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What is a Political Risk Insurance Breach of Contract?

Is your business engaging in cross-border trade with a developing country? While emerging markets can offer companies unique opportunities, they aren’t without their risks. Companies with overseas operations in emerging markets are exposed to political violence and financial crisis that can leave their business at risk of asset and income loss. When you work in a country that is at risk of civil disturbances and government upheavals and instabilities, you must protect your company with political risk insurance. 

What is political risk insurance?

Political risk insurance is a type of investment insurance that protects a business from the risks associated with conducting operations in emerging markets. The company is protected while doing business either in the host country or with the host government. Companies are protected from loss of income when sovereign financial obligations aren’t met.  A company’s assets that are held overseas, such as construction equipment, are also covered from damage in the event of a war, rebellion, or other political violence. 

Where can a business get a political risk insurance policy?

A company can get a policy from private insurers and export credit agencies like Niche Trade Credit. It’s also possible to obtain coverage from a state-owned organisation, or an investment guarantee agency MIGA, or the World Bank Group. An investment insurance company and a multilateral investment guarantee agency can also provide businesses with political risk insurance policies. If you already have a political risk insurance policy or are looking into getting trade insurance coverage, you may be wondering when political risk insurance covers a breach of contract. 

What is a breach of contract?

A contractual breach can trigger your political risk insurance policy to cover losses that happen from a breach of contract. In most cases, companies will need to obtain compensation for damages that occur when the failure to honour sovereign financial obligations occurs. If a host government does not honour their financial commitments to your company, that is considered a breach of contract and is covered under political risk insurance. The insurance company will compensate the business for any losses incurred from this type of contract breach. 

Sometimes, contracts are breached in other ways that are also covered under political risks. For example, the host country could seize your property, otherwise known as expropriation. They could make your company’s operations illegal, or take other actions that violate the conditions of your original contract with them. This would also constitute a breach of contract and would be covered under your policy. But it’s critical for the health and viability of your organisation that you choose the correct political risk insurance for protection from breach of contract issues. 

When you choose a policy, you want to make sure that it covers your business against all types of political risk and foreign instabilities. For example:

  • Wars and acts of terrorism
  • Political violence and rebellions
  • Currency inconvertibility 
  • Expropriation
  • Breach of contract

Every business is different, and so is its liability and risk profile. When it comes to choosing the right political risk insurance for your company, you’ll need to speak to a political risk insurance professional.

An insurance professional can accurately assess the short, medium, and long-term risks your company faces in a developing nation. Also, insurance companies who specialise in underwriting political risk insurance policies will consult with insurance professionals who are experts at the political risks that can arise in specific nations. Contact the insurance experts at Niche TC today to learn more about how political risk insurance can protect your business. Call us today 02 9416 0670.

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