The Case for Global D&O Insurance

In the constantly changing area of directors and officers (D&O) liability, significant D&O exposures are no longer limited to U.S. regulatory and legal actions. Recent legislative and regulatory developments, coupled with several large settlements outside the U.S., require prudent multinational companies to take a fresh look at global D&O exposures and related insurance coverage issues. Foreign laws and regulations sometimes change, which can leave an unprepared company exposed to uncovered and often unrecognized risks.

With the globalization of securities liabilities, those responsible for insuring D&O risk should be informed and monitor developments regarding:

• Admitted and non-admitted coverage requirements: A given country may prohibit a non-admitted insurer from insuring local risks. In many countries, local financial responsibility laws and qualification regulations may require a local admitted policy. This increases the potential exposure for companies that choose not to purchase admitted insurance.

• Pro-plaintiff legislation and escalating private settlements: There is a noticeable shift towards increased class actions in Europe and elsewhere, including in Australia and Canada.

• Increased regulation of cross-border corporate governance: There has been a proliferation and toughening of corporate governance rules and Sarbanes-Oxley type regulations in the EU and elsewhere, further increasing the focus on adequate global and local D&O coverage.

Alternative Methods

With no foreign underlyer policies, concerns have arisen that traditional worldwide territory policies may not effectively address other countries’ laws, regulations, and particular liability exposures. Alternative products and platforms currently available include the following four methods of insuring D&O exposures:

• Separate, stand-alone policies issued in foreign jurisdictions: The insured has the benefit of admitted policies that conform to local insurance regulations and local practices; however, separate, stand-alone limits for each policy could increase the aggregate cost of such coverage.

• Separate policies issued in foreign jurisdictions with shared limits: The insured may obtain individual foreign underlyer policies in the relevant foreign jurisdictions that comply with local law and provide the benefits offered by the separate, stand-alone policies; because limits are coordinated under the shared limits endorsement, the aggregate cost of such coverage may be reduced.

• EU freedom of services policy: Various directives allow carriers admitted in one EU member state to write policies covering risks in all other member states on the basis of existing authority in the “home country.”

• Separate policies issued in foreign jurisdictions with excess limits indemnity/reimbursement by U.S. parent: Coverage to the full extent of the foreign policy limits can be demonstrated to local insureds because all policies respond to pay according to the terms and limits of each policy, while the parent corporation is required to reimburse an affiliate of the local insurer for amounts paid above the agreed-upon worldwide aggregate limit.

Choosing the Right Carrier

In today’s global market, properly structured D&O coverage through a global carrier is a necessity for all multinational companies with operations outside their home country. Insureds should understand the coverages available and the advantages and disadvantages of each. In all cases, the insured should diligently review the carrier, ask pointed questions regarding its global presence, and challenge broad statements and commitments regarding coverage and local service. The coverage obtained will only be as effective as the carrier’s experience, resources, and ability to pay claims in applicable foreign jurisdictions.

This article was prepared for AIG Executive Liability by Michael Goldman, Deborah Cotton, James Pinkstaff, and Patrick Harrison of Sidley Austin LLP. For more information, please visit www.aigpassport.com.