Multinational Companies and Local Foreign D&O Liability Insurance

What you should consider when it comes to D&O insurance for your non-US subsidiaries, including why you may want to implement local foreign policies and who is at risk.

International compliance is getting harder, not easier—and the directors and officers of your foreign subsidiaries may be asking what your company is doing to protect them. In this week’s edition of the D&O Notebook, my colleagues Jane Njavro and Lenin Lopez walk through important considerations when it comes to D&O insurance for your non-US subsidiaries.
–Priya Huskins

Multinationals continue to find themselves subject to expanding laws and regulations across the world. Add to this the heightened frequency of cross-border cooperation between regulators and you have a recipe for increased legal exposure for the directors, officers, country managers and even the employees of your non-US subsidiaries. If these individuals become the target of regulators in their capacity as representatives of the company, a company’s standard directors and officers (“D&O”) liability insurance program may not respond adequately. A tailored multinational D&O liability insurance program can help protect these individuals and avoid business interruptions.

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Why do you need a local foreign D&O policy? Who is at risk?

D&O polices are, according to the typical insurance contract itself, written on a “global basis.” This means that for US multinationals, the D&O insurance policy in place for business activity in the US contemplates providing coverage outside the US for business activities conducted by a majority-owned foreign subsidiary. However, some countries, like Brazil, India, and China for example, require that companies purchase insurance (and pay applicable taxes) in that country before a claim can be paid in that country by D&O insurance. This is known as an “admitted insurance” requirement.

Failure to secure admitted D&O liability insurance in countries that require it may leave the associated directors, officers, country managers. and employees exposed to regulatory action (both criminal and civil), being pulled into corporate level bankruptcy proceedings, as well as personal liability for corporate taxes. It is true that US multinationals may choose to rely exclusively on their standard D&O liability insurance program instead of placing local policies. Doing so means they are taking the risk that their insurance policy response may not be what they had expected if the policy responds at all.

As companies grow more sophisticated when it comes to protecting the directors and officers of their non-US subsidiaries, they typically cite several reasons for placing a local foreign D&O liability insurance policy, including:

  • To attract and/or retain local directors and officers that would otherwise not join or remain on the board of a company’s subsidiary without an in-country D&O policy.
  • To avoid legal concerns regarding the company D&O policy’s ability to indemnify or advance defense costs to individuals in non-US jurisdictions: In many countries, the law does not clearly allow a company to indemnify local directors and officers. In some situations, these directors and officers may need to be proven innocent before the company can provide indemnification or defense costs.
  • To comply with local tax regulations: 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.
  • To protect against personal assets 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.
  • To minimize operational disruptions that might otherwise occur if directors or officers are sidelined by having to respond personally to an investigation or litigation.

Key Considerations in Structuring a D&O Insurance Program with Local Foreign D&O Liability Coverage

Rather than place foreign local D&O insurance policies on an ad hoc basis, you 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. This strategy will streamline your company’s coverage decisions in each country where you operate. This is especially important given the different options multinational companies have in structuring their programs. For a discussion of some of these options, see this article from Woodruff Sawyer’s D&O Notebook.

Developing your company’s global strategy in approaching international D&O liability coverage will likely involve multiple internal stakeholders and business and/or legal considerations. A well-constructed strategy typically involves input from:

  • Management: Certain members of management (e.g., CEO, CFO, Presidents, and General Counsel) often play a role in decisions regarding insurance. Management should be consulted early to identify potential changes to the company’s business and global footprint. What may seem like a small change to operations in a foreign jurisdiction may result in a significant change to the degree of legal and regulatory exposure.
  • Legal: Given their unique position in managing corporate governance, including for foreign subsidiaries, Legal is a critical stakeholder when it comes to developing your D&O insurance risk management strategy. This is also typically the group that can help identify which positions within an organization should be covered by a local policy, where necessary. In addition, Legal will be able to assess whether there are any limitations specific to local laws and regulations regarding the type of insurance that can be purchased, the ability to indemnify employees, and ability to advance defense costs to name a few.
  • Regulatory: This group, often within the overall legal function, will have visibility into regulations and the associated exposure applicable to operations of a company’s business (e.g., manufacturing, sales, export/import, R&D).
  • Risk Management: If your company has a formal risk manager or risk management group, this is the place to go for a holistic, portfolio view of the most significant risks to the company, including whether negative events in foreign jurisdictions may impact a company’s ability to conduct business.
  • Finance/Treasury: Each will have insight into a company’s ability to sustain financial loss and/or need to transfer that risk to insurance.
  • Tax: In addition to being able to advise as to any existing or potential tax related risks of doing business in a particular region, your tax group may have a preferred approach as to which local entity is named on a local policy and how premiums are paid.

When should a company reassess their locally admitted D&O insurance policies?

Generally, it is advisable to discuss your D&O insurance program with your broker four to six months in advance of the expiration of your local D&O insurance policies. Business or organizational changes may require revisiting policy terms, an exercise that you will want to be completed prior to the renewal of your insurance program in case your existing D&O insurance program is now insufficient given the changes that have taken place within your organization.

Finally, it is important to engage a broker with a strong expertise in international D&O insurance practices and a deep understanding of the challenges that directors and officers face internationally. An experienced broker will be able to help match a company’s appetite for risk with the D&O insurer that has the capability to help cover those risks. This is important because not all D&O insurers have strong global offerings or claims capabilities—something you surely do not want to learn after you are hit with a claim.

Woodruff Whiteboard Breakdowns: Why Would a Company Need a Local D&O Insurance Policy?



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