Political Risk Insurance

Contract Frustration / Sovereign Non-Honoring of Payment Obligations

Exporters, contractors and financial institutions doing business with foreign governments are exposed to the risk of non-payment for goods delivered, services rendered or funds borrowed.

Contract Frustration coverage, also referred to as Sovereign Non-Honoring coverage, is a form of Political Risk Insurance that responds in the event a foreign government, or government-owned enterprise, fails to make payment or honor a guarantee in connection with a contract.

Coverage is typically available for policy periods of up to 10 years at 95% – 100% indemnity. Limits of liability can total as high as $100MM per insurer for any single risk.

How is the product used?

The coverage protects exporters, contractors and financial institutions with debts owed by sovereign and sub-sovereign entities including central governments, state-owned enterprises, government agencies and ministries.

Various structures where a government body is the obligor can be covered. Examples of product usages include:

  • Financial institution lending money to or confirming a letter of credit issued by a government-owned foreign bank.

  • Manufacturer of farming equipment selling to a ministry of agriculture on multiple-year payment terms.  The payment obligation may or may not carry the guarantee of the foreign ministry of finance.

  • Engineering and construction firm performing services for a government-owned project company with milestone payments to be made in arrears.  Construction firm may also opt to insure bid, advance payment and performance bonds against unfair calling by the government-owned project company.

Related Coverages

Exporters and contractors required to post bid, advance payment, performance, maintenance and warranty guarantees (typically in the form of standby letters of credit or surety bonds) can insure against the illegitimate calling of those bonds. Insurance is also available for legitimately called bonds, so long as the non-performance by the exporter or contractor was due to specified political perils.

Coverage is available on bonds issued in favor of both public and private sector entities.

Failure of a public sector counterparty to honor an arbitration award in favor of the insured. Coverage is also available for a private sector counterparty’s inability to honor an arbitration award due to adverse government action.
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