The Investment Treaty Arbitration Review: Political Risk Insurance

One of the most significant risks faced by foreign investors in developing countries is 'disruption of the operations of companies by political forces and events'.2 The range of political risks faced by investors includes breach of contract, adverse regulatory changes and restrictions on currency transfers, expropriation and political violence. In a 2019 survey conducted by the Berne Union, the leading international association of investment insurers, and the International Credit Insurance and Surety Association, respondents recorded expectations of a significant deterioration of the risk environment. A total of 75 per cent of the survey respondents believed that political risks are becoming more prevalent.3 Political risk is likely to be even greater following the extraordinary measures taken by nations across the world in response to the covid-19 pandemic.

Tto mitigate political risk, investors employ a variety of tools, including market-testing smaller investment, joint ventures with local partners and risk analysis through engagement with local government. In addition, investors can consider purchasing political risk insurance (PRI) or structuring their investments such that they are protected under international investment agreements (IIAs).

This chapter explains the protections offered by PRI and IIAs; the conflicts or overlaps in the protections offered by the two tools; the process of making claims; and the rights of insurers in subrogation under IIAs.

i Political risk insurance: coverage and providers

PRI policies are aimed at protecting investors and businesses against risks that conventional insurance policies would not normally cover. Commercial risk insurance policies ordinarily protect against operational risks such as delay in the completion of a project, excessive maintenance costs or insufficient revenue for the payment of interest on a debt. However, PRI policies insure against specific non-commercial risks, which include (1) expropriation, confiscation or nationalisation, (2) restrictions on transferability and convertibility of currency, and (3) political violence. Some PRI policies also insure against the host country's (1) default in compliance with arbitral awards, (2) breach of contract or (3) default on loans.

PRI policies may be purchased from three types of providers: public, private and multilateral. Public PRI providers include agencies established by national governments to provide PRI policies to constituent businesses. Some popular public providers of PRI include Japan's Nippon Export and Investment Insurance Agency (NEXI), the Overseas Private Investment Corporation (OPIC) set up by the United States, the German government's overseas insurance programme administered by PwC and Euler Hermes, and the China Export and Credit Insurance Corporation (commonly called SinoSure). Private providers include Lloyd's of London and its syndicates, Sovereign Risk Insurance Limited, Zurich Emerging Markets Solutions, AIG and Chubb.4 Multilateral providers include agencies such as the Multilateral Investment Guarantee Agency (MIGA), set up by the World Bank Group, the Asian Development Bank, the African Trade Insurance Agency and the Islamic Corporation for Insurance of Investment and Export Credit.

PRI indemnifies foreign investors for losses arising from the materialisation of political risk. However, the risk mitigation benefits of PRI go beyond cash indemnification. This is because PRI translates uncertainty about political risk into premium amounts, allowing the investor to make an investment decision based on the economics rather than just perceptions and assessments of political risk.5

Additionally, PRI may also have a deterrent effect against host country interference with foreign investment. PRI obtained from a public provider, ordinarily a government agency, supplements the relationship between the investor and the host country of investment with an additional layer of relationship between two national governments. PRI from multilateral agencies also has a deterrent effect. This is because any interference in insured foreign investment by a host country could endanger that country's relationships with the international organisation. For example, MIGA, which is part of the World Bank Group, may have significant leverage in negotiations with host countries that may need support from the World Bank.6

ii International investment agreements

IIAs are entered into between two or more states with the aim of promoting and protecting foreign investment flows between their economies. They include bilateral investment treaties (BITs) and investment chapters in free trade agreements.

Although different IIAs offer different substantive protections to eligible investors, the most commonly seen protections include:

  1. the right to repatriate investments and returns;
  2. prohibition against uncompensated expropriation;
  3. fair and equitable treatment (FET) and full protection and security (which requires host states to provide the investors a consistent, stable and transparent regulatory environment and prohibits adoption of any arbitrary measures);
  4. national treatment (a requirement to treat foreign investors on a par with local investors and companies);
  5. most-favoured nation treatment (an obligation not to treat investors of any third state any better than investors); and
  6. 'umbrella clause' protection (which requires a host state to honour the specific obligations entered into in contracts with a foreign investor).

