D&O Exec's Exposure Rises Globally

Claims against corporate directors and officers are no longer exclusively a U.S. phenomenon, directors and officers insurance experts from Willis told risk managers and executives during a Webcast seminar earlier this week.

In fact, insurance buyers and other risk officers who think only about the U.S. plaintiffs' bar when they turn their attention to D&O liability issues miss a world of problems in which executives can face litigation simultaneously in several parts of the globe, according to Ann Longmore, Willis Executive Risks Practice D&O product leader.

Beyond U.S. borders, regulators--not lawyers--take the lead on D&O claims, said Julian Martin, executive director of Willis' Financial and Executive Risk practice in London. Outside the United States, he said, the anatomy of a typical claim begins with a regulatory investigation into fraudulent or criminal behavior instead of a civil suit. These investigations later impact the share price of a company, which eventually can result in a follow-on civil suit, he noted, reversing the typical U.S. process Ms. Longmore laid out.

Facilitating a "new reality" of worldwide D&O exposure, Ms. Longmore explained that over the past 20 years "a regulatory bridge" has been built--a framework of cross-border enforcement and cooperation between regulators that allows cross-border litigation.

Illustrating how regulatory cooperation is driving an increased frequency of claims brought outside the United States by local regulators, Mr. Martin displayed a list of eight recent cases against corporate directors and officers brought by regulators in Australia, France, Italy, South Korea and Sweden. In addition, he showed that the number of requests made by or to foreign regulators for securities enforcement assistance has increased in recent years to a level near 800 per year for each of the last four years.

Cross-border sharing of information between regulators can have dangerous consequences for directors and officers being investigated, since different liability standards apply in different parts of the world, Ms. Longmore said.

"Evidence that might get you off the hook in one jurisdiction could establish your liability in another"--such as the United States, where intent to deceive is a somewhat unique fraud standard, she pointed out.

After painting a picture of ever-increasing exposure, the Willis team explained that directors and officers can be left high and dry if their companies don't have a D&O insurance program that responds globally to cover claims. That's because in some jurisdictions, "corporate indemnification is strictly prohibited," she said. In other words, corporations cannot legally protect individuals named in suits or investigations even if they have the financial wherewithal to do so.

Further complicating matters, she explained that it is not the law of the country of the parent company that determines if indemnification is allowed. Instead, the local law of each and every subsidiary must be considered, she said, pointing out that some corporations have hundreds of worldwide subsidiaries.

Delivering some positive news, Mr. Martin said D&O insurance policies can be written to respond globally if buyers take care to ensure certain provisions are correctly worded. These include a global territory provision affording worldwide coverage and language defining the "functional equivalents" of U.S. directors and officers "as we understand them" in other parts of the world.

Other important issues to be addressed are tax compliance and questions of whether a D&O policy is legally able to respond in the jurisdiction where a D&O claim is made, the Willis experts said.

Most countries--roughly 85 percent--prohibit or limit nonadmitted insurance, observed Claude Gallello, international practice leader, defining nonadmitted insurance as insurance placed outside the country where exposure to loss is located.

Penalties for corporations that buy nonadmitted insurance run the gamut from fines and penalties to imprisonment, he said.

"Some clients buy one local policy; some buy 100," Ms. Longmore said, noting that corporations need to match their "global footprints" with those of potential insurers, comparing insurers' abilities to deliver local policies where needed.

In addition, she said, insurance buyers should coordinate coverage between master and local policies.

Mr. Gallello explained that a control master program exists where a single insurer provides a master policy in the country where the parent is located. The master policy acts in an excess capacity over the policies issued locally by that same carrier.