The industry has for some time been concerned about the impact of both the Foreign Corrupt Practices Act and anti-bribery provisions on cross-border insurance and reinsurance, both in relation to the obtaining of cover and also the operation of insurance policies.
Now the issue has come to prominence due to the filing of security actions in the US concerning the way construction contracts are entered into with Brazil’s biggest company, Petrobras. The allegations in the recent US class action show a scheme whereby repayments of bribe-related expenses were treated as costs under oil and gas infrastructure contracts, incorporated into asset values and then capitalised as part of those assets’ values on Petrobras’ balance sheet.
In Brazil itself, the investigations into how contracts are awarded and the performance of those contracts continue with the government having already dismissed senior management at Petrobras.
As Petrobras is involved in some of the major energy and construction programmes in Brazil, the Americas and elsewhere in the world, the repercussions are significant and include various construction projects slowing down or being shelved while being investigated.
The slowing down of payments and the provision of funds has an immediate effect on construction all risks and erection all risks contracts and delayed works clauses.
If any of the named insureds are under investigation or found to be involved in irregular payments or pricing, this will also have an impact on the contracts.
Depending on the nature of the allegations, the contract may become unenforceable in the hands of a given named insured.
D&O covers are of specific importance. There are a number of directors being investigated across the Brazilian construction industry and associated services, such as brokers and outside consultants. Most business is reinsured in the London market.
It appears that most companies being investigated are looking to resolve or avoid disputes with and subsequent penalties by the regulators by coming to arrangements with Comissão de Valores Mobiliários, Brazil’s securities commission, and other official bodies.
This is an issue which is already creating disputes in the insurance industry as penalties are explicitly excluded from insurance and reinsurance covers, which means they will not be reimbursed.
It follows that settlements avoiding penalties by the regulators are also not reimbursable, but this is not a widely accepted position locally, which has already led to requests for payment on this ground.
Other covers that may be affected are guarantees, sureties, performance bonds and essentially policies that ensure projects are done properly and on time.