In a guest post published on this site in October 2023 (here), Jane Njavro of Woodruff Sawyer took a look at the perennial issues surrounding the structure of D&O insurance for foreign subsidiaries of domestic U.S. companies. In the following guest post, Alex Hopkins, AVP & Counsel, Travelers Bond & Specialty Insurance, takes a further look at these issues and reviews the compliance, coverage, and claims management considerations involved. I would like to thank Alex for allowing me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Alex’s article.

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As highlighted in Jane Njavro’s guest post, Foreign Subsidiaries and D&O Insurance: Are You Prepared to Place?, the issue of D&O liability for foreign subsidiaries of U.S. companies is ever evolving. Claims made in foreign jurisdictions against U.S. corporations and/or their subsidiaries almost always involve regulatory and tax considerations. Multinational companies are often confronted with potential exposures in multiple jurisdictions and local directors and officers may be faced with personal liability. To make matters more complex, several countries prohibit companies from indemnifying their directors and officers when charges are made against them. Thus, in some foreign jurisdictions, having local D&O coverage has become a best practice for some U.S. multinational companies. As U.S. companies expand their operations globally, the intricate world of D&O compliance, coverage, and claims management outside the U.S. demands a nuanced approach to navigate the legal and regulatory complexities across various jurisdictions.

There are many ways in which U.S. multinational companies can structure their global D&O program. It’s important when doing so to consider the applicable regulatory landscape(s), the location of the company’s directors and officers, and also the claims process.

Understanding the Global Landscape:

1.Regulatory Variations:

Different countries have distinct regulations governing insurance and claims management. Understanding the various regulations is crucial for compliance. Multinational companies, their insurance professionals, and insurance carriers should invest in comprehensive research to stay abreast of regulatory changes and align with local laws.

2. Cultural Sensitivity:

Cultural differences can significantly impact the perception and processing of claims. Beyond effective communication, companies should provide training to help their claims professionals better understand the nuances in each region. Tailoring communication strategies to resonate with the cultural expectations of each region fosters trust and transparency, which are essential elements in successful claims management.

International Compliance Frameworks:

1. Implementing a Unified Compliance Framework:

Standardizing compliance processes across international operations can streamline procedures, creating policies that adhere to the strictest regulatory requirements among the countries in which a company operates. This unified approach not only helps ensure compliance but also promotes a cohesive corporate culture globally.

2. Investing in Technology:

Where properly deployed, advanced technologies such as artificial intelligence and machine learning may benefit the compliance monitoring process. Automated systems can identify potential risks and help companies comply with evolving regulations. A thoughtful, but proactive, use of technology reflects a commitment to staying ahead in the dynamic landscape of international business operations.

Claims Management Best Practices:

1. Centralized vs. Decentralized Models:

Insurance companies must decide whether to centralize claims management or adopt a decentralized approach. Centralization can provide consistency, while decentralization allows for customization based on local needs. Striking the right balance is crucial for effective claims management. (It should be noted that with a centralized approach it may still be necessary for a carrier to retain counsel or a Third-Party Administrator (TPA) in those jurisdictions where local claims handling is required.)

2. Capacity Building:

Investing in training programs for claims professionals helps create expertise in both local and global regulations, and facilitates efficient and compliant claims processing. Continuing education programs, including workshops and seminars, help claims teams stay updated on the latest legal developments, fostering a high level of proficiency in navigating diverse international jurisdictions.

3. Data Security and Privacy:

With the rise of data breaches and privacy concerns, companies must prioritize the security of sensitive information. Implementing robust data protection measures helps ensure compliance with international privacy standards and builds trust with customers. The European Union’s (EU) General Data Protection Regulation (GDPR) requires that organizations transferring personal data outside the EU must ensure that the data enjoys the same level of protection as within the EU. Adequate safeguards or specific legal mechanisms may be required. GDPR imposes substantial fines for non-compliance, with penalties reaching up to 4% of a company’s global annual revenue or €20 million, whichever is higher.

4. Continuous Monitoring and Adaptation:

Multinational companies, in partnership with their insurance professionals and carriers, should adopt a continuous monitoring and review process for their D&O strategies. This includes periodic reviews of insurance coverage, legal frameworks, and risk profiles in various jurisdictions. Staying proactive allows the company’s D&O strategies to evolve with the dynamic global business environment.

D&O Coverage Options: A Thoughtful Approach

Multinational companies often face diverse risks in different regions. Tailoring D&O coverage to specific jurisdictions is key to ensuring that the policy adequately addresses the unique challenges faced by the company’s directors and officers. This involves working closely with insurance professionals and carriers to account for the regulatory requirements of each country. Insurance professionals and carriers commonly address underwriting international D&O risks through three main approaches:

1. U.S. Global Policy Only:

While simplifying administration, solely relying on worldwide coverage may not comply with local regulations or provide adequate protection for local directors and officers. This approach necessitates a continuous review to best ensure alignment with evolving international regulations. 

