Just a few years ago, a company could buy a single insurance policy covering director and officer liability, and that single master policy would be good for claims anywhere on the planet.

That practice is changing, and fast.

These days a multinational company not only must buy a master policy in its home country, but potentially also other policies to cover operations in countries where the government requires local coverage. In insurance jargon, more jurisdictions want foreign companies to use “admitted” insurance.

“Regulators are getting smarter,” says Debbie Morris, a vice president at American International Underwriters, a subsidiary of insurance giant American International Group. “We are seeing the admitted versus non-admitted insurance debate coming up a lot more often than it ever has.”

The reasons are many, and not always clear. Governments may want to make sure that foreign companies get coverage appropriate for conditions within their borders. Boosting the local insurance industry may be another incentive.

Hill

“Before the admitted versus non-admitted issue, it was pretty simple,” says Stuart Hill, an attorney at Lovells, a London-based law firm. “One had a single policy written in the London market or in New York which would say, ‘We provide coverage worldwide.’ Now we have to issue individual policies in specific jurisdictions.”

But while many countries have laws requiring admitted insurance, enforcement against non-admitted insurance is spotty in many nations. Some companies simply try to skirt the requirement, but deducing which countries will enforce their insurance regulations can be tricky. Brazil, for example, is renowned for insisting on local coverage; China and India are also places where a non-admitted policy is unwise.

Elsewhere, however, matters are less clear. While the laws against non-admitted policies may exist, the regulators may not have the time to enforce these laws, or they may take a flexible attitude toward applying them. After all, when written properly, a non-admitted policy can cover a local subsidiary in any country.

“A lot of countries require admitted insurance,” Morris says. “But they don’t really enforce it.”

Crafting a Global Approach

Overseas policies for D&O coverage must be carefully crafted, insurance experts say, so they coordinate with the company’s master policy in its home nation. The policies should set worldwide and local limits on payouts, and all those details should be documented. Nick Foord-Kelcey, head of the European D&O practice at insurer Marsh McLennan, also warns that these complicated policies are not always fully tested, and surprises might crop up even in the best-written insurance plans.

D&O insurance is complex even in a place like the European Union. At first glance, writing one policy for the whole region would seem simple; according to EU regulations, a policy written in any one-member nation is valid in the other 26.

Proferes

“One policy achieves regulatory compliance across the EU,” says Jim Proferes, a D&O liability specialist at Chubb Specialty Insurance. But in practice, a comprehensive D&O policy for all of the European Union may not be so easy to assemble. A policy can be legal in all jurisdictions, but it is not the same as a locally admitted policy and might not be totally appropriate in all EU countries.

Foord-Kelcey gives the example of France. All D&O policies there require a five-year “runoff period”—that is, if a policy is canceled or amended, it has to remain in force for five years. But a policy written in England does not need a five-year runoff period. How would an English policy fare in France? Insurance experts say that isn’t clear.

France has other peculiarities. Criminal cases against directors are popular, and investigations can take years; meanwhile, it is illegal for a company to indemnify a director during a case against him. Some insurers say that it may be better to just write separate policies for all EU countries where a company operates, rather than trying to cover local nuances on an ad hoc basis.

“A lot of countries require admitted insurance, but they don’t really enforce it.”

— Debbie Morris,

Vice President,

American International Underwriters

Britain’s Companies Act of 2006 is raising particular concern on the D&O front. The law specifies an extensive list of director obligations that go far beyond the usually fiduciary responsibilities. Responsibility to the community and the environment are included, as well as numerous other hard-to-define obligations. For example, Hill says, companies must win environmental permission from the government to build a factory. So could the community later sue the company and directors for pollution problems, even if all legal requirements were met?

“Previously companies have been regarded as businesses,” Hill says. “If one looks at these changes, one could see the corporation becoming a sort of catalyst for social and environmental change. This could lead to an increase in claims.”

Lee Lindsay of the Aon Financial Services Group says much the same. She contends that the Companies Act simply codifies principles that were part of common law anyhow. Directors were always responsible to the community and for the environment; now, it’s just spelled out.

One bit of good news: Sizable actions against directors are almost unheard of beyond the developed world, so most companies can survive with low-limit D&O policies in developing countries. Insurance companies don’t necessarily advise against this strategy, but they warn that the developing world is catching up to Western governance standards, actions against corporate officers in poorer countries could be seen in the near future.

In Russia, for example, the law now includes a long and fairly exhaustive list of director responsibilities, says Hill—and courts there are known to be bold. In China, anticorruption campaigns could easily transform into officially sanctioned shareholder actions against foreign directors. The penalties could be severe.

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