While some litigation trends in the United States are troubling for business leaders and directors, what is happening in many countries around the world can be downright scary. As the pace of globalization intensifies, board members and corporate officers open themselves up to personal liability in far-off jurisdictions. We sat down with Suzan B. Friedberg, assistant vice president, foreign general claims at American International Underwriters, and Steve Whelan, executive vice president at AIG Executive Liability, to delve into some of the trends taking shape in Europe, Asia, and South America. They shared some good advice on what directors can do to manage their global liability exposure.
Do you see significant storm warnings ahead for directors?
Steve Whelan: The trend we are seeing is regulators engaging in more consumer-protectionism than was the case in the past for U.S.-based companies doing business overseas. You’re starting to see markets adopt U.S.-style litigation. A clear example is in Italy where, effective June 30, you will see consumer class actions for the first time. Germany adopted class actions in 2006. In Canada, they adopted Bill 198 a few years ago, which is similar in intent to Sarbanes-Oxley. The rationale? More and more countries are looking to protect shareholder rights.
You’re still saying that the U.S. remains the largest litigation market?
Suzan Friedberg: From a D&O perspective that’s true, but I will say that other jurisdictions, particularly Australia, are becoming very litigious and they’ve had a couple of developments that are fueling class actions. Unlike in the United States, litigation funding is not a function of contingency fees, but through litigation funding firms, which operate on the same type of basis but fund a class action in exchange for a percentage of the recovery. The plaintiffs’ attorneys are getting a regular fee. These litigation funders are really nothing more than investment companies.
What activities overseas can create liabilities?
S.W.: Our original perspective was that if you served on a board in a foreign country that would be the only place you would see liability. But there are many alternatives for overseas plaintiffs now. If you participate on a board which has a subsidiary in another country, you are at risk. There is also the chance of exposure if your stock trades on a foreign exchange or if you have a large percentage of investors in another country. If an action or decision is made in a foreign jurisdiction, it could lead to a claim against the director, regardless of his or her location.
So what you’re saying is that wherever you go— to put it in litigation terms—you’re still in West Virginia?
S.W.: That’s really the crux of it. A lot of this is coming from clients themselves. You’re seeing companies get hit on multiple fronts. Look at the case of CP Ships, for example. A suit was brought and settled against it in the United States, and then several other actions were brought in Canada, where the company is headquartered and operates in multiple provinces. In the Shell case, there was a U.S. settlement and then settlements in foreign countries. The real issue is that companies have gone global and their shareholder base is now global as well. U.S. companies, in particular, no longer have a majority of shareholders in this country. They’re spread out around the world.
In the circumstance you’re describing, director liability is a growing problem, but aren’t they covered by D&O insurance?
S.W.: There are a couple of different trends. One is an increase in the number of claims outside the United States. We starting to see more regulatory involvement and more legislation passed to permit class-action litigation. That leads to another subject: a U.S.-based company buys a U.S.-based directors’ insurance policy, but what if they are sued in a foreign jurisdiction that prohibits the use of non-admitted insurance? That’s the issue now. The U.S. policy is an admitted policy in the United States, but it is not an admitted policy in Brazil, China, or India, which are three countries that clearly state in their laws that they prohibit the use of non-admitted insurance.
Can you clarify the difference between admitted and non-admitted insurance?
S.W.: Some foreign jurisdictions require a licensed and admitted policy form that was approved by the insurance regulators in those countries. A policy in the United States that is on an admitted basis means admitted in the U.S. but is not necessarily recognized as admitted insurance in several countries abroad. So therefore, if you are sued in those jurisdictions you are facing the potential that the regulators deem the U.S. insurance policy to be non-admitted, meaning it is invalid.
“Nothing isolates or insulates from potential litigation. If you’re operating in any foreign jurisdiction, you face many kinds of potential liabilities.”
Steve Whelan, AIG Executive Liability
Are they simply saying they want you to buy insurance in their locality?
S.W.: Yes, in many instances it has to do with securing a policy in local jurisdictions so that premium taxes are paid to the appropriate authorities.
What do directors need to be on the look out for, and where are the courts that can be unfriendly?
S.F.: Our own legal system poses a lot of risks for companies doing business here. But one should be cautious with regard to liability in China. There are also big litigation risks in Australia and in Germany for insured claims. Then there are regulators involved in securities-related matters in Hong Kong, Taiwan, and Singapore, where we don’t really see private shareholder suits but the enforcement is really by the government.
S.W.: Just to add to that from the D&O front, many of the countries outside the United States do not have a lot of case law, so we don’t know how they’re going to react to the type of litigation we frequently see here that they are now adopting.
Is there an equivalent of the plaintiffs’ bar? Are plaintiff lawyers getting more aggressive overseas?