2. Local Policy Only:

Purchasing standalone local policies in jurisdictions with stricter regulations can help address compliance concerns and facilitate direct communication and payments in-country. This strategy demands a nuanced understanding of local laws and regulations, and the ability to customize policies accordingly.

3. Hybrid Approach – U.S. Global Policy Supplemented with a Local Policy:

Combining a global program with strategically placed local policies can offer a balanced solution, addressing specific geographic needs while effectively managing administrative costs. This hybrid approach requires a careful examination of the regulatory landscape in each jurisdiction to strike the right balance between global coverage and compliance with local regulations.

Claim Management: Navigating the Labyrinth

Due to structural and regulatory/compliance issues, the claim management workflows can vary significantly based on how the insurance program has been structured (U.S. global policy only, local policy only, or a hybrid approach).

1. U.S. Global Policy Only:

Admitted vs. non-admitted analysis, global endorsements, and financial interest coverage become crucial when local regulations require locally admitted policies. This detailed analysis helps ensure that the global program aligns with the specific requirements of each jurisdiction.

2. Local Policy Only:

Advantages of a locally admitted form include direct communication and local loss payment through the local carrier. Local placement options, such as direct placements, Lloyd’s coverholders, or traditional reinsurance fronting arrangement structures come into play.

3. Hybrid Approach – U.S. Global Policy Supplemented with a Local Policy:

Here, the devil lies in the details: Are limits tied? Is difference in conditions (DIC) coverage in place? If the limits are not tied and coverage is triggered under both the U.S. global and local policies, then limits may be stacked. If there is no DIC coverage or liberalization clause, and a claim only triggers one of the two policies (U.S. global or the local policy), then coverage may be limited by the wording of the triggered policy (e.g., a claim that is covered under the local policy may not be covered under the U.S. global policy, and vice versa).

Are all parties insured under both the global and local policies? If yes, to what extent (named insured, additional insured, parent company, etc.)? If no, which insureds are covered under the U.S. global policy only? Which under the local policy only? All these questions should be answered while underwriting the policies. Otherwise, they will have to be addressed if/when a claim is tendered, which may cause unnecessary friction between the insured, insurance professional, and carrier.

Additional Considerations: A Checklist for Smooth Sailing

Beyond structural complexities, critical factors shape the claims journey, including:

1. Office of Foreign Assets Control (OFAC) Compliance:

Ensuring all actions comply with the OFAC regulations is paramount. Regular training and updates on OFAC regulations are necessary to avoid legal complications and maintain compliance across international jurisdictions.

2. Company Indemnification:

Investigating whether local laws allow companies to indemnify directors and officers is crucial. It may be necessary to secure local legal opinions to help navigate the intricacies of indemnification laws in each jurisdiction and best ensure that companies can adequately protect their directors and officers.

3. General Claims Management Considerations:

Considering the availability of local panel counsel, understanding legal frameworks, and establishing crisis management and communication strategies are vital components of effective claims management. Engaging experienced legal teams that can seamlessly collaborate across borders goes a long way toward creating a cohesive defense strategy.

Clarify adjusters’ license requirements, claim acknowledgment timeframes, and the need for reservation of rights/coverage letters. In the event of a D&O claim, coordination among defense counsel in different jurisdictions is crucial when claims involve multiple jurisdictions. This coordination helps in navigating varying legal systems and effectively managing the complexities of international litigation.

4. Crisis Management and Communication:

D&O claims can attract significant media attention, which may impact a company’s reputation globally. Developing an extensive crisis management and communication strategy is essential. Companies should be prepared to communicate transparently, consistently, and in compliance with local regulations to maintain stakeholder trust.

5. Risk Mitigation and Prevention:

Implementing robust risk management practices is a proactive strategy for minimizing the likelihood of D&O claims. Regular risk assessments, ongoing training for directors and officers, and clear corporate governance policies contribute to a culture of prevention, and are often more cost-effective than dealing with the aftermath of a claim.

6. Utilizing Alternative Dispute Resolution (ADR):

Given the challenges of navigating multiple legal systems, exploring alternative dispute resolution mechanisms, such as arbitration or mediation, is advisable. ADR can provide a more efficient and confidential resolution process compared to traditional litigation, especially in cross-border disputes.

Conclusion: Navigating the Labyrinth with Precision

In an interconnected world, the ability to navigate international claims management and compliance is critical for the success and sustainability of businesses. Companies that prioritize understanding local regulations, adopting advanced technologies, and fostering a culture of compliance will be better positioned to thrive in the global marketplace. By embracing a proactive and adaptive approach, organizations can build trust, mitigate risks, and achieve sustainable growth across borders.

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Author: Alex Hopkins CPCU ARM RPLU+ CPLP ExecPLP, AVP & Counsel, Travelers Bond & Specialty Insurance

Note: This material is for general informational purposes only and is not legal advice. It is not designed to be comprehensive and it may not apply to your particular facts and circumstances. Consult as needed with your own attorney or other professional advisor.