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*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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"Emerging Markets and the International Investment Law and Policy Regime",
"Sustainable FDI for Sustainable Development", "Towards an Investment
Facilitation Framework: Why? What? When?", "Beware of FDI Statistics!",
"Towards an Indicative List of FDI Sustainability Characteristics", “The
Importance of Negotiating Good Contracts", "A New Challenge for Emerging
Markets: the Need to Develop an Outward FDI Policy”, "China Moves the G20
toward an International Investment Framework and Investment Facilitation", "The
Next Step in Governance: The Need for Global Micro-regulatory Frameworks",
and "The Evolving International Investment Law and Policy Regime: Ways
Forward" *are* available at
https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=2461782 and
http://www.works.bepress.com/karl_sauvant/.




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哥伦比亚大学国际直接投资展望中文版都可以在我们的网站查看:http://ccsi.columbia.edu/
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 223  April 9, 2018
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])
*Investment arbitration liability insurance: *
*a possible solution for concerns of a regulatory chill?*
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* <#m_6860282707952981519__edn1>
by
David Chriki** <#m_6860282707952981519__edn2>

Regulatory chill, one of the key tensions between international investment
agreements (IIAs) and democratic governance, could be dealt with by
creating liability insurance for governments. Regulatory chill occurs when
governments refrain from adopting certain measures out of fear that these
would trigger costly arbitration disputes with affected foreign investors.
Importantly, since IIAs often contain standards of treatment that create
uncertainties about how an arbitration panel would interpret and apply
them, governments might even refrain from measures that would have been
found to be consistent with their obligations if challenged in arbitration.
Though clarifying these standards could, theoretically, mitigate such
concerns, efforts to do so have had limited success and could reduce the
protection provided to investors.

Liability insurance for investor-state dispute settlements (ISDS) could
protect governments’ policy space while maintaining the protection granted
to foreign investors by IIAs. By offering governments partial
indemnification for their losses in arbitration, the risk of liability
would be alleviated.

Governments already use liability insurance in other contexts. As
government immunity from tort liability has diminished, local governments
across the US have begun purchasing liability insurance. This has allowed
them to avoid devastating consequences if found liable for significant
damages. Insurance is acquired from private carriers or by joining
municipal risk pools, commonly sponsored and administered by non-profit
organizations, which enable several municipalities to join together and pay
premiums in return for liability coverage.

Important examples of such insurance are errors and omissions (E&O)
policies that provide coverage for any act of neglect or breach of duty.
They may cover claims that arise from decisions made by elected or
appointed officials that allegedly cause loss of revenue or property
rights, including planning and zoning issues.[1]
<#m_6860282707952981519__edn3> Similar claims may constitute breaches of
IIA obligations to provide foreign investors fair and equitable treatment
and to refrain from indirect expropriation. ISDS liability insurance could
provide a sort of E&O insurance to participating governments in the event
of certain ISDS claims.

While insurance could mitigate concerns of a regulatory chill, concern with
moral hazard may limit its practicality. An insurer would worry that
insured governments might not act as carefully toward foreign investors as
they would in absence of insurance. In theory, the insurance could exclude
deliberate violations of IIAs. However, ascertaining intent is likely to be
impossible, and efforts to do so might undermine its purpose of enhancing
predictability. Therefore, the insurer would use objective criteria to
determine what types of measures should be covered by the policy. For
example, insurance could be limited to measures that promote clearly
defined public interests such as public health. In addition, experience
from E&O policies shows that there may be other ways of addressing moral
hazard concerns. First, insurance policies could have coverage limits and
large deductibles, thus exposing governments to a certain risk.
Additionally, premiums could be determined in relation to the level of care
countries adopt by considering losses in arbitration and could be linked to
the characteristics of each country's IIAs. These safeguards would reduce
concerns of moral hazard, though still limit the possible consequences of
each arbitration claim.

As E&O policies, such insurance could be provided either by private
carriers or by a risk pool established by multiple governments.
Theoretically, a risk pool could provide cheaper insurance since it does
not seek to make a profit. Although a competitive insurance market might
lower costs by pricing risk more effectively, an ISDS liability insurance
market may not be large enough to ensure competition.