These investment protection guarantees are reciprocal in nature (i.e., identical rights are available to investors of both contracting countries). In addition to substantive guarantees, IIAs contain a procedural mechanism pursuant to which investors may initiate binding arbitration against the host country for breaching obligations under the IIA.

iii PRI and IIAs: differences and overlaps

IIAs and PRI have the same underlying purpose – the promotion and protection of foreign investment. However, both tools are manifestly different. A PRI policy agreement is a contract between the investor and the insurance provider, setting out the terms according to which an insurer would indemnify the insured of losses arising as a result of non-commercial risks, ordinarily acts or omissions of governments. On the other hand, an IIA is a treaty setting out international investment law obligations of governments in relation to minimum standards of treatment of investors of other contracting countries. This section outlines some of the key differences between PRI and IIAs.7

i Eligible investors


Public PRI providers ordinarily provide insurance only to nationals of their own countries. For example, OPIC requires an investor to be either a US citizen or a US corporation (defined as a corporation that is organised under the laws of a US state with more than 50 per cent of its shares beneficially owned by US citizens and corporations).8 Some public PRI providers also extend coverage to foreign subsidiaries of domestic companies. Limited public providers also offer PRI policies to foreign corporations with a domestic presence.9

Unlike the national programmes of public providers, multilateral PRI providers such as MIGA have more liberal eligibility criteria, and ordinarily only have a membership requirement. For example, MIGA requires that an investor be a national of a member nation (other than the host country of the investment).10

At the other end of the spectrum, private PRI providers provide 'bespoke' coverage (i.e., the terms are tailored to the business situation of each client and, therefore, do not have the same 'nationality' requirements as public PRI providers).


IIAs typically restrict coverage to nationals of contracting countries. To qualify under an IIA, a natural person would normally have to provide evidence of citizenship, whereas a corporation would have to show that it is incorporated under the laws of the host country. Some treaties also impose the additional requirement of local control and management of the company.

ii Eligible host countries


For an investment to be considered eligible for insurance, providers have varying rules. Some public providers, such as NEXI, consider an investment to be eligible so long as the project is approved by the host country. Other providers require that the host county of investment offer 'adequate legal protection' for investment. Coverage under an IIA is a factor that is considered in determining whether the host country meets the adequate legal protection standard.11 In addition, some insurers require that the host country observes human and labour rights standards,12 anti-corruption practices,13 or impose geographical restrictions such as that the investment must be made in a developing country.14


Host country eligibility is a lesser concern in the context of IIAs. This is because once a treaty is concluded, and in force, an investor need not demonstrate that the laws of the host country meet any pre-defined criteria for the treaty protections to apply, save for the requirement (in the case of most IIAs) that the investment must be made in accordance with those laws.

iii Political risks covered


Typically, public PRI providers and MIGA provide coverage for three major political risks: expropriation, political violence and currency inconvertibility. In addition, some insurers provide breaches of contract by host countries as a separate class of risk coverage. However, for an insured investor to claim indemnification for losses arising as a result of breach of contract, MIGA requires that the investor demonstrate that (1) it does not have access to a judicial or arbitral forum to determine its claim of breach or (2) a decision by such a forum is not rendered within a reasonable period, or (3) a final decision from a judicial forum cannot be enforced.15 Although this may seem restrictive, it is commercially sensible. This is because providing PRI for simple breach of contract blurs the boundary between commercial and political risk.


Like PRI policies, most IIAs protect investors against expropriation, currency inconvertibility and political violence, but the scope of the protection provided under IIAs is often wider. In addition, a valuable guarantee available under IIAs, which is not found in any PRI policies, is the host state's promise to treat foreign investment in a 'fair and equitable manner'. Indeed, claims for breaches of the FET standard have become the most commonly brought claims in arbitrations under IIAs. This is primarily because clauses containing the FET standard are typically broadly worded and, therefore, permit creative (and often very expansive) interpretations.

