Political risk and trade credit policy wordings, and harmonisation in the context of the Insurance Act 2015

Political risk and trade credit insurance policies have become one of the key elements that can facilitate the occurrence of foreign direct investment and/or international and/or domestic trade. Without these policies such important global economic activity is often dampened down, or may in certain circumstances not happen at all, especially as not many commercial entities are willing to take these risks fully unprotected in today’s highly unpredictable global political and economic environment. Given the vast variations in the way in which global economic activity can occur; not surprisingly many different methods of protection, including methods other than pure insurance, have evolved to address the myriad of opportunities facing those companies wanting to trade and invest internationally. For the sake of simplicity, it makes sense to confine the contents of this article to insurance policies governed by English law and those predominantly in the private commercial insurance sector.

Policy wording quintessence

It may seem rather an overly obvious statement to make but at the heart of every political risk and trade credit insurance contract is the policy wording. The policy wording embodies the contractual agreement made, usually exclusively, between two willing and consenting parties who have negotiated a legally binding commercial agreement. Perhaps not surprisingly, policy wordings for this type of insurance can also take many different forms, cover many different risk situations and can be constructed in a variety of different ways to address the specific needs of each individual insurance buyer. To have a generic harmonised one size fits all policy wording is possible as demonstrated by market standard and various published wordings. However; very often a bespoke policy wording is negotiated between the contracting parties which reflect the specific nature of the risks to be insured.

UK commercial insurance changes

It would be possible to write a lengthy book on the many different types of policies that are available to protect foreign direct investment and global trade. However; it would be firstly remiss not to mention here the most significant change to UK commercial insurance contract law since the Marine Insurance Act 1906; being the UK Insurance Act 2015 (the Act) which introduces substantial changes to the laws governing disclosure in non-consumer insurance contracts (and to the remedies for breach), warranties and other contractual terms, insurers’ remedies for fraudulent claims and contracting out. It applies to all contracts of insurance and reinsurance as well as variations to existing contracts entered into after 12th August 2016 and which are governed by the laws of England, Scotland, Wales and Northern Ireland. All of these changes were extensively consulted upon and XL Catlin had representatives at these consultations, so the vast majority of the Act’s content was anticipated before it was passed into law.

Harmonization

Overall, we, at XL Catlin, have been broadly supportive of the changes; nonetheless, the effect of the Act on particular policies is complex and in some respects unclear. Seeking to harmonise policy wordings in the sphere of political risk and trade credit at this time, across such a wide range of options may not seem realistic in the context of such significant fundamental change to English law. However; one of the simplest and most important ways to harmonise policy wordings, especially where significantly large risk exposures need coverage, is to make full use of a multiple insurer syndication of the risk using a common policy wording. In fact, many current users of these products have come to expect insurers to be willing to participate upon a common set of policy terms, not limited just to the quantum of the premium. In some circumstances, actually the premium itself can vary between insurers on otherwise fully harmonised policy wordings as each insurer must set its own premium terms for taking the risk.

The services of a professional insurance broker with specific dedicated product teams and knowledge dedicated to this syndication process is considered to be best practice by this part of the insurance market in particular in the UK. As a customer it is very important to appreciate that unless a syndicated insurance policy is indeed on a harmonised policy wording that there could be very significant differences in the coverage and potentially important inadvertent consequences as to how any risk mitigation actions or claims and recovery work may be able to function. Differences need not necessarily be confined to simply the policy premium and particular care needs to be taken when this is the case.

The Insurance Act

With the arrival of the Act into law, the work of reviewing and potentially redrafting all policy wordings, which by their nature are usually bespoke, has been, or will be, significant. However, we believe that the Act reflects our philosophy of doing business in a clear, fair and client-focused way. Our approach to claims has always been to make fair decisions alongside our clients and not rely on points that might be regarded as unfair or highly technical. For instance, we announced before the Act was passed that we would not be relying upon Basis Clauses in our dealings with customers.

The parts of the Act that are of particular relevance to this article are: A) the duty of disclosure at the time of placing and remedies for breach of the duty; B) warranties and other clauses that go to loss prevention or reduction; and C) fraudulent insurance claims. As far as A) is concerned, the Act has introduced a new duty of fair presentation as well as a range of potential new remedies in the event of any breach. Policies containing clauses which touch on non-disclosure issues will need to be carefully reviewed and possibly updated in light of the Act. Where appropriate, London Market Association (LMA) clauses could be used.

