U.S. corporations that don't want to bail out one of their subsidiary's directors or officers from jail for perceived malfeasance had better buy a global director's and officers' policy from a large U.S.-based carrier, as well as a D&O policy issued in that foreign country, according to professional liability underwriting experts.
True, it's going to be more expensive for buyers; and true, executives representing carriers underwriting many of these policies may well have a vested interest in urging buyers to buy more coverage. Still, sullying the reputation of a firm because of a director or two named in a class-action lawsuit, particularly in countries with tendencies to lock up suspects first and ask questions later, just isn't worth the risk, said representatives of underwriting companies.
As recently as five or six years ago, for example, it would have been adequate for a parent corporation to buy a global D&O policy to cover a U.S. or foreign director sitting on the board of the company's foreign subsidiary. No longer.
"Times have changed, and one policy does not fit all," said Vincent Vandendael, global practice leader financial lines, with Zurich Insurance Co.
What happened? In the ensuing half-decade, nations adopted the lead established by U.S. regulatory compliance laws. Japan, for example, has adopted its own version of the Sarbanes-Oxley Act, in a package of laws dubbed J-SOX.
In other countries, financial authorities have codified the role of directors and officers. Israel requires that, of the two outside directors required to serve on a board of a public company, at least one of them have financial expertise.
In still others--the United Kingdom, for example--it's easier to pursue class-action status against a director or officer. Whereas plaintiffs could once pursue a case on the basis of suspected fraud, they can now initiate their legal action on the basis of negligence, a lower standard.
Mexico requires that 25 percent of a board serving on a public company be independent.
As the rest of the world catches up with the United States in terms of the deregulation of financial markets, the power afforded shareholders to seek redress is going to increase as regulatory authorities accord more rights to investors, the experts predicted.
"We're clearly exporting one of our greatest skills." said John Lupica, president of ACE USA, referring to the increase in class-action suits in foreign countries.
In short, three trends have emerged, according to Carol Zacharias, senior vice president, ACE USA: foreign nations have imposed more duties on corporate directors and officers, shareholders have been given more legal power and these shareholders are beginning to exercise that power.
Indeed they are. In one recent case in the Netherlands, the oil company Shell settled a D&O suit for $300 million, according to Vandendael. In other cases, said Susan Friedberg, assistant vice president of American International Underwriters, plaintiffs have sued the foreign subsidiary and the U.S.-based parent company in the same case.
"The game has changed when it comes to outside the United States; the largest settlement claims are outside the United States," said John Doyle, president of AIG Executive Liability, noting that European financial authorities have taken some of their cues from U.S. regulators. "Regulators are tough and collaborate with U.S. regulators. There's a lot happening there."
CYRIL TUOHY is managing editor of Risk & Insurance®.
April 1, 2008
Copyright 2008© LRP Publications