One of the continuing issues in the world of directors’ and officers’ liability insurance in recent years has been the question of when a U.S. company should obtain a separate locally admitted D&O insurance policy for its foreign subsidiaries. In the following guest post, Jane Njavro, Senior Vice President and Partner at Woodruff Sawyer, examines the issues surrounding this perennial question. This article was originally published on Woodruff Sawyer’s D&O Notebook, here. I would like to thank Jane for allowing me to publish her article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Jane’s article.
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 polices 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 will not 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 does not clearly allow a company to indemnify local Ds and Os. In some situations, a D or O 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 cannot 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 polices are written to provide a budget for household expenses (typically sub-limited) in case bank accounts are frozen.
With the Russian invasion of Ukraine in February 2022 and the sanctions that followed, insurance in Russia and Belarus became more complicated. Many polices now specifically exclude Russia and Belarus from the covered territories. As part of the underwriting process, insurers will want to understand any exposure to sanctioned countries. If there is 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 will want to work with your trusted insurance broker to develop a global strategy that is right for your company’s risk profile and risk appetite. It is especially helpful to have developed a consistent approach to be used throughout the company well before various local Ds and Os start lobbying for special requests. Waiting until later can ultimately lead to a less efficient solution from a coverage and 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 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 is value in being compliant in each and every 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 criteria such as having local Ds and Os 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 master program. In any country that does not 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 is not legally able to provide indemnification or advance defense costs, then there is no insurance policy to step in.
- Augment local coverage with a DIC (difference in conditions) drop down 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 polices in every country where there is 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 is no one-size-fits-all solution for every company, but many solutions are available to protect local Ds and Os. 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 has resulted in more options for companies looking to place international programs. Company engagement with underwriters is also valuable in this process.