Archive for the ‘D&O’ category

Small U.S. Businesses Need to Consider Their Global Exposures

3 May, 2011

Last week I attended a seminar here in Atlanta designed for small businesses to improve their sales. The attendees were a wide range of business types from heavy equipment sales to document security. I had the pleasure to talk with some of these business owners who were quick to dismiss their ‘global’ exposures because they are not Coca-Cola, UPS or some other multi-national firm – they are ‘Main Street USA’. To their credit, they were willing to spend 3 minutes with me and learn that many of them do have global exposures, and they have no plans for this risk, yet.


What I reminded them of, in a globalized economy all linked by overnight delivery, advanced telecommunications and the internet, even today’s small companies increasingly do business with foreign suppliers and customers. For these businesses, conducting business outside of the U.S. has never been easier, but doing so leads to a wide array of risk management and insurance issues.


Like them, it is obvious to most people that companies with foreign subsidiaries, branches or joint ventures need to be aware of their exposure to loss in the various countries in which they do business. They need to be certain that their insurance programs are appropriate to the exposures and in compliance with local regulations. Failure to do so may leave a company without insurance coverage – which may not become apparent until after a loss has occurred – and potentially subject to fines and penalties.


Managing a multinational insurance program can be enormously complicated. Some countries require policies to be purchased locally, meaning that the buyer needs access to distant insurance markets and must be able to manage language issues, especially since the policies are often issued in the local language. One solution is to delegate local insurance purchases to local employees, but this can lead to other issues concerning the quality and consistency of coverages. These ‘multi-national’ companies oftentimes simplify the insurance process by working with brokers experienced in international insurance programs and multinational insurers that can provide substantially one-stop service, even when local insurance policies are required.


However, a point I made with these small business owners is that most, if not all of them, have a company website, and there is where they are potentially exposed to liability from foreign sources. Even if they do little or no business in a foreign country, since the Internet is borderless, the company could potentially run afoul of various libel, intellectual property infringement and privacy laws. Companies that sell products to foreign buyers have even more opportunities to incur liability, such as product liability lawsuits and enforcement of consumer protection laws. Companies with physical locations outside the U.S. face the full range of property and liability exposures in each country in which they have facilities and people.


Understanding the exposures presented by each country in which a company operates can be daunting. Liability exposures are especially challenging since laws and legal systems vary widely.


Even if not required by law, local policies may be a good idea in many cases. Local policies are more likely to be tailored to local laws and practices, and ready access to local claims personnel may be essential following a loss. Additionally, buying local policies may avoid certain complex tax issues associated with multinational policies.


Globalization is a business and economic reality, but insurance still is regulated locally. A well-structured insurance program with an insurance broker that understands these exposures is critical. Businesses should expect their broker to choose an insurance company that can minimize the friction that can be caused by the myriad of insurance regulation around the world, and allow management of the businesses to focus on growth and profitability without liability and insurance issues being an impediment.


The Impact on D&O for Multinationals with Certain Cuba Sanctions Restrictions Lifted

27 April, 2011

Earlier this year, the US Treasury’s Office of Foreign Assets Control (OFAC) amended the Cuban Assets Control Regulations, 31 C.F.R. Part 515 (CACR or Cuba sanctions). The amendments implement policy changes announced by President Obama on January 14, 2011 to continue outreach efforts to the Cuban people. The amended regulations took effect immediately and among other things, authorize general licenses for (i) certain transactions with Cuban nationals who are permanent residents outside of Cuba, (ii) travel to Cuba in connection with educational and religious activities, and (iii) remittances to Cuba.


Immediately, I began to wonder about the impact of this lifting on the D&O policies of U.S. firms with local policies outside the U.S. Specifically, I previously had an insured client who had a subsidiary in France. We were looking to provide a local D&O policy in France. The French subsidiary had a Cuban National who sat on their Board. In the case of a claim, we were advised that we would not have had the ability to provide indemnity payments to this board member. The broker and client sought other alternatives. No one wanted to have to tell the French board that one of their members were excluded from payments by the US insurer whose policy was acting as a DIC / DIL.


