Originally from Enforcement of Arbitral Awards Against Sovereigns

Arbitration is a long process. The outcome may be unpredictable and enforcement can be difficult at best. Not only is an arbitral award inevitably subject to considerable collection risk, but host government actions or conditions in the host country can thwart or frustrate the arbitration process, resulting in no arbitral award at all.

A type of international investment insurance known as political risk insurance has long existed to compensate foreign investors for expropriations and similar actions of a host government. A wide variety of political risk insurance can be purchased to protect assets or other forms of investment, whether located in a single country or a portfolio of countries, from various specified risks, including expropriation, political violence and currency inconvertibility.

This chapter focuses on two lesser-known political risk insurance coverages—arbitral award default coverage and denial of justice coverage—that are specifically designed to facilitate collection of arbitral awards arising from contracts with a host government. Arbitral award default coverage is designed to compensate an investor if the host government breaches its contractual obligations, the parties go to arbitration, and the investor obtains an arbitral award that the government cannot or will not pay. Denial of justice coverage, often provided in tandem with arbitral award default coverage, is designed to compensate an investor if it cannot obtain an arbitral award in the first place because the government has thwarted or frustrated the arbitration process. In recent cases, host governments have obtained injunctions in local courts against arbitration proceedings, had fines levied against parties involved in arbitrations, and even detained arbitrators in an effort to derail the arbitration process.

Together these two specialized coverages provide strong protection for investors relying on arbitration as a dispute resolution mechanism in their contracts with the host government.

As discussed at the end of this chapter, some political risk insurers are even considering expanding arbitral award default coverage to cover awards resulting from international arbitrations arising from treaties, rather than only from direct agreements with the host government.