Clearly, the fewer different versions of such clauses that are adopted in the market, the better it should be for customers.

Regarding B), the Act has created two new regimes, one for warranties (section 10 under the Act) and one for terms (including warranties) which would have tended to reduce loss of a particular kind or at a particular time or location (section 11 under the Act). We are concerned that the introduction of these regimes has created fertile ground for disputes and litigation owing, in particular, to the potential uncertainty as to whether or not a term is a section 11 term. In an effort to reduce the scope for litigation, which is in the interests of all concerned, we would intend to use specific statements in the policy wordings to indicate how key terms should fall to be treated under the Act, for example by stating which terms are to be considered section 11 terms under the Act. We hope and expect this will provide greater clarity as to the remedies that will apply in the event of any breach of these terms.

Regarding C), the remedies for fraudulent claims will operate by virtue of the Act and, as such, there is no need for a clause in the policy. However, if fraud clauses are to be used, then as with disclosure clauses, we recommend the use of standardized LMA clauses relating to fraud for the same reasons as already articulated above.

Clear and present

With all the technical changes brought about under the Act, it is significant to bear in mind that for political risk and trade credit policies, we are dealing very often with complex underlying activity and contractual documentation. Despite this, best practice has often advocated the use of clear and plain English in policy wordings to describe the proposed circumstances to be insured. The range of perils to be insured can be described either on an “all risks” basis or on a named perils basis – the latter being the usual market standard for political risk and trade credit policies. In the case of trade transactions, this can be as simple as nonpayment by the debtor under the insured contract. This binary insuring clause can be simply proven – the payment has either been received or not; with any attendant reduction or proof of loss usually being relatively straightforward.

For policies covering foreign direct investment, usually the main peril covered is confiscation, expropriation or nationalization. In this sphere of activity, we have witnessed greater use of additional policy language designed to expand coverage to include many additional perils that are often found in more general property and casualty/liability insurance policies such as business interruption. Being clear at the outset of the contract on what it is supposed to cover or indeed not cover, how the quantum of loss is to be assessed and how loss and recoveries are to be handled, is one of the key ingredients for successful claims handling for all concerned in a loss scenario.

Cooperation and innovation

For those who are by constitution and mandate set up to act as nationally owned export/import credit agencies and/or foreign direct investment insurers and/or as actors for and on behalf of their countries’ national interest or multinational or even supranational entities operating in the field of political risk and trade credit insurance; it has been selfevident from years of global government cooperation agreements that working together can, and often does by necessity, produce a syndication of risk on a common policy wording. It can be very time consuming for all the various parties who are working together, on say a large power project costing many billions of dollars to construct, to reach agreement on all the terms of the insurance contract to support this important economic growth activity.

In recent years the cooperation between the private commercial insurance sector and the ECAs, multi and supranational agencies has grown significantly. Rather than seeing this as a potentially negative occurrence, we would argue that by bringing together willing and sophisticated public and private insurers, both sides can fulfill their mandates; whilst at the same time bringing certainty through policy wording harmonisation and syndication for our customers. A further benefit undoubtedly has been the ability to shorten the length of time it can take to bring some of these larger and more complex transactions to fruition through the involvement of privately owned commercial insurers.

As we all ponder the ramifications of Brexit and other fundamental shifts in global sociopolitical economics; will the global world of international investment and trade simply cease to function as a result of political decisions taken by various different politicians and electorates? This would seem highly unlikely – successful international trade and investment is at the heart of what all nations aspire to in terms of improving their populations’ standard of living. In these circumstances will insurance policy wording harmonisation and a one size fits all approach for all political risk and trade credit insurance be relevant and a reasonable desirable objective? In one sense, yes absolutely, in appropriate circumstances such as syndication of risk. Given the huge variety of business opportunities available to potential users of these policies, innovation of the policy wordings within the revised new legal environment under the Act, will remain at the cornerstone of what the private commercial insurance market will do to help facilitate customers’ activities in this crucial global activity.

John Blenknslopp

Senior Vice President, Global Head of Market Distribution and Development, XL Catlin Political Risk & Trade Credit Insurance