However, PRI is not available for breaches of the FET standard – which makes commercial sense. An insurance provider would not want to put in its policy vague standards of international protection that are subject to substantive interpretative ambiguity. Nevertheless, despite the absence of the FET standard, PRI policies may provide the same level of protection as IIAs in certain cases. A good example is CMS v. Argentina, in which an International Centre for Settlement of Investment Disputes (ICSID) award on merits was published just three weeks before OPIC's claim determination.16 OPIC and the treaty tribunal reached different conclusions as to whether an indirect expropriation had taken place. OPIC found that there had been expropriation. However, the treaty tribunal found that no expropriation had taken place but that Argentina had breached the FET clause of the treaty.17

iv Limiting or avoiding a claim


Exclusion clauses in a PRI policy prescribe circumstances in which an insurer may be exculpated of liability, on account of either the behaviour of the insured or the losses arising as a result of circumstances specifically excluded from coverage. For example, many PRI policies require that the insurance provider is given notice of potential losses and take all reasonable steps to avert losses from political risks.


Limited exceptions are available under IIAs for states to avoid or defend against allegations of treaty breaches. Barring any specific treaty exclusions, the defence most commonly invoked by states' investor-state arbitrations is that of 'necessity'; however, the scope of that defence is so narrow that it is seldom successful.

v Restrictions on the amount and duration of insurance


PRI policies often impose a number of restrictions on the amount or duration of the insurance provided. An investor's loss will be compensated by PRI only to the extent of the policy limits purchased. This may be further limited to coverage for only a portion of the loss. For example, coverage under PRI may be limited to just 90 per cent of the value investment, which would leave the investor to bear a proportion of the loss. By requiring the insured to bear part of the loss, the insurer aims to align the interests of the insured with those of the insurer and avoid irresponsible behaviour on the part of the insured.18 OPIC, for instance, requires the investor to pay the first 10 per cent of the book value of the expropriated property, and would only cover the remaining 90 per cent.19 MIGA insurance policies similarly require a 10 per cent deductible.20

With respect to duration, public and inter-governmental PRI providers offer medium-term as well as long-term coverage. Private providers ordinarily cover risks for a shorter term, with options of annual renewals (with revisions to premium, if necessary).21


An investor bringing a claim under an IIA may seek full compensation for all losses (direct and indirect, material and non-material) it has suffered. With respect to duration, IIAs, once in force, remain so unless terminated by one of the countries that are party to the agreement. IIAs are typically in force for a long time. Even if terminated, IIAs often contain a 'sunset clause', which extends the guarantees to covered investments for between 10 and 15 years following the termination of the IIA.

vi Costs


PRI coverage comes at a cost to the investor in the form of insurance premiums. PRI obtained from public and inter-governmental providers is available at lower and more constant premiums, determined case by case. For example, OPIC determines a premium depending on the risk profile of the project, assessed on the basis of factors such as location, industry, etc. On the other hand, private insurance premium levels can fluctuate widely based on the nature of the project.


Protection under IIAs, having been negotiated between states, is free.

IV Indemnification and recovery processes

Generally, the claims indemnification and recovery process for all national insurance providers works similarly. By way of illustration, the steps involved in the OPIC claims recovery process are set out below for guidance:

  1. an insured investor suffers a loss;
  2. the insured investor submits a claim before OPIC;
  3. the insurer investigates it and attempts to facilitate a settlement between the investor and the host state;
  4. if attempts towards settlement fail, OPIC carries out an internal claim determination process;
  5. OPIC either pays the investor or denies the claim; in either case, a formal determination is made. These decisions are now publicly available and are an important source of jurisprudence, which will have a significant effect on future claims determinations, as well as on arbitral jurisprudence regarding government actions alleged to be in violation of investment protections under IIAs;22
  6. if the claim is denied, the investor can seek formal review of the insurer's decision by bringing a claim against the insurer in local courts or by seeking arbitration (depending on the wording of the policy); and
  7. once the claim is paid, the insurer is subrogated to the investor's rights in the investment. The insurer may then assert those rights through negotiation with the host state, or through mechanisms originally available to the investor, such as binding arbitration under the investment contract or under a BIT.23

