Most primary D&O insurance policies are written on a global basis, meaning that the policy’s coverage will respond to claims wherever they arise, anywhere in the world. However, in recent years, as a result of tax, regulatory, indemnification, and currency questions, both insurance buyers and insurers have become concerned about the potential need for companies to have locally admitted policies in place in foreign jurisdictions where the companies have operations. The question about whether or not a company should have a local policy has become a perennial issue. In an October 16, 2019 post on Woodruff Sawyer’s blog entitled “Foreign Subsidiaries and D&O Insurance: Are you Prepared to Place?” (here), Jane Njavro takes an interesting look at the issues surrounding these questions. As discussed below, these questions raise a number of recurring concerns.
As Njavro notes in her article, a number of factors recently have increased concerns about the possible need for local policies, notwithstanding the worldwide coverage afforded under most D&O insurance policies. These factors include the increasing susceptibility of multinational companies to cross-border regulatory actions; the increasing awareness of local company officials to their personal liability; and the need to address local tax issues. In addition, there are countries that require the purchase of locally-admitted insurance and the payment of locally applicable taxes in order to have a claim paid in that country. In addition to the factors Njavro notes, another concern has to do with countries (such as, for example, China) where currency controls may limit or prohibit the payment of either insurance or indemnification from outside the country.
Njavro notes that there are a number of common reasons why U.S.-based companies will include local polices as part of their global D&O insurance program: A prospective director will not join the local board without a local policy in place; applicable local law may prohibit, or not clearly allow, the corporate parent to indemnify the directors and officers of the local unit; concerns about compliance with local taxes without putting a local policy in place; and the need to provide an insurance solution to address concerns about the possibility that governmental authorities may “freeze” the assets of local officials.
As Njavro’s article correctly notes, various companies take a wide variety of approaches to these concerns. At one end of the spectrum, there are the companies that are content simply to rely on the worldwide coverage provided by the parent company’s D&O insurance policy. At the other end of the spectrum, there are the companies (usually global companies in highly regulated industries) that choose to purchase local policies in every country where there is an employee on the ground. This latter approach, as Njavro notes, entails a great deal of complexity and requires a great deal of collaboration with the primary carrier.
In between these two categorical approaches are a variety of alternative intermediate approaches. One alternative approach is for the company to purchase locally admitted policies in a few key countries, based on considerations of the local liability environment, applicable indemnification and advancement laws, tax requirements, and currency control considerations. Another alternative is to arrange the global &O insurance program with a structure a master policy a tax schedule and/or with difference in condition/difference in limits policies over a program of local policies.
As Njavro correctly notes, while there are a variety of solutions and alternative approaches available, there is no single solution that will serve the needs of every company. Just to further complicate things, in the current disrupted D&O insurance marketplace, where many insurers have changed their underwriting and pricing approaches and many insurance buyers are facing steep increases in the D&O insurance premiums, there may be “added complexity” to trying to put solutions in place to address these foreign insurance questions.
Njavro is quite correct that different companies take different approaches to these issues. In my experience (perhaps a reflection of the kinds of companies with which I am usually working), very few companies take the approach that they need a local policy in every jurisdiction where they have an employee or representative on the ground. Again, at least in my experience, most companies simply do not want to deal with the complexity and expense involved in trying to take this approach to this issue.
At least in my experience, it is far more common for companies to conclude that they will simply rely on the their primary D&O insurance policy’s worldwide coverage provision, accepting the risk that they could be taking on risks (from their perspective, purely theoretical) in the various jurisdictions where they have employees or representatives on the ground.
In my view, even for companies inclined to want to rely on their base policy’s worldwide coverage section, the better approach is that the company still go through a country-by-country analysis in order to determine whether or not there are at least some countries where the company has a local presence where the company may want to consider buying a local policy.
When addressing this country-by-country analysis, I usually suggest that companies take a decision-tree type approach.
The first question in is whether the local unit is a formal subsidiary organized under the laws of the local jurisdiction or if the unit is just a local sales office or manufacturing facility. If it is a separate subsidiary, the next question is whether the subsidiary has a separate local board. If the answer is yes, I usually suggest that the parent company consider a local policy. If the answer is no, and if the local unit is not a legally separate entity, then the question is whether the local officials have separate decision-making authority or operate autonomously. If the answer is yes, then the parent company may want to consider a local policy.
Even if the local unit is not separately organized and the local officials do not operate autonomously, there is still another analytic level on the decision tree, which as to do with the local laws. The question is whether there are considerations arising from the local law that militate in favor of having a local policy for the protection of the local officials.
These local legal considerations could relate to local laws relating to the liabilities of local officials (if, for example local executives can be personally liable under the local jurisdiction’s environmental, tax, or criminal laws for corporate activities).
Another consideration that might militate in favor of a local policy would be if there are limitations on the corporate parent’s ability to indemnify the local officials or advance their legal costs. The kind of limitations relevant here would include not only local laws relating to indemnification, but also currency controls limiting the ability of non-local insurers or the corporate parent from sending funds into the jurisdiction.
While this decision tree approach provides a way to approach these issues analytically, the fact is that these questions always arise in a specific context. The nature and characteristics of the company involved will always play into this – companies in highly regulated industries (oil and gas, health care, casinos, etc.) will always take a different approach than companies that are not as highly regulated. Also, different companies will respond to these questions differently based on varying risk tolerance. For some companies, the key consideration is going to be cost or even a desire to avoid complexity. These kinds of companies – and there are a lot of them out there – when confronted with all of these undeniably subtle and elusive issues will waive the whole thing off as involving too much expense or confusion to bother with.
There is another contextual issue here that I can’t ignore, and that has to do with the insurers. The insurers tend to dominate the dialogue on these topics and each of the insurers participating in the dialogue tries to pitch the discussion so that it leads toward the particular solution that that insurer is able to offer. The problem is that the solutions the various insurers are offering are often diametrically opposed or at a minimum inconsistent, when it comes to way to approach particular jurisdictions; the coordination between a master and local policies; dealing with tax issues; dealing with local policy issuance, etc. The result of these conflicting signals is that all too often the discussion of these topics wounds up sounding to the insurance buyer like a lot of static. Because of that and because of the expense and complexity involved, at the end of the day a lot of prospective buyers wind up waiving off the entire issue.
Despite the static and occasional complexity, the question of whether or not a company should have local policies in any particular jurisdiction is an important one. I agree with Njavro that given the stakes involved, these issues require a “thoughtful approach,” one that takes into account the needs of both the parent company and the individual executives in each of the local jurisdictions, as well as the legal environment in the local jurisdiction and the overall company context.
I know that for many insurance professionals find the whole question of the need for local policies to be fraught and challenging. I encourage readers with views on this topic to add their thoughts to this post using the comment feature below.