OPIC has several insurance products offering coverages tailored to meet the special insurance needs associated with certain types of international investments.
Contractors and Exporters
OPIC’s insurance for U.S. contractors and exporters insures against:
- wrongful calling of bid, performance or advance payment guaranties, customs bonds, and other guaranties
- loss of physical assets and bank accounts due to confiscation or political violence and inconvertibility of proceeds from the sale of equipment used at the site
- losses due to certain breaches by the foreign buyer of the contractual disputes resolution procedure
This insurance can protect U.S. companies acting as contractors in international construction, sales or service contracts, and U.S. exporters of heavy machinery, turbines, computers, medical equipment and other goods. Typically, coverage is issued when the U.S. company has a contract with a foreign government or government-owned corporation.
For example, disputes coverage provides protection in the event of contractual disputes that may arise during the performance of a contract. As a condition for compensation, a U.S. contractor must invoke the dispute resolution mechanism in its contract with the foreign buyer, which is often a government ministry or a government owned corporation (a “public obligor”). Often the dispute resolution mechanism calls for international arbitration, and OPIC can insure against non-payment of an arbitral award. This coverage is often referred to as Arbitral Award Default insurance or “AAD.” OPIC can also consider denial of justice coverage to protect against host-country government interference with international arbitration.
Events of Compensation: OPIC will compensate the contractor if:
- the foreign buyer refuses to pay a judgment or an award in favor of the insured
- the foreign buyer’s inaction prevents the dispute resolution procedure from proceeding
- due to changed conditions in the project country, it is too dangerous or would be futile for the insured to pursue the agreed-upon procedure
In the first situation, OPIC compensation is based on the amount of the award. In the latter two cases, compensation is limited to the insured’s uncompensated cost of goods, services and materials provided pursuant to its contract with the buyer.
Requirements: Disputes coverage is only offered when a project has secure and adequate funding, commonly from an international development or export credit agency or an international rating agency “B-” or better rated obligor. As with performance and advance payment guaranties, disputes coverage is only available when the underlying contract contains an international dispute resolution procedure that, at the time insurance coverage is issued, is fair, impartial and expeditious, and leads to enforceable results.
Private Entities: If the insured’s contract is with a private, nongovernmental entity, OPIC will only compensate the insured if nonpayment or noncompliance with the dispute resolution procedure is directly caused by the host government.
Other coverages for Contractors and Exporters include:
U.S. contractors and exporters with physical assets overseas may insure project assets for the following risks:
Currency Inconvertibility. Local currency proceeds from the sale of insured property after job completion are covered against the risk that the currency will become inconvertible into U.S. dollars. Inconvertibility is offered only to the extent local currency is convertible, and dollars are transferable under host-country exchange regulations and practices in effect at the time the insurance is issued. Payments for work completed under the contract are not covered.
Confiscation. Physical assets and bank accounts of the insured in the host country in connection with a project are covered against the risk of confiscation by the host government.
Political Violence. Physical assets owned by the insured or for which the insured bears the risk of loss are covered against the risk of damage due to political violence.
Bid, Performance, Advance Payment and Other Guaranty Coverages
Bid, performance, advance payment and other guaranties issued on behalf of a U.S. exporter of goods or services, or a U.S. contractor in favor of a foreign government buyer, can be covered against the risk of a wrongful calling. The guaranties usually are in the form of irrevocable, on-demand, standby letters of credit. A wrongful calling is one not justified by the terms of the underlying contract, or the invitation for bids.
In the case of a bid guaranty, the insured may file a claim when it believes a wrongful calling has occurred and OPIC will then determine if the calling was, in fact, wrongful. With performance, advance payment and other guaranties, the insured must invoke the dispute resolution procedure in its contract with the foreign buyer before OPIC will pay compensation.
Events of Compensation: OPIC will compensate for wrongful calling of performance or advance payment guaranties if:
- the foreign buyer’s inaction prevents the dispute resolution procedure from proceeding
- the foreign buyer refuses to pay an award in favor of the insured
- the procedure yields an award in favor of the foreign buyer, and the award can be proven to have been obtained through fraud, corruption or duress, or, if there is a written record of the proceedings, the award is unsupported by substantial evidence in that record
- the decision maker fails to issue a determination within a reasonable period of time (not less than 36 months) despite the insured’s compliance with all of the procedure’s requirements
- due to changed conditions in the project country, it would be too dangerous or futile for the insured to pursue dispute settlement
Requirements: Coverage for wrongful calling of performance, advance payment and other guaranties is available only when the underlying contract contains a dispute resolution procedure that, at the time insurance coverage is issued, is fair, impartial and expeditious, and leads to enforceable results.
Exclusions: OPIC does not compensate the insured if the guaranty is drawn because the insured fails to perform its contractual obligations, or the insured provokes or agrees to the drawing.
Private Entities: Coverage is also available to insured investors who post guaranties in favor of private, non-governmental entities. In such cases, wrongful calling is defined as a drawing that is not justified by the terms of the contract, and is directly caused by the host government, or is followed by unlawful host-government action that thwarts the dispute resolution procedure.
Customs Bonds Coverage
Customs bonds are required when a foreign government wants assurances that a company will re-export machinery or equipment temporarily moved into the country, usually for the duration of a construction project or trade show, rather than selling it locally. Customs bonds replace customs duties and may be as much as 200 percent of the value of the equipment.
OPIC provides compensation for a loss resulting from a wrongful calling by a foreign government of a standby letter of credit issued as a customs bond. In the case of a claim, OPIC will determine if a calling is wrongful without requiring the insured to pursue dispute resolution procedures.
