5 Questions Global Risk Managers Should Ask Before Saying ‘Yes’ to Financial Interest Insurance
Business is conducted globally at a fast pace. But making sure that the appropriate insurance coverage is in place is sometimes not given the consideration it needs.
A classic conundrum for risk managers with companies doing business globally is determining how their insurance policies interact with local regulations and more specifically, local regulations around insurance.
What Is Financial Interest Insurance?
While global negotiations or business transactions can have gray areas, financial interest coverage looks to “fill the gap [when a business] has a foreign interest and [doesn’t] have local coverage in place,” according to Elliott Foster, managing counsel for Travelers.
When a policy is being issued from one country for business that is taking place in another, it could be considered a non-admitted policy, meaning the country in which the business is taking place would not deem the company or policy compliant. The result could be a loss for which there is no coverage.
For example, an insurance policy crafted by a licensed carrier in the United States might be not be applicable according to local regulations in Brazil.
Travelers created a financial interest insurance product so that clients engaging in global and multinational business can know that they’re insured; no matter where that business may be taking place.
How does it work? Travelers will include a $1 million additive into an insured’s policy with the specific intention of it being used to cover a loss that would otherwise not be covered in a particular country.
Referring to the previous example, financial interest insurance makes it so that a client with a U.S.-born policy, who would initially not receive payment for a loss incurred in Brazil, now would be able to receive compensation.
Before insureds think about using financial interest coverage, it’s imperative to understand the product from all risk management angles and to ensure that businesses are getting the necessary amount of protection they’re looking for.
Risk & Insurance® recently spoke with Foster, along with Tony Giannone, vice president of Travelers Multinational practice to discuss 5 questions every risk manager should ask before investing in financial interest insurance.
1. Which foreign entities can generate a financial interest loss?
Before a business can decide if financial interest coverage would be beneficial, dissecting the specifics on the policy itself is necessary. The first, and probably most basic, question risk managers should ask is who exactly is protected by the financial interest coverage?
In some cases, financial interest coverage will be limited to wholly owned subsidiaries while others will utilize the coverage in a slew of different ways, including partial or joint venture interests, according to Foster.
Because the scope of financial interest coverage is so vast, honing in on what exactly a policyholder wants to be covered within the product is a good starting point for risk managers to consider.
2. Does your financial interest insurance cover defense costs?
Businesses can’t simply worry about direct losses they may face working across the globe, but they should also build in a legal defense cost to their policy as well. Defense costs would kick in should a policyholder be engaged in a lawsuit in a foreign country.
“The cost of defending [a] lawsuit in [a] foreign jurisdiction, depending on the complexity of the claim, could be a lot of money,” Foster said. Ensuring that businesses have these costs built into their coverage eliminates the probability of policyholders paying out of pocket in claims-related litigation. This also benefits any other insurers on the company’s program, which may find themselves on the hook for legal costs.
3. Is your carrier able to refer you to in-country legal experts?
Like the challenge of securing policy coverage in some countries, the same challenge is present in securing specialized legal counsel, should a crisis occur with business in another country.
Claims litigation is bound to happen, and can jump up out of nowhere. When insureds finds themselves in the crosshairs of a suit, Foster said that carriers need to ask themselves, “Is there [a defense litigator] we can readily refer a client to in that country?”
With the Travelers panel counsel resource, insureds are able to access and utilize “expert, legal opinions” when “working in a foreign country,” per Giannone.
The in-country attorneys provide another proactive benefit under financial interest coverage.
4. Does your financial interest coverage have its own dedicated limit?
Before an insured decides on adding financial interest coverage to their program, determining the policy limit itself, and its relation to the overall policy, is an important discussion to have. Some financial interest policies can have standalone coverage limits that allow insureds to feel secure in their ventures at home and abroad.
Foster said: “In the event that the U.S. parent company uses up its own limits, it’d be beneficial to have some limit remaining for foreign exposures. Otherwise, the [overall] limit may have nothing left for issues that arise in foreign countries.”
5. Does a financial interest policy cover foreign taxes on claim payments?
When an insurance claim is filed in a foreign country, the payment stands at risk of being taxed by the local jurisdiction. This could cost the insured if the imposed tax is not covered by insurance.
Foster referred to this as “taxation on claim payments,” and it stems from “when [an insured] transfers money across international borders [and] the claim payments or country see it as a capital investment from a parent or subsidiary.”
Taxation implications typically ensue in this type of scenario. The presence and triggering of tax liability coverage in a financial interest policy would “pay up any applicable tax that arises from the claim payments,” per Foster. &