Global trade, and indeed virtually all economic activity, is being very seriously disrupted by the Coronavirus crisis. Our experience from previous crises shows that credit and political risk insurers (“CPRI”) are likely to face a variety of claims from insureds whose counterparties have defaulted on contractual obligations in light of (a) collapsing commodity prices, (b) counterparty insolvency and/or other lack of funds, and (c) a variety of direct or indirect political interventions. This note discusses the implications on the insurance contract of the rescheduling of a debtor’s obligation to insured creditors, and the necessity of obtaining insurers’ consent.
Contract Frustration and Trade Credit Policies
Insurers offer a plethora of CPRI products, however Lloyd’s rules identify ‘Contract Frustration’ and ‘Trade Credit’ insurance, amongst others, and it is convenient to use those labels for this discussion.
Both types of policy provide indemnity to insureds for default under specified contracts for the sale, lease or supply of goods or services, or of finance agreements relating to the same. The payment obligations insured can be in the form of receipt of goods, services or other receivables. In other words, both are forms of credit insurance policy. Contract Frustration policies typically insure creditors against the risk of default by state or quasi state entities due to political violence or the actions or inactions of state entities, including prohibition on currency conversion or transfer and defaulting under state backed guarantees of state or private companies. Trade Credit policies insure creditors for loss against default by commercial counterparties, including on specific trade flows, bonds and project finance.
The insured lenders or creditors are mostly Western businesses lending to, or investing into emerging markets. Repayment is often expected to be made, directly or indirectly, by the sale of a commodity. When the price of the oil, coffee, copper or any other relevant commodity collapses then commercial entities cannot fulfil their contractual obligations to creditors. The price collapse can also cause tax receipts to dive which in turn leads to the default by states on their various contractual obligations or guarantees. The problem is particularly acute in emerging market economies whose governments are unlikely to prioritise paying foreign creditors over meeting immediate domestic needs. Both situations can lead to claims under CPRI policies.
Policies Insure Against Default on Specific Obligations
In terms of documentation, credit insurance policies nearly always insure against the risk of default of closely defined obligations under a particular contract. So, for example a supplier of oil plant and machinery (the insured creditor) agrees with its customer (the obligor) to accept payment in instalments of 18 months from its customer. It can buy insurance against the risk of non-payment or late payment of those particular instalments by the obligor.
In considering whether to accept the risk, and if so what the premium should be, the underwriters will consider the position generally, the creditworthiness of the obligor, and the contract between the insured creditor and the obligor, including the repayment schedule. If the risk is accepted, the policy will usually incorporate, expressly or by reference, a specific schedule of insured payments due from the obligor to the creditor insured, including due date and amounts.
In times of difficulty, contracting parties will often seek to renegotiate parts of their contract with each other, to allow the relationship to continue profitably, albeit on modified terms. For example, the creditor may be persuaded to reschedule payment due under the contract by postponing due dates, reducing instalments or granting other indulgences to their counterparty obligor.
Taking such steps may appear to be perfectly sensible to a creditor insured, but whilst it has the benefit of credit insurance it must be mindful of the need to consult with and obtain insurers’ consent to changes in the insured contract. A failure to do so could lead to insurers being discharged from liability.
Contractual Terms Prohibiting Material Change in Risk
Credit policies often contain express terms prohibiting insureds from altering the terms of the insured contract with its counterparty in any way and/or waiving or rescheduling payment obligations. Often the prohibition would be found in a ‘material change in risk’ warranty, but sometimes the clause is packaged in an exclusion or condition precedent.
Accordingly, where an insured creditor unilaterally agrees with its debtor to reschedule repayment obligations, or grants some other indulgence, insurers can seek to rely upon breach of that clause as a defence to a claim, if they so wish.
Policy language can also set out the kinds of changes that can be made to the underlying contract without an insurer’s express consent. For example, sometimes policies recognise that insureds participating in syndicated loan agreements may be bound to agree to majority decisions of lenders, and that insurers’ consent is deemed granted, within certain limits.
Common Law Prohibition on Material Change in Risk
What is sometimes overlooked is that, even where there is no express no material change clause in the policy, a rescheduling of a debtor’s obligation under an insured contract (or other variation) can also discharge credit insurers from liability entirely unless the insurer has consented to the change.
It is a general rule of insurance law that insurers are not liable where circumstances have so changed that the new situation is not something which they originally agreed to cover.  In the case of credit insurance the rule is applied particularly strictly, in favour of insurers. As one leading textbook says, in the case of credit insurance, “any material alteration of the underlying contract between the insured and his debtor may have a serious effect on the insurer’s obligation. In these circumstances it seems only right that the insurer should be entitled to deny liability in the same way that a guarantor can claim he is discharged from his guarantee.”
