The question of purchasing separate local foreign D&O frequently arises for companies with foreign operations or exposures. The answer requires careful analysis on a country-by-country basis. While the most common regions for placement of foreign D&O are Europe, Asia and South America, all foreign countries should be carefully assessed. For large public or private companies and/or those with a larger number of foreign entities/subsidiaries, arriving at an appropriate solution is almost always best assessed with a large international broker with local offices in those countries of operation.
For midsize companies and those with fewer foreign locations, companies are likely to receive more immediate attention by utilizing separate local brokers with appropriate experience. While relying on a U.S. domestic D&O policy with global coverage can initially seem like an ideal solution, worldwide coverage alone does not mean that the insurance can respond, and even when allowed, there may be tax liabilities on claim payments and/or the carrier may be limited by their experience with the local law or court systems or their available resources. Foreign countries have differing laws regarding the allowance of director indemnification and laws requiring insurance to be purchased through a local/admitted carrier to name a few.
In many foreign countries, failure to comply can result in declination of coverage, directors’ assets being frozen, fines, penalties and, in some countries, imprisonment. The tax implications of a noncompliant program further complicate an already complex decision. Must claim payments be made in country? Can the subsidiary hire local counsel, experts and adjusters? Will the carrier make a payment directly to the subsidiary or to the parent company? How will that be handled? As both the frequency and severity of D&O claims continues to increase worldwide, properly coordinating your D&O for foreign exposures is becoming increasingly important.
Because this decision involves a chain of complex questions, we have developed a flowchart to assist directors in assessing their need for separate foreign coverage. Due to constantly changing laws/regulations, foreign case law and the ever-shifting verbiage of D&O policies in general, this guide is not meant to serve as an end-all. It is always advised that these decisions be made in partnership with an experienced attorney and your respective broker. As alluded to in the guide below, there is more than one solution when tailoring foreign coverage. These options range from U.S.-issued policies with global/worldwide coverage; FOS (Freedom Of Service) policies, which act as a local blanket D&O policy for the EU; separate, individually issued local policies issued in each foreign country of operation; and global master policies issued by an international insurer with separate local policies issued by the carriers’ local subsidiaries. The below flowchart addresses some of the following considerations.
- Brief country assessment
- Foreign risk, regulation and indemnification
- Claims process and tax implications/liabilities
- U.S. global policy carrier and coverage assessment
- Corporate interests, goals and miscellaneous risk management needs
The following guide is best reviewed in conjunction with a risk/exposure assessment to help quantify cumulative risk and help the organization gain a more accurate picture of the potential for foreign litigation. It is also important to note that small operational shifts do not result in a proportionate change in risk – the increased exposure created can be exponentially greater. Identical entities operating in Brazil and Sweden have considerably different risk profiles, liabilities and compliance requirements. A foreign energy company comprised of a small support office, two executives and a handful of employees operating in Germany may have less urgency for foreign coverage and may be able to adequately protect their executives through a well-drafted indemnity agreement. However, the same subsidiary, if relocating to China and actively seeking to secure energy contracts, has a significantly increased exposure due to bribery concerns and the legal and compliance environment of China.
Lastly, in situations where a U.S. global policy is entirely compliant with foreign laws (and viewed as a viable solution), organizations should still be engaging an internal dialogue of whether or not such a policy is appropriate. Simply coordinating a D&O policy to respond to an FCPA action/investigation alone can be a complex exercise requiring careful review and verbiage negotiations (such as the definitions of claim, loss, wrongful act and inclusion of informal vs. formal investigations). These complexities serve to highlight the challenges in attempting to groom a U.S. policy to adequately provide coverage for the any given foreign entity. This complexity coupled with the uncertainty of foreign courts’ interpretations of D&O language from a U.S. insurer (when allowed) is often enough of a reason to warrant the purchase of a separate local policy. Even when an entity strongly believes a U.S. global policy is the most appropriate solution, this dialogue is best had with a foreign local D&O quote in-hand so that a proper financial assessment can be included.
Additional Tools & Resources:
- Zurich Country Guide On Corporate Indemnification (published in 2013)
- RIMS & Zurich Whitepaper On Global Developments (published in 2013)
- Axco – Global Regulation & Compliance
Evan Bundschuh is partner and commercial lines head at 
