Insurance / 12 October 2018, 10:25am / Amanda Visser
JOHANNESBURG - Government's announcement that it will expropriate land without compensation has created interest among insurers to design products that will protect property owners against this new risk.
If expropriation without compensation is done “legally”, property owners will have no recourse in law, says Michael Chronis, an insurance lawyer at Norton Rose Fulbright.
However, he says it is early days, as the framework within which expropriation without compensation can be done legally remains unclear.
Once it is clear, insurers will take the legal framework, whatever it is, into account to determine the level of risk and at what price they would be willing to insure property owners.
“If a local insurer insures against the risk of expropriation without compensation, it can do so, but it cannot then claim compensation from the government unless the government breached its own laws,” Chronis says.
He says another problem is that if there is a bond on a property that is expropriated, the bond will still have to be repaid.
Chronis says a difficulty is when the property, such as a farm, is income producing, and the bond is repaid with the income generated from trading activities. This will have a ripple effect, placing banks under threat. “If this risk cannot be insured, then the banks and lenders will be at risk of losing their investments. Further, it will put a halt on lending to farmers.
“It is necessary to consider the knock-on effect on the economy of such an action, especially where the land expropriated is income-producing,” says Chronis.
He says there are several ramifications of the policy that no one has thought through.
Multinational companies have for years been insured against expropriation without compensation as a “political risk” in emerging economies such as South Africa, Chronis says. The companies generally enjoy treaty protection, where the expectations of the foreign country on the treatment of its companies in the emerging economy are set out. If any provision of the treaty is breached, the political risk insurer would pay the foreign company, step into its shoes and arbitrate in terms of the treaty against the country breaching the treaty.
In a South African context expropriation without compensation might be legal, but it might be a breach of such a treaty, leading to litigation.
“However, if you are a local company and the existing law has not been breached, you have no recovery action. Local insurers are talking about providing expropriation insurance, but they will probably look at where the biggest risks are.”
Depending on the level of risk, the premium might be extremely high, or the insurer might not insure the company or individual at all.
Although there is interest in writing “straight” insurance policies for expropriation without compensation, there is no cover against “creeping, or indirect” expropriation - hurdles placed in the path of business.