Hadenfayre v British National Insurance Insurance Society  concerned a credit policy by which insurers had agreed to insure Hadenfayre against the risk of default in payment by Modern Homes, to whom they had sold land. Modern Homes had agreed payments of £6000 per week and insurers accepted the risk on that basis. Later, the insured and Modern Homes agreed that payment could be made in 154 instalments of only £3000 per week. The total sum repayable under the rescheduled arrangement would be much greater that under the original one, in light of interest charges.
Modern Homes became insolvent and stopped paying instalments. Hadenfayre claimed under its credit policy for the shortfall. Insurers denied liability on the ground that the reduction in instalments was a material change in risk, which would discharge an insurer from liability.
The defendant insurers argued that ‘just as in a marine policy the Insurer is discharged in the event of a change in the voyage, unless there is a held covered clause, so insurer were discharged here. Noen haec in feodera veni. [‘it was not what I promised to do]' 
The judge took the analogy further: “Bringing the analogy closer home, it is well established that a guarantor is discharged from liability under his contract of guarantee in the event of any material variation in the terms of the contract between the creditor and the principal debtor. The contract of insurance in the present case, though not a contract of guarantee, has obvious affinities.”
The insured responded that the reduction in amount of each instalment in fact reduced the risk to insurers, and was not therefore material.
Although initially attracted to the insured’s argument, the judge accepted that insurers would have been immediately liable for the whole of the contract price in the event of Modern Homes paying a single instalment. On that basis, if a default had occurred at, say the first instalment, the total amount for which insurers would be liable would have been much greater with instalments at £3000 per week, than £6000 per week.
The judge commented that ““risk” is an elusive word in the law of insurance. But in the present context, where one is concerned with an increase or variation in the risk, it must include not only the greater likelihood of claim bit also the likelihood of a greater claim.” He found that the change in instalments to £3000 was a material increase in risk, not in the sense that it increased the likelihood of default by Modern Homes but the likelihood of a greater claim in the event of such default. Accordingly, credit insurers would have been discharged from liability entirely. 
What Degree of Change is a “Material” Change?
How substantial must a change in the insured contract be before it is considered ‘material’? The court in Hadenfayre noted the ‘obvious affinities’ between the law of guarantees and credit insurance. The court would have had in mind the well-known rule of Holme v Brunskill  which held that any change in the principal contract that was not ‘self-evidently … unsubstantial, or one which cannot be prejudicial to the surety’ will discharge the surety. Clearly that is a very low standard. It is logical that the same standard applies to credit insurance.
Accordingly, whenever a creditor insured seeks any variation in the terms of his contract with its debtor, such as a rescheduling, without the knowledge or consent of its credit insurer, it does so at his own risk.
If a variation has been agreed it is a matter for the insurer if it wishes to remain to be bound, or to be discharged. If the insured wishes to avoid that risk then it should obtain the insurer’s prior consent to the rescheduling, or indeed to any other change.
 The insured party is referred to in this note as the ‘insured creditor’, and its counterparty as the ‘debtor’ or ‘obligor’. The policy is agreed between an insurer and an insured creditor.
 “To this contract I have never assented”. This maxim appears to have gained traction in the US in the 1800s. Grew v Breed 11 Meto. 567 at 575 (Massachusetts): “He (the surety) is entitled to the benefit of the maxim Non haec in feodera veni”; Bethhune v Dozier (1) Ga 235, 239  (Georgia); Lie v. Churchill (14 Ohio St. 383), Ranney, J., "He (the surety) is entitled both at law and equity to make a short and conclusive answer, Non haec in foedera veni." Osgood vs. Toole (1 Hun 167, 171 (New York, 1874)), "The surety may always say: Non haec in foedera veni." The judges had in mind a famous passage in Virgil’s The Aenid ([19 B.C] Book IV 337-39. in which Aeneas legalistically and coldly denied that he had consented to marry Dido, Queen of Carthage, following a passionate affair in which she became infatuated with him. On leaving he tells her that he is being guided by a higher power and that anway “nec coniugis umquam praetendi taedas aut haec in foedera veni” (‘I never held out the wedding torches of a husband’). Lord Justice Rix, in the English Court of Appeal called this a “shabby excuse” in Edwinton Commercial Corp v Tsavliris Russ (“The Sea Angel”)  2 Lloyd’s Rep 517 at 532. Dido raged and committed suicide using Aeneas’s sword.
 In fact insurers lost the case for other reasons. The court found they were in fact aware of the change in instalments all along.
  LR 3 QBD 495 (Court of Appeal)