Before Entering Venezuela, Companies Should Consider Indemnification from US Government

Following the removal of Venezuela President Nicolás Maduro from power, the US administration has encouraged energy companies to resume operations in Venezuela. However, due to uncertain political and security conditions in the country, traditional insurers may find the potential liability of possible disruptions to business or damage to persons and property too great to cover. Fortunately, under Public Law 85-804, the federal government may indemnify companies operating at its behest in hazardous conditions.

BACKGROUND, SCOPE, AND EFFECT OF PUBLIC LAW 85-804

US Congress enacted Public Law 85-804, now codified at 50 USC §§ 1431–1436, following the Korean War. Although the statute technically applies only temporarily during a declared national emergency, it was activated in 1958 by executive order, and that declaration has never been rescinded. The statute allows the US president to authorize specific federal agencies to grant broad contractual relief even if that relief is otherwise prohibited by other statutes, so long as the relief “would facilitate the national defense.”

The agencies authorized to exercise power under Public Law 85-804 include the US Departments of Defense, Treasury, Commerce, Transportation, Homeland Security, and Energy (among others). Typically, the US government cannot indemnify contractors due to the Anti-Deficiency Act, but Public Law 85-804 creates an exception.

Public Law 85-804 permits the federal government to indemnify a contractor for the following claims when they arise out of the contractor’s performance in “unusually hazardous” conditions:

• Claims by third persons (including employees) for death, injury, or loss of property
• Loss of or damage to the contractor’s property
• Loss of or damage to the government’s property
• Claims arising from indemnification agreements with a subcontractor

Contractors may obtain this indemnification by securing a designation from an authorized federal agency that the activity they are undertaking is unusually hazardous and having the agency include FAR 52.250-1 (Indemnification Under Public Law 85-804) in their contracts. The contract will also include a clause defining the scope of the hazardous conditions, and therefore also the scope of indemnification. It should be noted, however, that indemnification does not extend to losses otherwise covered by insurance or that are caused by the “willful misconduct or lack of good faith” by a contractor or subcontractor.

POTENTIAL USE OF PUBLIC LAW 85-804 FOR COMPANIES OPERATING IN VENEZUELA

The federal government previously used Public Law 85-804 to indemnify companies from losses while working under government contracts in politically unstable environments—for example, the government covered many risks for defense contractors working in wartime Iraq and Afghanistan. More recently, several agencies issued blanket indemnification for contractors responding to the COVID-19 pandemic.

The same could be done for companies supporting work in Venezuela. Of course, indemnification under Public Law 85-804 is available only for work performed under a contract with the US government. It is not yet clear whether the US government will issue contracts or otherwise enter agreements with companies to return to Venezuela, but to the extent such arrangements materialize, Public Law 85-504 presents an opportunity for companies to seek protection in an otherwise seemingly unstable environment.

Public Law 85-804 is an extraordinary remedy that may be granted only for work in “unusually hazardous” conditions necessary for national defense. However, the administration has framed its efforts to revive US oil production in Venezuela as a matter of national security, not merely of economic opportunity. Thus, indemnification under Public Law 85-804 may be warranted to enable companies to operate in the fluid security and political environment.

Accordingly, government contractors facing difficulties insuring the risk of operating in Venezuela could seek to have the government cover their risk of losses by seeking a designation of coverage under Public Law 85-804 and including FAR 52.250-1 in their contracts.

Agencies often have defined processes to seek indemnification under Public Law 85-804. Morgan Lewis is well-equipped to assist with requesting indemnification under Public Law 85-804 or navigating the risks of business operations in Venezuela.

STAY INFORMED

Our team continues to closely monitor developments related to Venezuela. Visit our Venezuela Global Capabilities page for an overview of how we advise clients on Venezuela-related legal, regulatory, and risk considerations, and for ongoing updates and related insights.

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