Contract frustration insurance
A political risk cover that indemnifies an exporter or investor when a contract can no longer be performed because a public buyer defaults or a political event intervenes, such as war, embargo or license withdrawal.
Contract frustration insurance protects a company engaged in an international contract against the loss it suffers when that contract becomes impossible to perform for a political reason or because of a public counterparty. Two families of losses coexist. In the first, the buyer is a state, a local authority or a state-owned company that refuses to pay or perform, and the cover responds without any need to prove insolvency, since a sovereign cannot be compelled. In the second, the buyer may be private, but performance is prevented by a political event: war or unrest in the destination country, embargo, license withdrawal or refusal, change in law. Depending on the policy, the indemnity covers unpaid receivables, costs incurred and not recovered, or the loss on goods manufactured for the contract. The cover differs from trade credit insurance by its trigger, a sovereign act rather than a commercial default, and from investment insurance because it protects a contractual flow rather than an asset. It is widely written in the London market, which prices it country by country and counterparty by counterparty.
When the Libyan civil war broke out in February 2011, Turkish construction companies, whose ongoing projects for Libyan public owners were estimated at around fifteen billion dollars, had to evacuate their teams and halt work: the textbook situation in which contract frustration cover indemnifies unpaid progress billings and costs incurred.
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.