An expropriated investor often holds two remedies bearing on the same facts and unlike one another. The first is its policy, resting on a contract it signed and settling within a few quarters if the file holds. The second arises from a bilateral investment protection treaty concluded between its own state and the host state, to which it is not a party and from which it nonetheless derives a right of its own: that of bringing an international arbitral tribunal against a sovereign state, without going through its courts. That construction is singular in law, a private party acting directly against a state on the basis of an agreement between two states, and it has conditions the policy does not.
Three of those conditions decide the very existence of the remedy and are checked before any reasoning on the merits. The investor's nationality, which must belong to the state party to the treaty, which puts holding structures routed through a third country in issue and makes it decisive to know where the interest is held. The existence of a protected investment within the treaty's meaning, a narrower notion than it looks and one that sometimes excludes a mere receivable or a supply contract. And observance of a prior period, often six months of amicable negotiation, whose breach has already brought down entire cases on a procedural point.
Then comes the question that concerns our subject, the articulation between the two routes, and a badly formulated fear must first be set aside. Being indemnified by an insurer does not extinguish the treaty right: what happens is a transfer, the insurer taking the insured's place up to what it has paid, by subrogation or by express assignment according to the drafting. The remedy does not disappear, it changes holder. What disappears is the investor's ability to recover the same loss twice, which is the ordinary principle of indemnity and no peculiarity of the subject.
A serious problem nonetheless appears at that precise point, and it is what this module means to install. Standing before the arbitral tribunal turns on nationality, yet the subrogated insurer does not necessarily hold the one that opened the treaty. A Dutch investor insured by a carrier from a third country transmits to it a claim the treaty between its own country and the host state does not protect, and the remedy can empty itself by changing hands. Tribunals have adopted nuanced and not always converging solutions, some accepting that the subrogee exercises the right as it existed in the insured's hands, others not. The practical consequence is clear: the question is settled by drafting that lets the insured continue in its own name for the insurer's account, rather than by an outright assignment, and that is decided at inception.
The timetable creates a second difficulty, less legal and more concrete. The policy pays within a few quarters, the arbitration rules in five to twelve years. Throughout that period the indemnified insured no longer has a direct financial interest in the dispute and yet holds the evidence, the witnesses and the memory of the file. It is asked to cooperate under a clause it signed without thinking, and that cooperation costs executive time on a case that no longer earns it anything. It is an ordinary source of failure, and it is prevented by organising cooperation before payment rather than invoking it after.
One must then look at what happens when the award exceeds the indemnity paid, which occurs more often than supposed, an arbitral tribunal sometimes compensating going concern value where the policy took asset value. The surplus returns to the insured, after reimbursement of the insurer and of costs, in an order the contract fixes and few people read before needing it. That sharing must be written precisely, particularly the fate of interest, which over twelve years represents a considerable part of the total and is the subject of the bitterest disputes between an insured and its own insurer.
A final asymmetry deserves naming because it changes strategy. The insurer wants to recover and settle quickly; the insured, if it still operates in the region or hopes to return, often wants to spare the state. Both positions are legitimate and they diverge at the moment of settlement. Serious wordings designate in advance who conducts the proceedings and who decides whether to accept an offer, and the absence of that clause produces a lasting deadlock neither can break alone.
Three checks close this chapter, and all of them are made before signature. Check, before placing cover, that the holding structure actually opens a treaty, which is a question of law rather than of insurance but decides the value of the remedy. Have the transmission mechanism drafted so that the remedy survives the change of holder. Organise cooperation and the sharing of any surplus while interests are still aligned, that is before any loss. Those are three clauses, they are negotiated in one meeting, and they are worth more than most discussions about the guaranteed amount.
A Dutch group holds, through a Luxembourg holding company, an 80 per cent interest in a gas distribution company in a Central Asian country. A bilateral treaty protects Dutch investments in that country; none exists between Luxembourg and it. In May 2023 a decree transfers the distribution licence to a state owned enterprise. The insurer, a Bermudian company, pays 95 million euros in February 2024 under a policy providing for assignment to the insurer of all rights and actions relating to the loss. In November 2024 the insurer commences arbitration under the Dutch treaty and claims 160 million. The state objects to admissibility. What will it raise, and what should have been done?
Two objections present themselves and they are not of equal weight; they must be taken in the order a tribunal will take them. The first, and it is close to fatal here, concerns the holding structure: the interest is held by a Luxembourg holding company, and no treaty binds Luxembourg to the host state. The investor protected under the Dutch treaty is therefore not the one holding the asset, and that question arose before insurance ever entered; it belonged to the group's legal structuring and not to its cover. It is the heaviest and least visible defect, because it never shows while nothing happens. The second objection concerns the assignment: the policy assigns to the insurer all rights and actions, and the insurer is Bermudian. Even assuming the Dutch chain intact, the state will argue that the treaty right of action attaches to its holder's nationality and does not pass to a carrier of a third country. Tribunals do not converge on this point, some accepting that the subrogee exercises the right as it stood in the insured's hands, but a serious objection and several years of uncertainty are already a considerable cost. What should have been done comes down to two gestures, both before any loss and both inexpensive. Check, before placing cover, that the holding structure actually opens a treaty, a question of law on which the value of the remedy depends and therefore the value of the subrogation the insurer believes it is buying. And have the transmission clause drafted so that the insured continues in its own name for the insurer's account, rather than assigning the actions themselves: that form preserves the nationality that opens the treaty while securing the remittance, and it costs nothing more than an outright assignment at the moment it is negotiated. It remains to say that this file is not lost for the insured itself, whose duty of cooperation becomes the central question here, and which has an interest in the claim succeeding since the amount sought exceeds the indemnity received by 65 million.
- 01The treaty opens a right of the investor's own against a state, subject to three conditions of existence: nationality, protected investment, prior negotiation period.
- 02Payment does not extinguish the remedy, it changes its holder: what disappears is double recovery, not the right.
- 03Standing turns on nationality, and a subrogated insurer from a third country can empty the remedy by receiving it: drafting must let the insured continue for its account.
- 04The indemnified insured holds the evidence and no longer has an interest in the dispute: cooperation is organised before payment, never after.
- 05The sharing of any surplus and the fate of ten years of interest are drafted in advance, as is the designation of who decides whether to accept a settlement offer.