OPIC’s political risk insurance enables U.S. banks and other financial institutions to play an active role in financing projects in developing countries while managing the incremental cross-border exposure associated with these investments. A wide range of banking activities can be insured by OPIC, including:
- loans made or arranged by banks;
- debt-for-equity investments;
- commodity price or interest rate swaps; and gold loans.
For institutional lenders, currency inconvertibility insurance coverage pays compensation for defaults on scheduled payments that result from deterioration in the ability to convert these payments from local currency to dollars, or to transfer dollars outside the host country. In the case of expropriation or political violence, compensation generally is payable if the borrower defaults on a scheduled payment as a direct result of an expropriatory event, and the default lasts three months (or one month in the event of subsequent defaults caused by the same event).
Loans must have a tenor of at least three years. Coverage may be tailored to reflect the specific nature of the project.
In response to growing demand, especially for infrastructure projects, investors and their financial advisors have sought new sources of financing, and have turned to the bond capital markets to supplement traditional bank financing. Consequently, capital markets transactions, such as 144A bond issues, are playing an increasingly important role in financing projects in emerging markets. OPIC can provide inconvertibility and expropriation of funds coverage for capital markets transactions similar to the coverage provided under OPIC institutional lender’s coverage. The coverage may enable investors to mobilize capital markets funding for transactions where it was previously unavailable.
Non-Honoring of a Sovereign Guaranty
Since 2003, OPIC has been offering insurance coverage for U.S. lenders (bond capital markets and financial institution investors). The Non-Honoring of a Sovereign Guaranty (NHSG) coverage protects investors if a sovereign government fails to meet its contractual obligation for any reason to “honor” its contractual sovereign guaranty of a debt obligation. NHSG coverage is generally available in countries with a public rating of B/B+ or better. Transactions utilizing NHSG coverage receive the same credit rating as the U.S. Government. Eligible loans must meet all of OPIC’s policy criteria and generally have a tenor of ten or more years. A PowerPoint presentation on the product is available upon request.
OPIC’s expanded use of reinsurance offers additional opportunity to support foreign investment, economic growth of developing countries and enhancement of the financial strength and market outreach of the insurance sector both in the US and internationally. To increase underwriting capacity and support development in countries where investors have difficulty obtaining political risk insurance, OPIC can reinsure licensed U.S. and international insurance companies. Reinsurance must meet all of OPIC’s policy criteria and must have sufficient U.S. participation to meet OPIC’s statutory requirements. Reinsurance is done on a case-by-case basis. Please contact OPIC Insurance for a discussion of potential transactions.
Natural Resources (excluding oil and gas)
Mineral and other natural resource projects can be major contributors to economic development. To encourage such projects, OPIC may offer coverage tailored to the special needs of investors in this sector. Additionally, investors may also be insured against the unlawful withdrawal or breach of project contracts by the host government of mineral exploration and development rights, and other legal rights vital to the success of a particular project. Larger natural resource projects typically involve substantial risk-taking by project lenders, owners and others. Accordingly, OPIC typically offers coverage for equity, parent company and institutional loans, owners’ guaranties of loans (including completion guaranties), leases of equipment to project companies, and other exposures to these projects.
Cross-border leasing is another means of financing capital investments in many developing and emerging market countries. OPIC has insurance packages to cover both capital and operating leases. The insurance is available to U.S. investors leasing to private-sector entities. Transactions should have a tenor of three years or more.
Capital or financial leases are those where ownership of the asset is expected to be transferred to the lessee at the end of the lease. Under OPIC’s inconvertibility coverage, compensation is paid if defaults on lease payments are caused directly by deterioration in the conditions for conversion of local currency or transfer of dollars. In the case of expropriation or political violence, compensation is paid if one of these events directly causes a default on a lease payment.
Under operating leases in which the U.S. lessor expects to recover the leased assets when the lease expires, expropriation and political violence compensation is based on the value of the leased assets, including installation and transportation costs.
Under OPIC’s inconvertibility coverage, compensation is paid if defaults on lease payments are caused directly by deterioration in the conditions for conversion of local currency, or transfer of dollars. OPIC also provides coverage against unlawful host-government actions that prevent a lessor from enforcing its right to repossess, re-export or de-register leased equipment.
Oil and Gas
OPIC has comprehensive insurance products that cover petroleum exploration, development and production in developing countries. In addition to its standard political risk insurance, OPIC can provide the following enhanced coverages:
Expropriation coverage for oil and gas projects includes coverage for losses caused by material changes in project agreements unilaterally imposed by a host government. This includes abrogation, impairment, and repudiation or breach of concession agreements, production sharing agreements, service contracts, risk contracts, and other agreements between the U.S. investor or the foreign enterprise and the foreign government. Such actions must last for at least six months, and prevent the insured investor from effectively exercising its fundamental rights with respect to the project agreements (such as rights to take and export petroleum, or to be paid for it), and otherwise meet OPIC’s expropriation criteria. The coverage can also include compensation for confiscation of tangible assets and bank accounts. Compensation is based on the value of the insured investment, or, in the case of confiscation of specific assets, the book value of the confiscated assets. OPIC will not compensate for loss of reserves of any kind.
Interference with Operations
This coverage insures against cessation of operations lasting six months or more caused by political violence. The investor has the right, and OPIC may require the investor, to reacquire from OPIC its insured interests in the project if within five years the political violence has abated and the investor can resume operations.