Prior to the amendments, the Cuba sanctions broadly prohibited transactions with Cuban nationals no matter where they resided. The amended regulations establish a new general license that authorizes persons in the United States to engage in certain transactions with individual nationals of Cuba who are permanent residents outside of Cuba. The general license is subject to the requirement that US persons obtain from the Cuban national at least two documents issued to the individual by the government authorities of the new country of permanent residence. However, all property in which a Cuban national has an interest that was blocked prior to the later of the date on which the individual took up permanent residence outside of Cuba or January 28, 2011, remains blocked.  


The amendments to CACR also add general licenses for certain educational and religious activities that had previously required specific licenses from OFAC. A specific license will still be required for any educational or religious activities not authorized under the new general licenses. The new general license for educational activities authorizes accredited US graduate and undergraduate degree-granting academic institutions to engage in travel-related transactions incident to certain educational activities. Students traveling under the general license must carry a letter on official letterhead, signed by a designated representative of the sponsoring US academic institution, stating that the study in Cuba falls within the scope of the general license.  


Similarly, the new general license for religious activities authorizes religious organizations located in the United States, including members and staff, to engage in travel-related transactions that are incident to religious activities in Cuba. Under the general license, travelers must engage in a full-time program of religious activities, and donations to Cuba or Cuban nationals are not authorized. In addition, individuals traveling under the general license must carry a letter on official letterhead, signed by a designated representative of the US religious organization, stating that the travel is within the scope of the general license.


Finally, the amended regulations add three general licenses related to remittances to Cuba subject to certain restrictions. Unfortunately, it appears that the D&O claims issue may not be resolved because these new licenses authorize (i) remittances of up to $500 per quarter to any Cuban national, except prohibited officials of the Government of Cuba or prohibited members of the Cuban Communist Party, to support the development of private businesses, among other purposes; (ii) unlimited remittances to religious organizations in Cuba in support of religious activities; and (iii) remittances to close relatives who are students in Cuba pursuant to an educational license for the purpose of funding transactions authorized by the license under which the student is traveling.

UK developments on climate change risks disclosure

13 February, 2010

In the UK there is a growing scrutiny of how climate change and environment issues are managed and reported.

1. The Companies Act 2006 (the “Act”)

The Act requires directors to carry out their duties in a way which is most likely to promote the success of the company for the benefit of its members as a whole. The Act also obliges most companies to produce a business review. Directors of listed companies must understand the likely consequences of any decision in the long-term and disclose the main trends and factors likely to affect the future development, performance or position of the company’s business in their business review. Large quoted companies must also report on environmental risks, policies and key performance indicators (KPIs). Environmental risks encompass a wide range of issues, not purely climate change although climate change may be an inherent factor. In order to assist with the reporting process the Accounting Standards Board has issued a statement of best practice and DEFRA has issued guidance on KPIs.

2. Recent Guidance for Auditors

In September 2009 the Environment Agency and the Institute of Chartered Accountants for England and Wales (ICAEW) launched new guidance on annual reporting in annual financial statements, entitled “Turning Questions into Answers: Environmental Issues and Annual Financial Reporting 2009”. The report provides guidance to assist preparers, users and auditors of annual financial statements to identify sufficiently relevant environmental issues, which affect company financials warranting disclosure. The aim being that the disclosure of management policies relating to environment matters and companies’ corporate commitment to these issues will assist in avoiding financial risks and prompt internal change. The report is expected to be of interest to directors and users of annual reports in addition to auditors.

Whilst particular obligations are placed by the Act on large and quoted companies to report on environment related risks, policies and KPIs, the report advocates voluntary reporting for all companies in excess of the required standards in order to generate information on environment performance.

3. Calls for harmonized climate change disclosure framework

The ICAEW, the Climate Disclosure Standards Board and Prince’s Accounting for Sustainability Project and others including 12 accountancy institutes from around the world have called for a single set of universally accepted standards for climate change related disclosures in mainstream financial reports.

