Contract Frustration Insurance

In an ever-changing global marketplace, territories can appear stable one day and then unexpectedly be faced with political tension. Political or economic instability is unpredictable, and we have seen an increase in this in recent years.

Often the most attractive growth opportunities for banks, traders, corporates, and investors are in territories where political and economic instability is less foreseeable.

When contracting with governments ‘in emerging markets’ - whether in the form of a payment obligation for goods/services provided, reimbursement of a prepayment or the repayment of a loan/honoring of another financial instrument, there is a risk that they will fail to observe agreed contractual terms. This is also the case when contracting through state-owned counterparties.

Our diverse, global and creative team of specialists works as your agent and problem solver to overcome concerns or challenges, and delivers strategies to leverage your business volumes. We help protect our clients suffering from losses resulting from any combination of the risks mentioned above on individual or groups of transactions.

We believe insurance contributes to the growth of your business, as well as provides crucial protection in unstable circumstances.

We find opportunities where others see challenges. Our entrepreneurial culture and exclusive analytical ability helps clients to identify and realize opportunity in volatility.

WHAT WE DO

Contract frustration

We work with international insurance markets to offer contract frustration insurance to our global clients. This protects them against the non-payment or non-performance by the Government/state owned counterparty.

Cover is for non-payment for any reason and the policy is designed to respond where there has been a financial loss due to the counterparty failing to meet contractual obligations.

Contract frustration

Our clients find that contract frustration insurance can be a more cost effective means of risk distribution than other available options, and assists them with internal constraints on country and counterparty limits. Our global clients also benefit from reduced capital allocation, as policy wordings meet Basel II requirements.

Our creative and specialist team works extensively with clients to manage and mitigate state-owned counterparty risk. We ensure policy wordings are bespoke, tailored to each insured’s individual requirements and in accordance with the underlying contract.

FAQs

We recommend early engagement – even on a conceptual basis - because CPS insurances may often be a core component of securing trade or investment and the risks are transient. The more information the insured is able to share on the underlying transaction, the more meaningful the feedback we can deliver. When a deal is in its very early stages, we may provide general and/or theoretical feedback, as the risks will continue to evolve and change. This feedback can be used to help enhance deal structures and develop a risk management strategy.

We provide a proposal form to complete which we can then take to the market.

Alternatively, we may request:

  • Details of the counterparty
  • Contract terms and conditions
  • Information about insured goods/services
  • Law and jurisdiction
  • Payment terms
  • Experience you have had with the counterparty.

For short-term trade credit insurance multi-buyer policies, we ideally require a list of all customers, credit limit requirements, annual sales, and payment terms.

By the insurers? The policy is cancellable by the insurers ONLY for the non-payment of premium by the insured.

By the insured? This policy is cancellable by the insured by written notice to insurers. Any premium in excess of the minimum and deposit that is unearned but already received by insurers shall be returned to the insured. Similarly, any premium in excess of the minimum and deposit that is earned but not yet received by insurers shall be payable by the insured.

You must notify the insurer as soon as possible (within a maximum of 30 days) and provide proof of loss within 90 days. From day one to day 90, you must act to minimize the effect of the loss. After day 90, underwriters will deliberate the claim and may request further evidence and information. Typically, by day 165 after the loss has been reported underwriters make a final decision on the validity of the claim.

There are some standard template proof of loss forms which are usually included as an appendix in a policy. If your policy has one, it will need to be filled out and submitted to JLT.

If no proof of loss form is included, then the provision of proof of loss will need to include the following:

  • Written confirmation by the insured that there has been a default under the insured transaction (email is sufficient)
  • Proof that you have taken measures to retrieve the overdue payment from the obligor, such as copies of emails or letters chasing payment
  • Summary of action taken by the insured to pursue payment from obligor
  • Supporting documents – contracts, correspondence, etc. concerning activity to mitigate loss.

In addition to the above, there may further information relating to the insured transaction that is requested by underwriters in order to process the claim. This will vary depending on the specifics of the policy wording.

Key Stats

Contract frustration Contract frustration Contract frustration Contract frustration

WHY JLT

Contract frustration

Clients wishing to purchase insurance for contract frustration risks need to ensure that they select a broker with the relevant skills, knowledge, and expertise in their business sector. We believe insurance contributes to the growth of your business, as well as provides crucial protection in challenging circumstances.

We find opportunities where others see challenges. Our entrepreneurial culture and exclusive analytical ability helps clients to identify and realize opportunity in volatility.

Our multilingual team handles broking services for clients globally, including many of the world’s leading corporations, financial institutions, and government/multilateral agencies.

Contract frustration

JLT CPS clients benefit from:

  • Access to our diverse global team to deliver creative, comprehensive risk and insurance solutions which facilitate growth, reduce capital costs, improve returns, secure people and assets
  • Ideas and products that positively impact and inform risk mitigation and risk transfer strategies, as well as business decisions
  • Our ability to create capacity to underwrite new and evolving risks
  • Our proprietary analytics tools to ensure you have access to complete and accurate real-time information which enables fact based decision-making
  • Experienced resources available where you need them without geographical or financial barriers
  • Consistent engagement through advisory, structuring, placement and claims, drawing in management leverage and technical expertise to ensure that when losses do occur, we maximize recovery and minimize the impact on your operations

CASE STUDY

Contract Frustration Policy

A bank insured wanted to provide a loan to their client, a state-owned oil company, whose main activities are crude oil production, refining, and marketing of oil products. The loan was to be secured against future receivables (future production from existing assets) over a period of three years. Despite a good track record over many years, the insured faced internal aggregation restrictions to this client.

Given the existing relationship and pressure from competing banks, the insured was reluctant to decline the financing opportunity.

The insured needed a solution that would provide the bank’s credit committee comfort they could disburse the loan without incurring additional exposure to this client.

JLT’s team of specialists structured and negotiated a contract frustration insurance policy with leading AA rated insurers, allowing the insured to mitigate the risk of default for up to 95% of the value of the loan. The insured was therefore able to proceed – the insured’s client had no knowledge of any internal aggregation issue the bank was facing.

Claims capabilities

We deliver results. We deploy all resources to help resolve complex losses and deliver claim payments.

Our clients have confidence that the insurance policies we arrange are expertly structured and written by experienced insurers with strong track records in paying claims. Our approachable brokers work alongside our meticulous CPS claims professionals who specialize in handling, managing, and negotiating claims.

In the event of a loss, we provide:

  • A single point of contact with overall accountability for all losses wherever they occur
  • Our proactive claims handling process maximizes your recovery under your program, while minimizing the intrusion and interference to your on-going operations
  • We leverage our strong relationships with major leaders, loss adjusters, and lawyers to help expedite the claims process
  • Access to our sophisticated pre-loss consulting and effective post-loss recovery services

CPS ANALYTICS

Our starting point when structuring a new policy is to precisely understand your needs. Our brokers sit alongside a team of risk analysts drawn from security, technical and academic backgrounds.

Their substantial knowledge is utilised to help us understand the precise nature of your risk profile, thereby assisting us in determining the right insurance solution for your requirements.

Using ground-breaking modelling and rating tools, such as Sunstone and World Risk Review, our analysts can pinpoint risks, map exposures, analyse the risk triggers, and evaluate probable maximum loss (PML) ratios across a portfolio of assets.

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