Global Companies, Global Liabilities

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.