In 2009 the Climate Disclosure Standards Board (CDSB) consulted on a Draft Reporting Framework designed for companies to use in evaluating the type and extent of disclosures that should be made about climate change in their mainstream reports. The Framework is to apply to disclosures made in or connected to information provided outside financial statements – such as the business review – that assists in the interpretation of a complete set of financial statements or improved users’ ability to make efficient economic decisions. A response to the public consultation is expected in the first quarter of 2010.

Ceres report on survey of asset managers practices

A recent report by Ceres entitled “Investors Analyze Climate Risks and Opportunities: A Survey of Asset Managers Practices” (January 2010) is also of significance. The report is the result of a survey conducted in 2009 of the world’s 500 largest asset managers asking them to describe how they are considering climate risks in short and long-term decisions. The report examines best practices that asset managers are using to incorporate climate and environment risks into their due diligence, corporate governance and portfolio valuation. The key findings reveal that many companies are still developing protocols for reporting on their carbon emissions and the risks and opportunities that they face. Whilst these disclosures are more prevalent, they are still voluntary and lack consistency.

The report notes that five of the world’s largest financial institutions have adopted the Carbon Principles, a roadmap for banks and utilities to evaluate and mitigate climate risks in lending to electricity generation projects. These financing entities acted out of concern about long-term viability of high-emission electricity generation. This means that the Carbon Principles initiative could increase the cost of financing high-emission enterprises if lenders demand more favorable terms to compensate them for potential liability, or if they simply avoid financing high-emitting projects. Ceres identifies that utilities that are investing in energy efficiency and cleaner renewable energy may not only face fewer material risks related to climate change regulation, but may also benefit from lower financing costs and higher market share, as emission regulations and renewable portfolio standards take effect.


Increasingly climate change impacts, sustainability issues and environmental compliance are being considered in making investment decisions. The emergence of new guidance on requirements for disclosures on climate change risks is indicative of heightened awareness of how environment related legislation, policy and risks should be factored into business decision making in a cohesive way.  More developments in this area should be expected.

Foreign Corrupt Practices Act — Probes may hit D&O insurers

17 December, 2009

Frederic Bourke Jr. was convicted in July by a federal jury in Manhattan of violating the Foreign Corrupt Practices Act (“FCPA”), among other charges, in connection with an alleged scheme to bribe Azerbaijan government officials, and highlights an emerging area of concern for directors and officers liability insurers and policyholders.

The FCPA prohibits paying foreign government officials to obtain or retain business. Mr. Bourke did not pay bribes himself. But he invested $5.7 million with a Czech expatriate, Viktor Kozeny, whom he knew—or should have known—planned to bribe Azerbaijani government officials, jurors found.

The FCPA bars attempted bribes, even if unsuccessful, and jurors found that Mr. Bourke must have known Mr. Kozeny’s intentions. Mr. Kozeny was sometimes called the “Pirate of Prague” for allegedly stealing investor money as part of a similar scheme in the Czech Republic, and two witnesses said Mr. Bourke knew of the bribes.

The case is part of a pronounced effort by the federal government in recent years to enforce the 1977 statute more aggressively. The Securities and Exchange Commission has established a dedicated FCPA enforcement unit, and the Justice Department says it is investigating at least 120 companies on five continents.

According to attorneys who track these actions, the number of SEC and DOJ enforcement actions has increased 500% between 2004 and 2009. This is why the FCPA could become a significant exposure for D&O liability underwriters.

Fines and disgorgement penalties paid in connection with SEC or DOJ probes likely would be excluded from coverage under most D&O liability policies, legal observers agree. But defense costs for such cases likely would be covered by D&O liability policies. Those costs often can be significant and sometimes blow through D&O liability limits.

In addition, professionals involved with D&O say FCPA violations make follow-on litigation—a securities fraud or derivative suit—more likely. In addition to its bribery prohibition, the FCPA also requires companies to maintain adequate internal accounting controls and accurate and transparent records. Violations of this “books and records” provision of the FCPA often provide a foundation for suits alleging that directors and officers breached their fiduciary duty.

