The collapse of Lehmann Brothers sparked a tsunami of political risk claims in the London Insurance Market and prompted a shift in focus in the legal issues involved.

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 1970s; 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 to 2002 Argentina came to the fore. Since 2007, we have seen the resurgence of “resource nationalism”, particularly in South America.

Crisis of confidence
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. However, in September 2008, with the collapse of Lehman 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$4bn. 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 the legal profession will not be needed.

However, the sheer size, number and complexity of some claims mean that lawyers will need to be involved – usually initially by the insurers – and thereafter, should problems be perceived, also by the insured.

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. But whatever the setting, the legal issues that have arisen traditionally 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? 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.

It seems that banks 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.

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