This is similar to the process for obtaining compensation under an IIA. Under an IIA, the investor would first seek to resolve the dispute through negotiations with the host state (the 'cooling off' period). If negotiations are unsuccessful, the investor can bring its claim before an investor-state tribunal. The tribunal will apply the legal standards of the treaty to the factual evidence to determine whether there has been a violation of the IIA and, if so, the amount of compensation owed to the investor.

There are two important differences, however. First, an investor-state arbitration typically takes longer, and costs substantially more, than a claim before OPIC. Second, at the end of an investor-state arbitration, the investor receives an award, which has to be enforced. The tribunal cannot compel the state to pay. It is possible, therefore, that, despite receiving a favourable award, the investor may never receive any compensation. Instead, such an award may often only be realised through expensive and uncertain judicial enforcement proceedings.

By contrast, a PRI policy is effectively 'a promise to pay money to the insured investor if certain conditions are met'.24 Therefore, as long as OPIC has the funds, which is likely to be the case given that it is supported by the US government, the insured investor will get paid.25

V Insurer's rights of subrogation

Subrogation is the legal medium to transfer the rights of a creditor to a third party who has paid a debtor's debts to the creditor. Subrogation, therefore, allows an insurer to 'step into the shoes' of the insured after indemnifying the insured for its losses. The doctrine of subrogation is a domestic law concept, which is not found in any formal sources of international law.26 That said, the doctrine of subrogation has been discussed in the decisions of a few international tribunals, such as the decision by the International Court of Justice in Israel v. Bulgaria and the ICSID Award in Hochtief v. Argentina.27

Subrogation clauses are found in a majority of IIAs. Although, on their face, all treaties appear to provide for the same subrogation rights, there are real differences that can have a determinative effect on a claim brought by an insurer. The two main categories where one can draw distinctions between subrogation provisions found in IIAs are the identity of the insurer and the scope of coverage.

i Identity of the insurer

Subrogation clauses typically refer to two different entities as potential insurers: (1) the home state of the investor (i.e., the contracting party); and (2) the home state and its designated agencies. Private and multilateral insurers are generally excluded and, therefore, cannot take advantage of the treaties' subrogation clauses.

As to the first sub-category – where reference is made only to the home state – several treaties provide that subrogation rights belong to the contracting party that indemnifies the investor when an insured event occurs.28 The second sub-category – where reference is made to the home state and its designated agencies – is effectively the same as the first sub-category. That is so because 'designated agencies' are likely to be state-owned political risk insurance providers, who, by virtue of being organs of the home state, are in any event captured by the term 'contracting party'. Nevertheless, none of the surveyed treaties explains what the term 'designated' means.29

ii Scope of coverage

Here, IIAs differ in two principal respects. First, they differ based on the type of insurance product covered by the treaty. The wording used in the subrogation clauses of BITs tends to vary between whether an 'indemnity', a 'guarantee' or simply 'insurance' is being provided. None of the treaties, however, explains the difference between these terms. In the absence of any guidance in the treaty language or under international law generally, the answer should depend on either the law applicable to the insurance policy or the law of the home state (i.e., the state in which the insurer is incorporated).

