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Ever since Ukrainian President Viktor Yanukovych was ousted in February and the subsequent annexation of Crimea by Russia, tension remains elevated in Crimea and the surrounding regions of the Ukraine and Russia. In recent days, a number of foreign governments, including the United States, posted travel warnings advising their citizens to avoid travel to Ukraine. As of March 28, 2014, U.S. citizens are discouraged from traveling into the Ukraine. Visitors currently in the impacted zone should evacuate as soon as possible while it is safe to do so.

Crimea

Map from BBC News

While the situation is still fluid, companies with investments and/or holdings in the region must be aware of potential loss to assets through political violence and political risks should sanctions against Russia become broader. For political risks, there is no new capacity and existing policyholders are anxious to see if the policies they currently have will remain in force and respond, if needed. This is in addition to actions that could jeopardize the safety and security of a firm’s people, assets, and supply chains.

Financial Impact on Multinational Corporations

The conflict between the transitional government in Kiev and Russian president Vladimir Putin’s regime caused the aid packages by Russia to the Ukraine to be suspended. Consequently, this may lead ratings agencies to downgrade Ukraine’s country rating, making payment difficulties for creditors to Ukraine-based companies. At the moment, insurers are expecting further trade sanctions and waiting to be instructed to stop supporting trade with Russia.

Furthermore, the currency exchange rate has devalued approximately 30 percent since early January which may render the local policy to be inadequate. Therefore, risk managers may consider issuing the local policies in U.S. currency or similar hard currency.

Although risks related to political instability, or any situation, cannot be completely eliminated, multinational corporations can take steps to limit the potential effects on their operations. Businesses with operations in Ukraine, especially those in Crimea, should check their crisis response and insurance programs to ensure they sufficiently mitigate these effects.

Protecting People and Assets

Protecting human capital resources is crucial, and businesses are encouraged to take the following actions:

  • Take inventory of travel plans for all employees, and if there are employees currently in the Ukraine region, make travel arrangements to evacuate the area as soon as practicable.
  • Provide employees with regular updates about local government travel advisories.
  • Monitoring airlines’ flight schedules and statuses.

Communication is critical and companies should remain in contact with their employees often. It is possible that local governmental actions may disrupt power or damage communication networks. Therefore, it is important to engage employees by multiple means including email, mobile phone (both business and personal) and even through social media so employees can be reached through as many channels as possible.

Business Continuity and Crisis Management

During such a crisis as this, it is important to set up real-time crisis support committee, providing 24/7 expert guidance to manage your corporate response, protect brand and reputation, and work with the product risk and supply chain groups. Business continuity planning (BCP) and crisis management are crucial elements for all companies. Organizations should identify their essential functions and assess the potential impact of unrest, taking into consideration customers, employees, and other key stakeholders.

Insurance Considerations

Before a loss, multinational organizations must consider the following questions:

  • Is coverage in each territory where we have operations in compliance with local insurance laws?
  • If a claim arises, will the loss be adjusted and paid directly to the local loss bearing entity or, alternatively, to the parent company?
  • Would my property policy respond if further sanctions are levied against Russia?

Answering these questions can help organizations understand how their claims will be handled and manage exposures related to income tax (imposed on claim proceeds received by the parent), premium tax, and regulatory compliance.

Most property policies exclude war and terrorism, and the wordings are broad enough that what is happening in the Ukraine/Crimea would fall under the War/Terrorism Exclusion. However, each situation has its own facts and circumstances, and deciding whether there is coverage or not must be addressed on the merits of the case. A thorough review of the applicable policy wordings is necessary, and organizations should clearly understand their policy limits and sublimits, deductibles, covered perils, exclusions, loss reporting requirements, and any other restrictions.

Furthermore, should Russia becomes fully sanctioned by the U.S. federal government, as defined by the Office of Foreign Assets Control (OFAC), insurance payments and all business transactions between the U.S. and Russia must cease immediately.

Claims Preparation and Filing

In the event of a loss, organizations should begin to gather data for a claim filing. This includes capturing potential loss information and additional costs associated with the claim, including temporary repairs, extra expenses, and business interruption loss of income costs. Businesses should record photographic and/or video evidence of damage and maintain open lines of communication between employees, insurers, and claims advisors to support policy loss mitigation and notification terms.

How Lockton Can Assist Our Clients

Please engage the International Resource Group, property specialists, tax and forensic accounting specialists, and claims experts to assist your clients relating to this situation.