Only 31% of companies report having a “comprehensive” FCPA compliance program, according to a September survey by Deloitte Financial Advisory Services L.L.P.

It is expected D&O underwriters will increase their attention and inquiries into a company’s practices in foreign countries with an eye toward FCPA exposure. However, history in our industry tells us that until they have losses, they will ignore the possible risks.

Guest Post: European D&O Market Primed for Robust Growth

9 November, 2009

New laws put corporate directors at risk, sparking demand for protection.

Directors of European companies are more likely than ever to be sued by disgruntled shareholders, according to a new report from Advisen Ltd. As a result, directors and officers liability (D&O) insurance is one of the fastest growing insurance products in Europe, and sales will continue to increase at a brisk pace in the coming years.

Accounting scandals and corporate governance shortfalls have led to new laws across Europe requiring greater transparency and heightened shareholder protections. Additionally, legal systems have been reformed to give shareholders unprecedented access to the courts. These governance and legal reforms expose directors to greater liability, and lawsuits naming companies and their directors have increased throughout Europe. Some recent suits have settled for hundreds of millions of Euros.

“The United States is still the world’s preferred venue for litigating shareholder lawsuits, but more and more suits are being brought in European courts,” said John Molka III, the author of the report. “Increasingly, directors of European companies are demanding insurance protection. The US D&O market has shrunk during the recession, but premium volume is up sharply in Europe.”

Securities regulators across Europe have stepped up enforcement activities in recent years, further exposing corporate directors to liability. Regulators across the globe are sharing information and coordinating investigations, putting additional pressure on multinational corporations. Investigations and other enforcement activities not only are costly for companies, they also can spark shareholder suits.

“Underwriters clearly are concerned about the heightened exposure to claims, but at the same time the threat of regulatory investigations and shareholder suits is creating unprecedented demand for D&O insurance,” observed Dave Bradford, executive vice president of Advisen. “Most of the largest European companies now buy coverage, and a growing number of mid-size firms are recognizing that they too are potential litigation targets. We expect to see double-digit growth in D&O premium volumes in the coming years, driven by both rate increases and a windfall of new companies seeking to purchase D&O insurance.”

Advisen’s 20-page report, European D&O Insurance Market to Benefit from Governance and Legal Reforms, tracks the latest developments in legislation, regulation and litigation reform across Europe, and shows how the rapidly shifting management liability landscape is transforming the D&O market. It offers management liability brokers and underwriters a unique pan-European perspective on the D&O market, while presenting actionable information on a country-by-country basis for marketing, sales, product development and strategic planning purposes. The report is essential reading for risk managers of any company with European operations to understand the emerging liability picture and how the rapidly escalating risks faced by their firms’ directors and officers vary by country.

European D&O Insurance Market to Benefit from Governance and Legal Reforms can be purchased for $499 at The Advisen Corner,

U.K. Directors’ and Officers’ Programs Should Be Reviewed

27 October, 2009

With legal and economic risks increasing for businesses in 2009, many in the U.K. are expected to look at their insurance programs in more detail.

It’s set to be a tough year for anyone running a business. As well as the difficulties created by the economic slowdown, the introduction of more legislation will heighten the risk of legal action and financial penalties.

For those involved in insuring those risks, 2009 will bring a mixture of challenges and opportunities.

One insurer, Zurich Insurance, says that there’s going to be increased demand for directors’ and officers’ cover this year as more people think about their responsibilities. Yet after seeing prices fall, often substantially, over the last three years, there will be pressure on price as claims start to come through.

Certainly, claims are on the up. At the end of 2008, insurance research firm Advisen revised its forecast for D&O losses, taking it up to $5.9bn from the $3.6bn it had forecast in February. Its revision resulted from “the mushrooming of the credit crisis into a global financial calamity”. It also reflected an increase in securities class-action lawsuits, securities fraud lawsuits brought by regulators and law enforcement agencies, bankruptcies, and shareholder derivative lawsuits.

