Jim Gervang has spent the last 15 of his 20 years in the insurance industry designing, implementing and managing international insurance programs. Gervang, managing director, national practice leader, international, leads Wells Fargo's Insurance Services International Practice.
Historically, multinational firms have insured their directors and officers worldwide by purchasing a global directors and officers (D&O) liability policy. Today, however, international directors and officers may be at significant risk if they are insured only by a U.S.-based policy. Prudent companies are augmenting their global program with country-specific coverage.
T&R: What are the challenges of protecting executives in foreign countries?
Gervang: Directors and officers overseas face increased exposure, due to changes in international regulations, stricter enforcement of compliance laws and increased litigation outside the United States. Just as every U.S. state has different insurance regulations, foreign countries have different requirements for D&O insurance. In fact, in some countries, U.S.-based global policies are not considered legal. If a director or officer is sued in a country that doesn't honor your U.S.-based D&O policy, then that executive can face fines or penalties, the freezing of personal assets, and perhaps even prison.
T&R: Can you give some examples of how D&O regulations vary?
Gervang: France, for example, does not allow indemnification by the organization and does not allow U.S.-based policies. In this situation, the term indemnifies means to free the director or officer from risk of loss, or to make compensation to the director or officer for a loss they become liable for. Therefore, if a director or officer at your French subsidiary is sued, the company cannot pay the loss for the director and your global insurance carrier cannot pay the claim directly in France.
That means your executive can't just turn the claim over to the insurance company as he would in the United States. Instead, he must manage the claim himself and front his own money for potential fines or judgments. Furthermore, once the director receives reimbursement from the global carrier, that money may be subject to tax because French regulations do not allow payment from a U.S. policy.
In China, as another example, all insurance policies must be purchased through a Chinese carrier--and the Chinese insurance regulations consider U.S.-based D&O policies illegal. So if you have officers at a Chinese subsidiary who are covered only by a global D&O policy, then they are at risk. In addition, if the officers are suspected of any impropriety, the Chinese Regulatory Commission can investigate them and impose fines and penalties up to imprisonment.
Similarly, in India it is illegal for a director or officer to receive money from an insurance policy that isn't written in India. In other words, if a director at your Indian subsidiary faces a claim for improper financial reporting, she would eventually receive reimbursement from your global D&O policy. However, as long as she is in India, she cannot be reimbursed for any claim payments without risk. As a result, the director may have to fund the claim on her own or risk performing an illegal act to be reimbursed by accepting money from an insurance policy written outside of India.
In Brazil, it is illegal to use a global D&O policy as collateral for a claim. For example, if the local government sues a director or officer for environmental degradation and the subsidiary does not have a Brazilian D&O policy, then the legal system can freeze that executive's assets. These kinds of government protocols can lead to serious consequences for directors and officers.
The U.K., interestingly, does allow global policies that are written in the U.S. However, these policies do not protect multinationals from exposures associated with the 2008 United Kingdom Corporate Manslaughter and Corporate Homicide Act. This legislation allows companies to be prosecuted for manslaughter if systematic failures in their health and safety procedures cause the death of an employee or a member of the public. If your company is found guilty of this charge, you can face unlimited fines, required remediation, and negative publicity. You can get coverage for the cost of your defense--but only if you have a local D&O policy.
T&R: What's the best way to mitigate these riss and ensure adequate protection?
Gervang: It's still important to have a global D&O insurance policy, which provides high limits and broad protection for your international entities and the executives there. But, in addition to that global policy, you need local D&O policies in the countries where the global policy is not allowable. These in-country policies can protect local executives' personal assets, ease their hardship in the event of a claim, and better protect your operations and executives in each country.
T&R: How can companies secure local policies in international markets?
Gervang: Work with your broker to thoroughly investigate the laws and regulations concerning D&O insurance in each country where you operate. What kinds of operations do you have in each country? How many directors and officers do you have there? Is indemnification allowed? Are there exposures that are unique to a certain country? Is your global D&O policy allowed in those countries? If not, then how will you protect your directors and officers there? These are the kinds of things to consider in developing an international D&O program that provides adequate coverage.
T&R: What would such a program look like?
Gervang: There are two possible approaches. If your primary global carrier has the ability to place locally admitted policies, then your broker can design the program, determine proper limits, work with the carrier to place local D&O policies in the countries where you operate, and integrate the claims management process with your global program. If your global carrier does not have this ability, then work with your broker to buy local policies in individual countries and establish a global, high-limit program over all of the local policies. This way, you don't necessarily have to buy full limits in each country.
T&R: How can U.S. multinationals get into action?
Gervang: The first step is to engage a broker who has the international professional-risk experience to develop an effective global D&O program. Look for a broker with a strong country-by-country understanding of laws, insurance practices and coverage, as well as the international resources to develop solutions for different countries. From there, you and your broker can determine the best strategy for managing executive liability overseas.
Key Questions About International Directors and Officers Coverage
o In what countries do you have operations?
o How many directors and officers do you have in each country?
o What kinds of exposures do they face?
o Is your global D&O policy allowed in the foreign countries where you operate?
o If not, can you secure local policies for those countries?