The second notable difference in the scope of coverage is with respect to the type of risk to which subrogation rights apply. Certain treaties specifically provide that treaty rights apply only where the insurer has provided insurance against 'non-commercial risks', which is another way of referring to PRI.30 The majority of BITs, however, do not limit the scope of coverage in this way – that is, they do not state that the insurance contract should cover a certain type of risk. In such cases, arguably, subrogation rights apply even where the insurer extends coverage against commercial risks (i.e., ordinary business risks, as opposed to political risks). In practice, however, that is unlikely to be the case because (1) most treaties limit subrogation rights to state-owned insurers, which generally only provide coverage against political risks, and (2) substantive protections contained in IIAs are relevant only to political risks; therefore, even if a commercial insurer falls within the scope of the treaty's subrogation clause, the treaty's substantive protections are unlikely to be of much use to that insurer.

VI Should PRI payment be deducted from an arbitral award?

An interesting question that arises when an insured claimant is pursuing a claim under an IIA is whether payment received from an insurer under a PRI policy should be deducted from compensation awarded for losses arising as a result of breaches of an IIA. To date, this issue has been addressed by at least two investor-state tribunals in different ways. In Hochtief v. Argentina, the claimant had received payment from a public PRI provider for losses arising as a result of political risks. The grounds for requesting compensation under those guarantees were the same as the grounds relied on by the claimant in the arbitration.

Argentina contended that the amount received as insurance should be deducted from the total damages payable by them. However, the tribunal found that the insurance payment should not be deducted because it was:

a benefit which Claimant arranged on its own behalf, and for which it paid. It does not reduce the losses caused by Respondent's actions in breach of the BIT: it is an arrangement that had been made by Claimant with a third party in order to provide a hedge against potential losses.31

The tribunal went a step further to find that it did not consider that:

any principle of international law requires that such an arrangement, to which Respondent was not a party, should reduce Respondent's liability. It may be that under such insurance policies the protected investors are obliged to hand over to the insurer all or part of any sums recovered as damages: but that is a matter of private contract, into which the Tribunal has no cause to inquire.32

The tribunal in Ickale Insaat Ltd v. Turkmenistan came to a completely different conclusion and deducted payment recovered (or recoverable) from insurance in its calculation of compensation. That said, there is no publicly available record of detailed submissions, and it may have been that the claimant did not contest the deduction.33

Most recently, the issue has been brought before the tribunal in Glencore Finance Bermuda v. Bolivia.34 The award in the proceedings is still awaited.

vii Conclusion

PRI and IIAs are separate tools available to foreign investors to mitigate political risk. However, they differ in very material respects. First, PRI policies are expensive and require payment of substantial premiums, whereas IIA protections are free. Second, IIAs and PRI schemes do not cover the same risks and, even where they do cover similar risks, the extent of protection differs (for example, PRI schemes do not protect against the risk adverse regulatory changes; however, under the FET standard, IIAs do require states to maintain a predictable and transparent regulatory framework). The third critical difference between PRI policies and IIAs is in respect of the compensation structure. PRI policies contain various limitations on the amount of compensation that can be ordered, including, for example, an upper limit based on the 'insured amount' and a requirement for 'self-insurance' (usually around 10 per cent); no such restrictions appear in IIAs.

Given the availability of the two risk management tools, sophisticated investors should consult their advisers and determine how to integrate optimal protections for their investments. Proper analysis of the applicable IIA at the time of investment may help to identify the ways in which a prospective investment remains unprotected. A targeted PRI may then be negotiated to fill the gaps in coverage.


1 Rishab Gupta is a partner and Niyati Gandhi is a senior associate at Shardul Amarchand Mangaldas & Co.

2 World Bank Group, Multilateral Investment Guarantee Agency (MIGA), 'World Investment and Political Risk 2011', at 21, available at (last accessed 23 Mar. 2022).

3 Berne Union and International Credit Insurance and Surety Association, Press release, '2019 State of the Industry Survey', available at (last accessed 23 Mar. 2022).

4 Hannah Mayer, 'Political Risk Insurance and its Effectiveness in Supporting Private Sector Investment in Fragile States', available at (last accessed 23 Mar. 2022).

