Differences in Limits, Differences in Conditions Could Rear Up and Bite Your Global Program
Imagine reading news headlines screaming that your global company’s subsidiary in Brazil has violated domestic insurance regulations and later discovering that the authorities have fined the company and even placed key executives in custody.
An extreme scenario, yes, but one that could arise if a multinational company’s global master insurance program responds to claims that exceed the limits of its subsidiary’s local policy without sufficiently taking into account the country’s specific regulations.
“There are multiple things that can go wrong and result in fines, insurers and brokers losing their licenses, and jail time in the most extreme cases, if local executives don’t do things the correct way,” said Patric Jones, Chubb’s global multinational senior managing counsel.
In a recently published advisory from Chubb, Jones and Tom Harris, executive vice president, Chubb Global Services, explained what insured companies should scrutinize regarding the difference in conditions (DIC) and difference in limits (DIL) clauses included in global master programs.
The advisory says they are especially useful in a controlled master program (CMP) that pairs a master policy issued in the insured’s home country with policies issued in foreign jurisdictions.
Here’s What the Report Had to Say
CMPs can come into play when the multinational’s local policy limit is exhausted or when the multinational’s foreign subsidiary files a claim but terms of the local policy do not respond to it.
Describing key considerations, the advisory noted that in order for DIC and DIL clauses to respond to claims abroad, local policies must be in place, and in some cases, the company may have decided that isn’t desirable.
In other cases, such as in the so-called BRIC countries — Brazil, Russia, India and China — only carriers licensed in the country can issue policies and certificates of insurance.
“Where non-admitted insurance is prohibited, unlicensed carriers can face substantial fines and penalties (even jail time) if they are found to have conducted the business of insurance locally — including investigating and/or paying a claim under a non-admitted master policy,” the advisory read.
In addition, the advisory noted, “Local rules and regulations can impact how, if or when a local policy can trigger DIC/DIL coverage under a master policy.”
Typically, the local policies are issued by the in-country subsidiary of the parent insurer providing the master program. Harris emphasized the importance of local policies coordinated with the master policy, to provide the full coverage available.
“That’s key — putting this together in an intelligent way to accomplish the insured’s goals,” Harris said. “That’s what DIC and DIL clauses afford.”
For example, a U.S. multinational may have a local policy in Brazil with a limit of $1 million, so if losses exceed that amount the master policy can cover the full loss. “How that claim is paid may differ because of the rules in Brazil, but the corporation can be made whole for the total loss between the two policies,” Harris said.
Critical for insured companies is making sure their insurance carriers understand the nuances of local regulations. Chubb’s advisory noted that DIC and DIL clauses should always articulate how and where a claim must be paid if the insurer is not licensed or permitted to pay in the jurisdiction where the loss occurs, and that insurance licensing and tax-related implications must be considered.
“In places where non-admitted insurance is permitted, restrictions (and penalties) are generally less applicable but still merit thorough consideration,” the advisory said.
A U.S. company may not have a subsidiary in the foreign jurisdiction or otherwise have an insurance policy providing coverage there.
In that case, the advisory said, the parent can purchase financial interest coverage that enables the U.S. company to submit a claim under its U.S. policy for the covered “financial interest loss” sustained in a foreign jurisdiction.
“These programs and DIC and DIL clauses need to be set up correctly,” Harris said.
“You don’t want to find out when you make a claim that the company is barred from recovering something, or [that] it has a potential regulatory or tax risk because it’s expecting a payment to be made that the country authorities would frown upon.” &