MIGA Unveils Simpler Guarantee Contract

December 1, 2003—MIGA officially launched its new contract of guarantee in December 2003, responding to client requests for a simpler and more efficient document. The new contract will be used for all definitive guarantee applications received beginning January 1, 2004.

“We changed the contract because some clients were finding it hard to interpret,” says Srilal Perera, chief counsel, who oversaw the drafting of the new contract. “The old contract was the same one used since the agency’s inception in 1988. It was a complex document that required a lot of patience to understand the scope of coverage and the consequences of the coverages. There were an inordinate number of cross-references, which resulted in multiple complications.”

The biggest difference in the new contract is its simplified language. “It’s easier to understand now,” says Perera. “The need for interpretation and cross-referencing will be minimized.” Because it’s simpler, MIGA is expecting a shorter turnaround time for executing policies, and in general, less headaches for clients. The contract does not depart in any way from the agency’s convention or operational regulations requirements.

The contract was influenced, in the early design stage, by current capital market operations, as well as project and structured finance deals,” adds Peter Jones, manager for Operational Strategy in MIGA’s Underwriting Department. The document also benefited from investor and insurer feedback, he says.

Another bonus is the simplification of terms. Coverage elections used to be considered complex by investors, but the new contract has done away with the different categorizations of guarantee amount, such as maximum aggregate liability, maximum amount of guarantee, current amount of guarantee, and standby amount of guarantee. Now there is just one amount of guarantee coverage, plus a standby option for amounts of investments that are committed but not yet disbursed.

Waiting periods for payment of claims have also been reduced for all of the coverages offered: for expropriation claims, it has been reduced from 365 days to 180 days; for transfer restriction, from 90 to 60 days; for war and civil disturbance, from 365 to 180; and for breach of contract claims, from 365 to 180 days. However, contracts retain the flexibility for waiting periods to be increased depending on the risk profile of each project.

In addition, claims adjudication periods are now shorter. MIGA will let investors know whether a claim will be paid within 30 days. Investors can also now file a claim during the waiting period, although the claim becomes final only when all required evidence is submitted.

The new language clearly spells out what evidence the guarantee holder needs to provide in the case of a dispute, as well as what is expected after a claim has been filed and approved.

“We modeled the simplified contract on our inherent strength—that is, our ability to prevent investment disputes from becoming claims,” says Perera. “This strength derives from the fact that our shareholders include most countries in the world, which enables us to provide an umbrella of deterrence against government actions that could disrupt investments. We are also able to influence the resolution of potential disputes. At the same time, the new contract has strengthened our guarantee holders’ obligations, requiring them to give information early on about the possibility of a potential loss. Tightening this obligation gives us the information we need to help prevent a claim.”