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How to Design Directors & Officers Program That Protects Company’s Assets both in the United States and Abroad
As we highlighted in Part 1 of doing business abroad, understanding the personal exposures of Directors and Officers is a challenge for today’s multinational companies. This is particularly important when you begin to contemplate company employees’ individual duties, the probability of potential lawsuits and the regulatory landscapes that can vary widely from country to country.
The key to mitigating both types of risk is to ensure that the organization implements a customized program designed to manage each of the three sides of D&O insurance effectively. How does a company test this? The best way which is also the one we advocate for our clients is to stress test how a policy would respond across the organization, from headquarters to a local director.
How Should an Organization Design its D&O Coverage?
Many insurers issue a single global insurance policy to the parent company in the parent company’s jurisdiction. This global policy insures all directors and officers at both headquarters and foreign subsidiaries. However, several growing developments among various countries complicate this type of arrangement. This is precisely why we review our clients’ risks on a country by country level to avoid exposing them to a country specific financial risk.
The United States and many European countries permit non-admitted insurance. However, certain other countries, such as Brazil, Russia, India, China, Mexico Japan and many others impose strict conditions on procuring insurance locally. For example, a director in Mexico could be thrown in jail if the company failed to procure local coverage. In another example, a director or officer can be held personally liable for the organization’s failure to procure adequate D&O insurance and violating the Companies Law in a particular country.
Foreign regulatory authorities increasingly guard against insurance transactions that do not strictly comply with local laws and regulations. Any kind of non-compliance could lead to costly fines and taxes or to the loss of coverage for foreign executives. In some cases of non-compliance, foreign governments could levy unanticipated premium taxes and income tax assessments against the U.S. parent company and its overseas unit.
Mitigating Operational Risks Overseas
There are important mitigation strategies that can help reduce the risks outlined above, such as purchasing a master D&O policy. However, this too must be done in a strategic and thoughtful way with a carrier that has a global presence and recognizes the strategic nature of risk. While effective, even this solution has its own unique difficulties when it comes to specific countries. Only through an independent review of a company’s exposures can its leadership truly understand how to mitigate their company’s exposures.
In Part 3 of our series on mitigating risks while doing business abroad, we will address we will address financial and reputational risks faced by companies whose employees are doing business abroad.
About The ALS Group
Albert L. Sica is the Founder and Managing Principal of The ALS Group, an independent insurance and risk management consulting firm focused on helping their clients reduce insurance and risk related costs. Visit www.thealsgroup.com or e-mail Al at asica@thealsgroup.com, or call (732)395-4251 for more information.