A risk pool could operate similarly to regional disaster risk insurance
programs, such as the Caribbean Catastrophe Risk Insurance Facility
(CCRIF). The CCRIF allows participating countries to pool their specific
catastrophe risks into one diversified portfolio. Aside from an initial
funding from donors, it is based on premiums that are calculated according
to each country's risk profile that assesses the probability of a
catastrophe, based on its characteristics and historical events. Though the
CCRIF is not subject to moral hazard as an ISDS insurance pool, its general
structure could be similar: the ongoing activity could be funded by
premiums that are based on each country's ISDS experience, IIAs and desired
coverage.

Clearly, such a plan demands the participation of several countries. Though
large countries may prefer self-insurance, others may be inclined to
participate, especially once experiencing regulatory chill, even if an
actual arbitration claim was not filed. Nevertheless, if insurance rates
were high and equal for all countries, a country that does not foresee a
probable risk of arbitration might not be inclined to purchase such
insurance. The above guidelines would likely increase the number of
countries that might find such insurance attractive. It would allow them to
strive for more regulatory space and mitigation of risks of regulatory
chill caused by IIAs, while still promoting investment and protecting their
investors abroad.

Often, the choice between policy space and foreign investor protection
through IIAs is described as a zero-sum game. Introducing insurance into
this game may achieve the impossible: assuring policy space while not
reducing the protection granted to investors.

------------------------------
* <#m_6860282707952981519__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
series.*
* <#m_6860282707952981519__ednref2>* David Chriki (
[log in to unmask]) received his LLM and LLB from the Hebrew
University of Jerusalem. The author is very grateful to Ari Afilalo for his
valuable comments and suggestions. The author would also like to thank Tom
Baker, Alejandro Garro and Lou Wells for their helpful peer reviews.
[1] <#m_6860282707952981519__ednref3> See, Christopher Serkin, “Insuring
taking claims,” *Northwestern University Law Review*, vol. 111 (2016), pp.
75-137.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “David Chriki, ‘Investment arbitration liability
insurance: a possible solution for concerns of a regulatory chill?**’
Columbia FDI Perspectives, No. 223, April 9, 2018. Reprinted with
permission from the Columbia Center on Sustainable Investment (*
*www.ccsi.columbia.edu*
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=eb6b91220a&e=dd153d6a25>*).”
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Marion A. Creach, [log in to unmask]

*Most recent Columbia FDI Perspectives*
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   - No. 222, Makane Moïse Mbengue, “Facilitating investment for
   sustainable development: it matters for Africa,” March 26, 2018.
   - No. 221, Karl P. Sauvant and Howard Mann, “Sustainable FDI for
   sustainable development,” March 12, 2018.
   - No. 220, Roel Nieuwenkamp, “Responsible FDI is no longer optional,”
   February 26, 2018.

*All previous FDI Perspectives are available at *
*http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/*
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*. *

*Other relevant CCSI news and announcements*

   - *On* *April 23, 2018*, from 6-9pm at the Grand Hyatt in New York City,
   CCSI, the International Institute for Sustainable Development, and the
   International Institute for Environment and Development are organizing a
   session for interested members of the public (e.g., civil society,
   academia, practitioners) to present their views on the issues being
   discussed at UNCITRAL, namely:  the problems with ISDS, options for reform,
   and suggested directions for UNCITRAL. *If you are interested in
   presenting, or attending, please see our website here
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   for details. Space is limited and registration is required.*
   - *Save the Date: September 27-28, 2018:* This year, CCSI’s Annual
   Columbia International Investment Conference (CIIC) is on “Multinationals
   in the Age of Sustainable Development: New Thinking on the Role of
   International Investment Agreements.” The Conference, taking place
   alongside the 73rd Session of the UN General Assembly in New York, will
   build on a multi-year effort to identify guiding principles and practical
   approaches for aligning international investment treaties with the
   Sustainable Development Goals (SDGs). Additional information will be posted
   shortly on our website here
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   .
   - CCSI is still accepting applications for our upcoming executive
   training: Investment Treaties and Arbitration for Government Officials
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   (July 30-August 9, 2018). The program is designed to equip participants
   with the necessary skills, analytical tools, and frameworks to address
   relevant challenges and opportunities, and to encourage a rich dialogue
   about best practices from around the globe. *More information about the
   training, including the brochure and application, is available at the link
   above.*
   - CCSI has released its 2016-2017 Annual Report. *The full report is
   available here
   <https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=0c2daae49c&e=dd153d6a25>.*

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2018 Columbia Center on Sustainable Investment (CCSI), All
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