Many companies might already consider their directors and officers liability (D&O) insurance policies to be global. After all, many policies contain a territory clause stating that the policy will pay claims made anywhere in the world it is legally permissible. But are you confident about where these claims will be paid?
Generally speaking, executives prefer to have their expenses advanced in the jurisdiction where they need to pay for their defense and investigative costs, along with covered settlements and court awards.
But D&O policies typically do not specify where the insurer would pay these claims. Does this happen in the country where the policy was written, or in the local jurisdiction where a claim needs to be investigated and defended?
Here are five circumstances when companies should consider supplementing their D&O program with local placements:
- When operating in jurisdictions where non-admitted insurance is not permitted. This means that the “global” policy is not legally allowed to pay claims in the country where the D&O claim is being investigated and defended.
- When the first line of defense for corporate executives — the right to corporate indemnification — is unclear, untested, or not anticipated. Note: There may be a substantial overlap of jurisdictions where non-admitted insurance is not permitted and the right to corporate indemnification (and advancement) is neither clear-cut nor guaranteed. In those jurisdictions, there is a risk that the personal assets of a local director or officer could be exposed.
- When there are significant compliance concerns, often related to applicable local premium taxes. Some local tax authorities require insureds to pay taxes on a portion of a “global” insurance premium considered to be placed in their jurisdiction. Where legally permitted, the insurer issuing a local D&O policy typically assesses, collects, and remits relevant premium taxes from and for the local insureds, addressing this compliance concern.
- Where a company or a board simply desires local coverage, including coverage nuances specific to particular locality.
- Where a company sees a frequency of claims in a country and needs a carrier with local claims-handling ability that understands jurisdictional nuances.
It is important to note that, unlike property or bonding coverages, local D&O insurance is not compulsory or mandatory in all jurisdictions around the world. In fact, local D&O coverage is only rarely legally mandated.
Determining whether you need a local D&O policy
- In which countries do you conduct business outside the US?
- Of those countries, which ones do not allow non-admitted insurance?
- Do you have a local subsidiary or local office, board of directors, and/ or officers?
- Are the directors and officers located in that country? If not, are there other local country managers that you might want to protect?
- Does the country permit corporate indemnification/advancement?
- Do you generate a significant amount of revenue in the country of risk?
If, after assessing the above factors, you decide that you need a local D&O policy, you should consider:
- Connecting individual, locally admitted policies to your primary D&O program, sharing its limits with local policies issued (“fronted”) by a local licensed insurer addressing local claims.
- Using Lloyd’s special licensing arrangements to issue a single policy (primary or excess) that is locally admitted in multiple jurisdictions under a freedom of services (FOS) policy.
- Creating a “wrap” structure where non-US risks are covered under a separate, parallel program that allows for the ring-fencing of US exposures. The wrap policy may then have local policies written on a tie-in basis.
- Purchasing standalone local policies with separate limits, which may be necessary in limited jurisdictions at the current time — possibly for India or Brazil — due to reinsurance constraints.
Marsh FINPRO’s specialists have the multinational expertise to help you build a program that is most suitable for your circumstances.
Please note that administrative fees are typically required by insurers to cover their own network costs for the placement and issuance of the local policies. These administrative fees vary by carrier. Additionally, taxes are assessed against the premium allocated to those jurisdictions and are in addition to the allocated premium.
The evaluation process should take place annually, and also when acquiring a company that has foreign operations.