The number of securities lawsuit filings in the U.S. reportedly has increased sharply in the last two years. There were 119 filings in 2006, 176 in 2007 and 210 in 2008. It is widely held that the statistical average is 200, so we have moved to a position where filings are above that number. Additional concern for some insurers is that it takes three to five years for a lawsuit to reach the filing stage.

See you in court

With new legislation coming into force this year, directors have additional rules to observe. Most recently, the Health & Safety Offences Act came into force on 16 January and will increase the penalties for companies that break health and safety law.

It is not just domestic U.K. regulation that directors need to be mindful of, either. A company can also face legal action from the U.S., regardless of where it is domiciled. A prime example is the German engineering company Siemens, which paid $800m to the US Justice Department and stock market regulator, Securities and Exchange Commission, in December to settle corruption charges. This was on top of the EUR395m it had already paid to German regulators.

There has also been an increase in regulatory risk. The Financial Services Authority and the Serious Fraud Office have become more aggressive in their approach to fraud over the last 12 months. The FSA has beefed up its criminal prosecutor and enforcement teams and sent out a clear message about its intentions by carrying out a series of dawn raids to combat insider dealing.

As well as action from the regulatory bodies, it is believed that there will be more claims brought against former directors this year. There’s been a lot of change in boardrooms and as the new directors settle into their roles, it’s not inconceivable that there will be claims brought against former board members.

And there has been a steep rise in the number of firms going into liquidation, which will also result in an increase in claims. Figures from the Insolvency Service show that 4001 companies went into liquidation in the third quarter of 2008, an increase of 10.5% on the previous quarter and a rise of 26.3% on the same quarter in 2007.

It is not uncommon to see more claims being brought against directors in a recession. If a company goes out of business, people, including the administrator, look to the directors for potential redress.

Colleagues of mine in the U.K. tell me these factors are starting to influence the market, with rates hardening and terms and conditions getting tougher on some cover.

The market is also very divided, with financial institutions facing very different conditions to companies in the commercial market. Rates are reportedly hardening for financial institution business because of the problems in this sector, whether it’s the credit crunch or the alleged Madoff fraud.

The extent to which premiums are rising does vary, with sectors like hedge funds and U.S. banks hit hardest. But while recent press reports have put a figure as high as 50% on the increases, this level of premium hike is still unusual.

But while the financial market may be having a tough time, it’s pretty much business as usual for the commercial market, with the 1 January renewal date passing relatively smoothly.

Insurers are fighting for market share and there’s plenty of competition for commercial D&O business. The loss ratios are low and profits are good. That market hasn’t really been affected by what’s happening in the financial market yet, in large part driven by segments like private companies being largely unaffected.

However, this is expected to change. As many insurers have exposure to both the financial and commercial markets, the problems facing financial customers are likely to have a knock-on effect for commercial customers. No longer is pricing falling, but rather many renewals are reported flat. Some are gradually moving up and it is expected that this will accelerate.

Additionally, Clients are paying more attention to the cover they purchase. Rather than buying purely on price, directors are giving more thought to their purchase and analyzing coverage as part of a broader risk management and corporate governance approach.

With a higher level of claims anticipated, capacity could come under pressure this year. It is likely that, although there will still be plenty of cover to go round, it will not necessarily be as easy to obtain. This will require insurers to adjust their pricing strategies.

Underwriters are still basing their pricing on financial stability and other financial factors, but that this does not give sufficient insight into the business which is why risk management can become an even more critical factor. Claims and bankruptcies can come from anywhere but it is more likely to be those companies that have poor controls in place as well as those with weak balance sheets.

In spite of the greater risks present in the market, new players may also be attracted to the market over the next 12 months. With rates hardening and demand for the product. An underwriter coming into the market now wouldn’t have a history of claims and, with a good risk management strategy, could maintain a clean and profitable book of business. It could be a very good time to be writing D&O cover.