5 K Hamdani, E Liebers and G Zanjani, 'An Overview of Political Risk Insurance', Federal Reserve Bank of New York (2005), available at (last accessed 23 Mar. 2022).

6 P Protopsaltis, 'Investment Guaranteed and Political Risk Insurance' in Research Handbook on Foreign Direct Investment (eds M Krajewski, R Hoffman, 2019).

7 Rishab Gupta, 'The Relationship Between Political Risk Insurance Policies and International Investment Agreements' (2017), Chapter 2 (thesis available on file with author).

8 Overseas Private Investment Corporation Handbook (2015), p. 13.

9 Kathryn Gordon, 'Investment Guarantees and Political Risk Insurance: Institutions, Incentives and Development' in OECD Investment Policy Perspectives (2008), available at (last accessed 23 Mar. 2022).

10 Convention Establishing the Multilateral Investment Guarantee Agency, Article 13(a).

11 PwC/ Euler Hermes requires that the host state must be able to offer adequate legal protection for the investment. See MD Rowat, 'Multilateral Approaches to Improving Investment Climate of Developing Countries: The Cases of ICSID and MIGA', 33 Harvard International Law Journal 103, 140–43 (1992).

12 Congressional statement of purpose; creation and functions of Corporation, 22 USC Section 2191.

13 Both OPIC and MIGA conduct an integrity risk assessment – see Kathryn Gordon (op. cit. note 9, above). See, also, MIGA, 'Providing Political Risk Insurance and Investment Guarantee Solutions', available at (last accessed 23 Mar. 2022).

14 MIGA Convention, Article 14.

15 ibid., see footnote 11 Article 11(a)(iii); Operational Regulations, paras 1.42–1.45.

16 CMS Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award (12 May 2005).

17 ibid., 263, 302–03.

18 Kathryn Gordon (op. cit. note 9, above).

19 OPIC, Insurance Contract Form, 51 FR 3438-03, Section 9.01(3).

20 MIGA Operational Regulations, see footnote 28, Section 2.09.

21 A Berlin, 'Managing Political Risk in the Oil and Gas Industries', 1 Transnational Dispute Management 1 (Feb. 2004).

22 Mark Kantor, Karl Sauvan and Michael Nolan (eds), Reports of Overseas Private Investment Corporation Determinations, 724 (Oxford University Press, 2011).

23 For example, investments of GE, Bechtel and affiliates in relation to the Dabhol Power Project were insured by OPIC. When the project fell through, OPIC was ordered by an American Arbitration Association arbitration tribunal to pay about US$110 million to Enron, Bechtel, General Electric and Bank of America in risk insurance for the Dabhol project. Thereafter, the US government brought a claim against India in a state-to-state arbitration to recover this payment.

24 Mark Kantor, 'Comparing Political Risk Insurance and Investment Treaty Arbitration', 12 Transnational Dispute Management 5 (2015) at p. 456.

25 Rishab Gupta, The Relationship Between Political Risk Insurance Policies and International Investment Agreements (2017) (thesis available on file with author).

26 ibid., at p. 9.

27 Aerial Incident of 27 July 1955 (Israel v. Bulgaria) Preliminary Objections, Judgment, [1959] ICJ Rep 127; Hochtief v. Argentina, ICSID Case No. ARB/07/31 (2015).

28 See, e.g., German Model BIT (2008), Article 6.

29 See, e.g., UK Model BIT (2008), Article 10.

30 See, e.g., India Model BIT (2015), Article 8.

31 Hochtief v. Argentina (ICSID Case No. ARB/07/31) Decision on Liability dated 29 December 2014, para. 309.

32 id.

33 Ickale Insaat Ltd Sirketi v. Turkmenistan (ICSID Case No. ARB/10/24) Award dated 8 March 2016.

34 Glencore Finance (Bermuda) Limited v. Plurinational State of Bolivia, PCA Case No. 2016-39, Respondent's Preliminary Objections, Statement of Defence, and Reply on Bifurcation (English), 18 December 2017.

The Law Reviews content