Borrower’s Bankruptcy Petition Triggers Bankruptcy Exclusion of Lender’s Political Risk Policy

Applying New York law, a New York state intermediate appellate court has held that the bankruptcy exclusion of a lender’s political risk insurance policy barred coverage for a claim following a borrower’s bankruptcy petition. CT Investment Mgmt. Co., LLC v. Chartis Spec. Ins. Co., 2015 WL 2184309 (N.Y. App. Div. May 12, 2015). The court also concluded that a foreign government’s stay of loan payments and money transfers following the borrower’s bankruptcy petition did not trigger the policy’s coverage for certain unlawful or prohibitory acts of a foreign government.

An entity agreed to lend $103 million to Mexican companies for financing timeshares at resort properties in Mexico. One of the borrowers subsequently filed a bankruptcy petition, and a Mexican court stayed all loan payments and money transfers by the borrower. The lender sought coverage for its loss under its political risk policy, which provided coverage for losses caused by expropriatory acts by a foreign government and losses stemming from frozen currency transfers or currency conversions. The policy contained an exclusion for losses “caused by or resulting from . . . insolvency, bankruptcy or financial default.” The lender’s insurer denied coverage based on the bankruptcy exclusion.

The court agreed with the insurer, holding that the bankruptcy exclusion precludes coverage for the lender’s claim. The lender argued that the term “bankruptcy” refers only to a final adjudication liquidating or reorganizing an entity under the Bankruptcy Code. The court concluded that the lender’s definition was too narrow, stating instead that “bankruptcy” is generally understood to include being under the judicial protection of a bankruptcy court. Here, the court held, the borrower’s bankruptcy petition triggered the exclusion during the reorganization or liquidation process.

The court also held that, even if the exclusion did not apply, the claim did not trigger the policy’s coverage for expropriatory acts or currency events. The policy defined “expropriatory acts” in relevant part as certain acts of foreign governments that violate international law or include a material alteration of local law to permit the expropriatory act. The court held that the Mexican court’s stay of loan payments and money transfers was not an alteration of Mexican law. Additionally, the policy’s currency clause affords coverage for losses caused by prohibitions on transfers of an “amount” of currency. The court held that the Mexican court did not impose such limitations, but instead simply put restrictions on certain accounts surrounding the loan transaction.