confidential arbitration provisions, so it’s challenging to report on claims activity. But in all likelihood, Russia’s invasion of Ukraine, and the resulting sanctions, will cause an uptick in claims activity this year. Smith Thayer noted: “Our firm has not seen it yet, but there’s this rumbling that claims are coming.”