A state that stops paying or takes back an asset almost never stops cleanly. It proposes. A partial payment, a rescheduling, settlement in local currency, compensation in kind, a new contract replacing the old one, a lump sum against a waiver of all claims. Each of these offers calls for an answer, often within a short deadline, often before the insurer has taken a position on the notification. And each of those answers can alter the cover, in a direction the insured does not suspect at the moment of giving it.
The difficulty is that the insured carries, at that instant, two contractual duties pointing in opposite directions. The first is to mitigate the loss: accepting a reasonable partial payment reduces it, and that is exactly what the mitigation duty commands. The second is to preserve the insurer's recourse, into which it will be subrogated after paying: yet accepting a settlement, granting a release or novating the debt destroys precisely the rights the insurer would have exercised. The same act performs one duty and breaches the other. No wording resolves that dilemma on the merits, because it cannot be resolved in the abstract; wordings resolve it procedurally, by requiring the insurer's prior consent.
One must therefore understand what that prior consent clause actually does, and what it does not. It converts a substantive problem into a scheduling problem: the insured no longer has to decide alone whether the step is right, it has to ask. Its practical weakness lies there: a state's offers expire, sometimes in thirty days, while an insurer takes weeks to pronounce, longer still when a reinsurance panel must be consulted behind it. The clause therefore protects only those who use it early, which means flagging the offer as soon as it is received, as a circumstance, before even holding an opinion on it.
That leaves the question of silence, which is rarely addressed. If the insurer does not answer within the offer's deadline and the insured accepts, positions diverge: the insured will say it had no choice, the insurer that it did not consent. A few wordings provide that consent is deemed given after a certain period, most say nothing, and the insured then acts at its own risk. The right question when an offer arrives is therefore not whether it is a good one: it is how to build the proof of having asked in time, because that proof is what will separate the two versions.
Certain forms of settlement deserve particular suspicion, because they look like a solution and operate a substitution. A state offering to pay in blocked local currency, in government bonds, in commodities or in tax credits is offering something whose value depends precisely on the risk that was insured against. Accepting extinguishes a hard-currency claim, which was covered, and replaces it with an asset the policy does not cover. The claim does not disappear because it was refused: it disappears because the insured accepted an exchange, and it is very hard to argue afterward that one suffered a loss on an asset one chose to receive.
Novation produces the same effect by another route, and it is quieter still. A new contract replacing the old creates a new debt, dated after the loss, possibly outside the policy period, and not necessarily carrying the original's arbitration clause or its security. A rescheduling can therefore be worse than a default: the default triggers the cover, while the rescheduling moves the debt into a state the triggering event no longer fits. The insured believes it has improved its position because it holds a more recent promise, and it has in fact exchanged a covered claim for one that is not.
From all this follows a simple course of conduct, and it comes down to three steps that can be taken within days. Flag the offer to the insurer on receipt, as a circumstance, without waiting to hold a position. Request consent in writing, setting a deadline of your own that accounts for the state's, which documents diligence whatever silence comes back. And above all, answer the state by accepting the sums on account of the claim, expressly without release, without novation and without waiver of any right whatsoever. That sentence, written into the acceptance letter, banks what is offered while leaving the original claim and the recourse that follows it intact. It is the practical resolution of a dilemma the contract leaves whole.
A French group's subsidiary was taken over by the host state in March 2025; the net book value of the assets is 40 million euros and the claim was notified in April. Nine months later, the insurer is still investigating. In December 2025, the state proposes a compensation agreement: 40% of net book value, that is 16 million, payable over five years in government bonds denominated in local currency, in exchange for a full and final waiver of all claims relating to those assets. The offer expires in thirty days. The finance director wants to accept, on the grounds that something beats nothing and that the duty to mitigate requires it. Is he right?
No, and accepting on the terms proposed would very probably destroy the cover, for three cumulative reasons. The full and final waiver extinguishes exactly the rights into which the insurer was to be subrogated, which breaches the duty to preserve recourse and hands it grounds to decline the whole indemnity. The consideration consists of a state's bonds denominated in its own currency, that is an asset whose value depends on the very risk insured against: accepting it substitutes an uncovered asset for a covered claim. And the waiver closes any later arbitration route, including one a treaty might have opened. The finance director's reasoning rests on a misreading of the mitigation duty: it is assessed against reasonable conduct, and no reasonable insured surrenders a 40 million claim covered at 90% to obtain a doubtful 16 million promise spread over five years. What must be done within the thirty days comes down to three steps. Flag the offer to the insurer immediately, as a circumstance. Request its consent in writing, setting a deadline that accounts for the state's, which documents diligence even if silence persists. And answer the state by accepting payments on account of the claim, without release, without novation and without waiver, which banks what can be banked while extinguishing nothing. One calculation also needs redoing: the amount at stake is not 40% of book value, it is the present value of local currency bonds of a state that has just expropriated, which is in all likelihood a great deal lower.
- 01Faced with a state's offer, the duty to mitigate and the duty to preserve recourse command the same act in opposite directions.
- 02The prior consent clause does not resolve the merits, it shifts the question onto the calendar: it protects only those who flag the offer early.
- 03Settlement in local currency, bonds or in kind substitutes an uncovered asset for a covered claim, and the claim disappears by acceptance.
- 04A rescheduling can be worse than a default: the default triggers the cover, novation moves the debt outside the triggering event.
- 05Accepting sums on account, without release, without novation and without waiver, banks what is offered while leaving the claim and the recourse intact.