Before globalization merged the world into one giant marketplace, only the largest corporations dipped their toes into overseas markets. That meant that insurance coverage tailored to meet international risks was a highly specialized product purchased by a select group of businesses and offered by only a few insurers.
Today, companies of all sizes are seizing the opportunity to expand their sales territory, go farther afield for suppliers or reach out across borders to form business partnerships. As they do so, addressing the issue of new risks and exposure to liability is probably far down on their list of priorities. But companies can't wait until something goes wrong outside of the territorial limits of their current insurance coverage to discover that they are overexposed and underinsured.
The solution: Be aware of the Global Gap--the uncovered liability that lurks just beyond the limits of domestic insurance--and work closely with current insurers to extend policies to provide appropriate coverage.
On a business trip to China, a U.S. company's employee takes one drink too many at a banquet, drives away in a car and crashes into another vehicle, fatally injuring the other driver. The U.S. policy does not cover accidents or claims overseas, and local Chinese coverage carries an alcohol-related exclusion.
In Grenada, a U.S. company's subcontractor fails to handle equipment properly and causes extensive damage at a power plant. The company's U.S. liability policy excludes events that take place outside of the United States.
Laptop computers are stolen from a branch office in Germany during the lunch hour when few workers are onsite. The local German insurance denies coverage because there was no forced entry.
Once a rarity, these kinds of situations are becoming more common problems for U.S. businesses as they reach out to both suppliers and markets abroad. A variety of statistics document the globalization trend.
For example, even as economists fret about a recessionary slowdown in personal consumption at home, U.S. exports have been fueling the economy with sharp increases. In 2007, exports to China rose 16 percent, to Brazil 30 percent and to India 65 percent, according to a report in the Kiplinger Letter. In fact, exports are expected to account for about half the growth in the U.S. economy in 2008.
In addition, surveys indicate that U.S. companies are increasingly looking at overseas markets to drive their future growth strategies. A 2006 Grant Thornton report found that 46 percent of 300 businesses surveyed are currently selling products or services outside the United States, and another 3 percent are in the planning stages of doing so. More than a quarter--26 percent--either already have or plan to set up small offices or branches outside of the United States.
At the same time, many companies are increasing employee travel to meet with potential buyers and sellers abroad. The same Grant Thornton survey showed that 51 percent are sending employees outside the United States on corporate missions. Another survey, this one by Accenture, found that more than a third of business travelers expect to increase their time on the road in the future, with more than 20 percent planning on international trips.
While the corporate embrace of globalization is opening new doors to profitability, it also is bringing home the realization that there is increasing risk that is not covered by typical domestic insurance policies. It is becoming critical for businesses to be aware of the growing global gap between their activities and their level of protection.
Companies and their insurance agents should work together to review four areas of corporate activities for indicators that their protection needs to be expanded with international coverage:
-- General Liability. The typical domestic policy does not cover lawsuits filed in foreign countries or events occurring outside of the United States. Exposure to risk includes selling products or services that may be blamed for defects or damages, buying supplies or services that are later found to cause damages, or operating in other countries in any manner that gives rise to a potential lawsuit filed in a foreign court.
-- Workers' Compensation and Employers' Liability. While state laws mandate the scope of coverage and dictate the remedies when an employee is injured on the job in the United States, workers may be left without protection by the standard domestic workers' comp policy when they are injured overseas during the course of the workday.
Typically, they are not covered during their off hours, even though a work assignment abroad extends the employer's liability to the 24/7 exposure of employees to conditions not of their own choosing. For example, an employee who contracts malaria in India from a nighttime mosquito bite may not be covered by a domestic workers' comp policy because the disease did not arise out of a work exposure.
-- Commercial Property Loss and Damage. Equipment that is stolen, lost or damaged is a common occurrence for businesses--but one that is often not covered by domestic policies when it happens overseas. In addition, coverage that is obtained locally in foreign countries may have exclusions that leave policyholders open to losses that they are used to having covered with their home policies.
-- Travel Coverage and Auto Liability. Accidental Death and Dismemberment policies cover tragedies at home, but are no protection for the employee traveling abroad without special extension policies. In addition, the liability for car mishaps may fall into a gray area between local coverage and the company's domestic policy unless international coverage is arranged.
Addressing the global gap in a company's insurance protection takes two steps: 1) understanding insurance requirements in other countries where the company plans to operate, and 2) knowing the limits and exclusions of the company's current coverage.
Each country has its own laws regarding liability and insurance. Some require mandated coverage for certain activities; others assign liability in a specific manner; and still others spell out from whom insurance must be purchased. Rather than becoming an expert on each country, a company should work closely with an insurer with a demonstrated track record of offering international coverage.
One way for domestic insurers to obtain the necessary foreign expertise is to affiliate with insurers in other countries. For example, the International Network of Insurance provides member insurers with access to the top local insurance providers in more than 90 countries around the world. These types of affiliations allow U.S. insurers to assure policyholders that in-country requirements will be met and dedicated service will be provided when they operate in countries served by the affiliated insurers.
Another indicator that an insurer has extensive experience with overseas coverage is the number of specialized benefits offered to support employees when they are abroad. For example, some insurers offer support services that allow companies to reassure employees that their needs abroad will be met when emergencies arise, such as the need for medical evacuation or assistance with legal issues, lost passports and translation difficulties.
The second step companies and their agents should take--understanding the gaps between an existing policy and what is needed abroad--is less difficult when international liability can be covered by merely having the domestic insurer also provide the global policy. If a company purchases primary insurance from one company and an international policy from another, there is the danger the two policies will not match in some areas.
However, when the existing domestic policy is paired with a complementary international extension or policy, all from the same insurance company, the policies are automatically in sync, with less chance of uncovered gaps.
With the increase in trade and travel between countries, the chances grow that a company will slide, sometimes inadvertently, into a global gap on insurance coverage. Insurance agents should review the following questions with risk managers for their customer companies:
-- Do your employees travel outside the United States?
-- Do you buy or sell products or services outside the United States?
-- Do you outsource any service or manufacturing outside of the United States?
-- Do you have business personal property, equipment or buildings located outside the United States?
The answer "yes" to any of the above puts a company at risk. While overseas engagement may increase the potential for profit, going "uncovered" in a global economy threatens to drain away those profits. By paying attention to the global gap in insurance, companies can reap the benefits of globalization with fewer worries about liability.
JON FARBER is the president of Travelers Global Underwriting.
April 15, 2008
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