S.F.: In Australia, the attorneys are paid by the litigation funders, so they’re the ones who are getting the large returns like the plaintiffs’ bar gets here. In the United Kingdom, we haven’t seen the same type of class actions we are starting to see elsewhere, and my understanding is that the class-action statute hasn’t been tested.
S.W.: I only know of one case in the U.K. In Italy, since they’ve adopted class actions as of June 30th, there is a case that’s going to go forward there. It’s in the premature stages, but also why we want to be out in front of these issues.
Are you recommending that companies should avoid certain markets? Or are these issues so embedded that they can’t be avoided if you’re global?
S.F.: Any company going into a new country needs to do its due diligence— that’s just good practice. You weigh the pros and cons and make decisions accordingly. If you do business in Latin America, you might have kidnap exposure. In the United States, you would have litigation exposure. In Australia, you would certainly have litigation exposure. And in Europe, you’re going to have regulators breathing down your neck. Companies generally are responsible in doing due diligence before entering new markets.
Directors and officers might not know that they have litigation exposure in some markets if they don’t have a major facility there, but a claim can be made anyway. Yes?
S.W.: That is the case. There was a company that in 2007 had their offices raided and 40 people arrested for evading import taxes. What they were doing was shipping product from the United States to an island and then shipping the product from the island to their customer and avoiding the import tax. In that case, it turns out, it was not actually a subsidiary of a U.S. parent company that created the problem; it was a sales office that represented less than 1 percent of the total revenue of that company. From our perspective, the larger the operation in any given country, the longer the decision-making process and the larger the risk; but nothing isolates or insulates from potential litigation. If you’re operating in any foreign jurisdiction, you face many kinds of potential liabilities.
S.F.: When we have companies that are domiciled in the Netherlands, France, or Australia and they do business here, they’re subject to criminal investigations, just like any U.S. company. So it goes both ways.
Are there cases where what is deemed a civil act in the United States may be deemed a criminal act in another foreign jurisdiction?
S.F.: The corporate manslaughter act that recently went into effect in the U.K. is one example. The act was geared mainly to go after the corporation, but there’s a lot of talk right now that even though it’s geared toward corporate liability rather than individual liability, you would need to have someone who individually was proved negligent or ignored a situation and it is possible that you could have a criminal case.
If a company is significantly sized and wants a worldwide policy, is that out of reach?
S.W.: Our policy has been for years a worldwide policy where permissible by the law. There are three issues that a client would need to be thinking about: First, am I operating in a country that does not allow non-admitted insurance policies? Second, you need to pay appropriate premium taxes to local jurisdictions, so you need to figure that out, which we do by securing a policy on a standalone basis or tied into the U.S. policy. The third issue is coverage. Our D&O policy in the U.S. differs from what is required by other countries around the world. Two countries are worth noting: In Germany, you have the dual board based system where there is a supervisory board, and their job or their duty is to bring action against the board of directors. If you read the policy, that is an insured action which is excluded from the U.S. policy. In France, there’s a provision in that policy that should the policy be non-renewed you must provide a minimum of five years of runoff or tail policy— again the U.S. policy does not have that provision in it.
Do you believe that many U.S. companies have insufficient coverage given the global liability issues we’re discussing?
S.W.: I think there are more clients who are placing a separate limit policy or going through our Passport service and doing a shared policy with the U.S., because they know if they are sued in a foreign jurisdiction, many jurisdictions are not clear if they take non-admitted policies.
Are there cases overseas where the coverage was proved to be inadequate?
S.W.: We do not have a case where a policy written by AIG has failed to provide coverage in an overseas jurisdiction at this point. To go back to the beginning of our conversation, the trends are changing. The regulators are becoming much more active enforcing laws that have been on the books for years that have not been enforced. There is not a case that I know of where a U.S. policy has failed, but nobody wants to be the first to find that out. We’re averaging between 12 and 15 new clients per month particularly on D&O, securing some type of coverage outside of the United States. A foreign-based underwriter is also seeing the same type of multinational activity.
Where are the greatest risks abroad?
S.W.: I can tell you the countries our clients have expressed the most interest in: Brazil, India, France, Germany, Switzerland, Japan, China, and Russia. The main reason for appearing on this list is that many of those countries do prohibit the use of non-admitted insurance. Clients are also very concerned about indemnification laws in these foreign countries. If they’re not permitted to indemnify their individuals and they’re not sure about nonadmitted insurance, then the individuals in those countries may be left to fend for themselves. That is a grave concern to our clients.
What are the main things that directors need to consider regarding liability risks overseas?
S.W.: The three main things are: do I have operations outside of the United States? Do I have a board of directors in those jurisdictions? And what are the indemnification laws in these foreign jurisdictions? The only secure way to be sure you can get insurance proceeds into a country is to make sure you have an admitted policy, whether it’s a standalone policy or shared with a U.S. policy. Finally, once you have made sure you’ve met your admitted status, make sure that you’ve paid your premium taxes to the foreign jurisdiction.