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Risk in Context

How Brazil’s Corruption Scandal Could Affect Your D&O Liability

Posted by Ann Longmore August 10, 2015

Playing host to the 2014 FIFA World Cup and the upcoming 2016 Summer Olympics, Brazil has been the focus of significant international business opportunities in recent years. But a corruption scandal stemming from allegedly inflating oil contracts threatens to undo the positive momentum. As the situation unravels and potentially involves more firms, government officials, and individual executives, you need to be aware of the potential for increased directors and officers (D&O) liability if you’re doing business in Brazil.

TIGHTENING D&O INSURANCE MARKET

The corruption scandal in Brazil is straining local insurance markets as insurers increase premiums, raise retentions or deductibles, and restrict or reduce available coverage limits for a given D&O risk. Given the market, some are relying solely on global D&O placements, contracted for outside of Brazil. But such foreign insurance programs are unlikely to be permitted to respond locally to D&O claims made in Brazil.

For companies looking to do business in Brazil, that makes finding the right insurance coverage a potential challenge. D&O capacity, in particular, may now be difficult to find. And each renewal or new placement requires additional information requests from insurers and more stress testing of local company financial statements. It’s the kind of environment where one set of answers potentially leads to another set of questions.

STEPS FORWARD

The passage of Brazil’s corporate liability law in 2014, commonly known as the Clean Company Act, signaled a significant change in legal liability and potential enforcement in Brazil. With potentially more regulatory fallout from the latest scandal, corporate directors and their firms will likely be further impacted.

Brazil has historically been a challenging jurisdiction for corporate executives due to the perceived likelihood of prosecutors seeking to freeze a defendant’s assets and/or income stream, thus making the individual more dependent on corporate indemnification and/or insurance.  But there are several steps you can take to prepare your firm for potentially increased D&O liability in Brazil:  

  • Allow additional time to review your local and global D&O policies at renewal to help reduce uncertainty about additional restrictions or other costs (increased premium and/or retention).
  • Consider the adequacy of local limits (including the potential need to add additional insurer(s) to the local program).
  • Examine your company’s local operations to determine whether you may be in the current “zone of danger.”
  • Determine if, after reviewing your local policy, you may also need to submit a notice of claim (or of circumstances that could potentially lead to a claim) under the local or the local and global program for international firms.

Brazil continues to offer numerous possibilities for doing business. But as with any opportunity, there are risks, and companies should be prepared to manage them.

Ann Longmore

Managing Director and Multinational Practice Leader in the Financial and Professional Liability (FINPRO) division