Multinationals continue to be subject to expanding laws and regulations around the world. Add to that the increased frequency of cross-border cooperation between regulators and you have a recipe for increased legal exposure for directors, officers, country managers and even employees of your non-US subsidiaries. If these individuals become the target of regulators in their capacity as company representatives, a company’s standard Directors and Officers (“D&O”) liability insurance program may not adequately respond. A tailor-made D&O multinational liability insurance program can help protect these people and avoid business interruption.
Why do you need a local foreign D&O font? Who is at risk?
D&O policies are, according to the typical insurance contract itself, written on an “aggregate basis”. This means that for U.S. multinationals, the D&O insurance policy in place for U.S. business activities contemplates providing coverage outside the U.S. for business activities conducted by a majority-owned foreign subsidiary. However, some countries, such as Brazil, India and China, for example, require companies to carry insurance (and pay applicable taxes) in that country before a claim can be paid in that country by insurance. A&D. This is called an “admitted insurance” requirement.
Failure to obtain D&O liability insurance accepted in countries that require it may leave directors, officers, country directors associated. and employees exposed to regulatory action (both criminal and civil), embroiled in corporate-level bankruptcy proceedings, as well as personal liability for corporate taxes. It is true that US multinationals may choose to rely exclusively on their standard D&O liability insurance program instead of underwriting local policies. This means that they take the risk that their insurance policy’s response will not match what they expected if the policy responds at all.
As companies become more sophisticated when it comes to protecting the directors and officers of their non-U.S. subsidiaries, they typically cite several reasons for purchasing a local D&O foreign liability insurance policy, including:
- Attract and/or retain local directors and officers who otherwise would not join or remain on the board of directors of a subsidiary of a company without a D&O policy in the country.
- To avoid legal issues regarding the ability of the Company’s D&O policy to indemnify or advance the defense costs of persons in jurisdictions other than the United States: In many countries, the law does not clearly allow a company to indemnify local directors and officers. In some situations, it may be necessary to prove the innocence of these directors and officers before the company can provide indemnification or defense costs.
- To comply with local tax regulations: Some countries allow insurance placed in another country to respond (i.e. allow non-admitted insurance), but an additional fee applies. If the insurer cannot collect this tax, it is up to the company to declare these taxes itself. Failure to file these taxes may result in a penalty or audit. A local policy can avoid this inconvenience by providing a vehicle for the collection of local taxes.
- To protect against the freezing of personal assets: For example, some local policies are written to provide a budget for household expenses (usually under-limited) in case bank accounts are frozen.
- To minimize operational disruption that could otherwise occur if directors or officers are sidelined because they must personally respond to an investigation or litigation.
Key Considerations in Structuring an A&D Insurance Program with Local Foreign A&D Liability Coverage
Rather than placing foreign local A&D insurance policies on an ad-hoc basis, you want to work with your trusted insurance broker to develop an overall strategy tailored to your company’s risk profile and risk appetite. . This strategy will streamline your company’s hedging decisions in each country where you operate. This is particularly important given the different options that multinational companies have for structuring their programs. For a discussion of some of these options, see this article from Woodruff Sawyer’s D&O Notebook.
Developing your company’s overall strategy to address international A&D liability coverage will likely involve multiple internal stakeholders and business and/or legal considerations. A well-constructed strategy generally involves the contribution of:
- Management: Certain members of management (eg, CEO, CFO, presidents, and general counsel) often play a role in insurance decisions. Management should be consulted early to identify potential changes in the company’s operations and global footprint. What may seem like a small change in operations in a foreign jurisdiction can result in a significant change in the degree of legal and regulatory exposure.
- Legal: Given its unique position in managing corporate governance, including for foreign subsidiaries, Legal is a key player when it comes to developing your D&O insurance risk management strategy. It is also usually the group that can help identify positions within an organization that should be covered by local policy, if any. Additionally, Legal will be able to assess whether there are any specific limitations in local laws and regulations regarding the type of insurance that may be purchased, the ability to indemnify employees, and the ability to advance defense costs. , to name a few.
- Regulatory: This group, often within the overall legal function, will have visibility into the regulations and associated exposure applicable to a company’s operations (eg, manufacturing, sales, export/import, R&D).
- Risk management: If your business has a formal risk manager or risk management group, this is the place to go for a holistic view of the portfolio of the most material risks to the business, including whether events adverse events in foreign jurisdictions can impact a company’s ability to conduct business.
- Finance/Treasury: Everyone will get insight into a company’s ability to sustain financial loss and/or transfer that risk to insurance.
- Tax: As well as being able to advise you on the existing or potential tax risks of doing business in a particular region, your tax group may have a privileged approach to determining which local entity is named on a local policy and how premiums are paid.
When should a company reassess its locally admitted D&D insurance policies?
As a general rule, it is advisable to discuss your D&O insurance program with your broker four to six months before your local D&O insurance policies expire. Business or organizational changes may necessitate reviewing the terms of the policy, an exercise you will want to perform prior to renewal of your insurance program in case your existing D&O insurance program is now insufficient given the changes that have occurred. place within your organization.
Finally, it is important to engage a broker with strong expertise in international D&O insurance practices and a deep understanding of the challenges directors and officers face internationally. An experienced broker will be able to help match a company’s risk appetite with the D&O insurer that has the capacity to help cover those risks. This is important because not all D&O insurers have strong global offerings or claims capabilities, which is something you certainly don’t want to learn about after being the victim of a claim.