Author: Jane Njavro
The issue of D&O liability for foreign subsidiaries of US companies is an evolving one. Claims in non-US jurisdictions against directors and officers of subsidiaries of US corporations generally involve regulatory or tax issues. Multinationals can face actions in several countries as cross-border cooperation between regulators continues. Local directors, officers and country managers are becoming more aware of their personal liability. Frequently, a request for a local D&O policy from a local director is the catalyst for a company to add local policies to their program.
When you need to purchase local policies
Most D&O polices are, according to the insurance contract itself, written on a "global basis." However, some countries require that companies purchase insurance (and pay applicable taxes) in that country in order to have a claim paid in that country, i.e., they require "admitted" insurance. Given the personal nature of D&O insurance for key company executives, our recommendation is typically to purchase local policies where admitted insurance is required.
Some common reasons US.-based companies will place a local D&O policy in foreign jurisdictions include:
- A local director won't join the board of a company's subsidiary without an in-country D&O insurance policy in place.
- There can be legal concerns regarding the company's ability to provide indemnification or advancement of defense costs to individuals on the ground. In many countries, the law doesn't clearly allow a company to indemnify local directors and officers. In some situations, a director or officer may need to be proven innocent before the company can provide indemnification or defense costs.
- Complying with local tax regulations may be a priority. Some countries allow insurance placed in another country to respond (i.e., allow non-admitted insurance), but an additional tax applies. If the insurer can't collect this tax, it becomes the company's responsibility to self-file these taxes. Failure to file these taxes may result in a penalty or an audit. A local policy can avoid this awkwardness by providing a vehicle for local tax collection.
- A local policy can protect personal assets from being frozen. For example, some local policies are written to provide a budget for household expenses (typically sub-limited) in case bank accounts are frozen.
As part of the underwriting process, insurers will want to understand any exposure to sanctioned countries. If there's an exposure, the policy will likely come with an exclusion for that country. The solution for companies with operations in those countries is to source local insurance with a local broker that is separate from the global program.
Varying strategies for coverage and compliance
A common question I hear is this: My company has a number of foreign subsidiaries; how can I optimize my D&O insurance program for worldwide response and compliance?
You'll want to work with your trusted insurance broker to develop a global strategy that's right for your company's risk profile and risk appetite. It's especially helpful to have developed a consistent approach touse throughout the company well before various local directors and officers start lobbying for special requests. Waiting until later can ultimately lead to a less efficient solution from a coverage perspective.
Major carriers commonly repeat the statistic that roughly 60% of Fortune 500 companies include some type of locally admitted coverage in their D&O program; in my experience, this number seems right.
There are different ways to approach providing local admitted coverage depending on how the company's footprint matches the capabilities of its existing primary D&O insurance carrier. A company's risk management philosophy will play a role as well. For some companies, there's value in being compliant in each - country, and such companies are willing to undertake the administrative work required to make this happen. Other companies focus on countries that have reached certain criteriam such as having local directors and officers on the ground or having an operation of a meaningful size. Still other companies may choose to rely on the worldwide nature of their primary US-based policy and accept the risk of foreign tax penalties or challenges to indemnification. Oftentimes, a company's approach is a combination of these philosophies and evolves over time.
Depending on your company and its needs, here are some options global companies might consider as a starting point:
- Rely on the worldwide coverage provided by a master program. In any country that doesn't allow non-admitted coverage, the insurer will pay loss to the parent company. Most insurers use their best efforts to get payment to individuals anywhere in the world, but if the country has strict restrictions, in-country payment may not be possible without a local insurance policy. Also, if the company isn't legally able to provide indemnification or advance defense costs, then there's no insurance policy to step in.
- Augment local coverage with a difference in conditions (DIC) dropdown or tax schedule. If Lloyd's of London is on your program, you can take advantage of their broad license to provide local admitted coverage in an efficient manner in many (but certainly not all) countries.
- Select a few key countries to purchase local policies. Some companies choose to purchase local policies only in countries that are highly regulated, where they have large assets or are of particular strategic importance. The process varies from country to country; this approach usually includes a Lloyd's placement along with locally procured policies.
- Purchase local policies in every country where there's an employee on the ground. This is the most robust approach and most appropriate for large global companies. Collaboration with the primary carrier is a critical element of this approach. A handful of insurers can offer local placements in most countries, or a separate "rest of world" tower may be purchased.
More international D&O options than ever before
There's no one-size-fits-all solution for every company, but many solutions are available to protect local directors and officers. Since not all insurers have strong global offerings, a thoughtful process is required to match the company's geography and priorities with the insurer that is the best fit. Over the past few years, several insurers have invested in and expanded their international D&O capabilities. This expansion has resulted in more options for companies looking to place international programs. Company engagement with underwriters is also valuable in this process.
Published October 2023
