Global programs: Claims, the need to respond locally

Global programs: Claims, the need to respond locally

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Claims, the need to respond locally

The laws of a country generally apply to companies operating within its borders. Global policies are generally transacted entirely within the home country of the insurer and the multinational. During the solicitation, negotiation and binding of the global policy, the insurer does not undertake activities outside the home country. Moreover, the insurer underwriting the policy is generally not licensed or conducting its insurance business outside its home country, and is thus likely entirely outside the purview of foreign regulation. Simply covering potential exposures, such as people or legal liability, in other countries without undertaking activities in those countries does not by itself subject an insurer to regulation in those countries.

While an insurer may be able to consummate a global policy solely from its home country, it may not be able to provide essential insurance-related services locally, because it is neither licensed nor conducting business outside of its home country. It may be prohibited by local law from providing claim services or making claim payments locally. Even if it is not prohibited, a global insurer may refuse to undertake these activities in foreign countries so as to avoid creating a nexus that could subject it to legal or regulatory scrutiny in those countries. 

The fact that an insurer on a global policy may be unwilling or unable in some cases to adjust or pay claims locally is a universal concern for many types of insurance. Consider how this might play out:

A multinational’s Southeast Asian subsidiary owns a factory that manufactures widgets. A chemical explosion causes significant damage to the facility, destroying inventory. While it is too soon to quantify the extent of the loss, a group of loss control experts, engineers, and investigators will be needed to conduct forensic analyses and facilitate the release of insurance proceeds vital to the local operation’s financial survival. The factory does not have a local property policy in place. Rather, coverage for the loss is being sought under a global property policy that was negotiated and purchased by the parent company in Australia and issued by an insurer licensed and operating only in Australia. Because the carrier’s license and operations are confined to Australia, it may not be able to undertake any claims-related activities in Southeast Asia or retain a third-party to do so either. The subsidiary may be left to service the claim itself, locating and engaging all necessary engineers, adjusters and experts, in-country or elsewhere, to investigate, analyse and adjust the property damage and time element aspects of its loss.

Additionally, as a result of the explosion 25 individuals sustain bodily injuries, many of them severe. They are suing the subsidiary, alleging negligence in maintaining the factory in a reasonably safe manner.

Here again, the factory does not have a local policy in place to respond to these allegations. Instead, coverage will be sought under the parent company’s global liability policy, also negotiated and purchased in Australia and issued by the same insurer.

Once again, the insurer may not be able to undertake any local claims-related activities or retain a third-party to do so. The subsidiary may need to retain local counsel to defend these claims. Moreover, because of the country’s underdeveloped legal system, the subsidiary is likely to have difficulty identifying and retaining appropriate counsel. Due to conflicts of interest and other legal considerations, multiple law firms may need to be retained.

In summary, due to limitations on the ability of a global insurer to respond locally, a multinational and its subsidiaries may be in the unenviable position of responding to claims on their own. The best way to ensure that a carrier will manage losses and claims locally is to have local policies issued by a global carrier’s local affiliates as part of a Controlled Master Program.

Claims Questions

When designing a program for multinational exposures, consider:

  • If a loss occurs locally, can the local subsidiary retain local counsel and other litigation experts to defend a lawsuit?
  • Will the subsidiary be able to retain loss control experts, engineers, medical providers and other vendors to assist in the claim adjusting process?
  • Will the subsidiary be able to retain investigators, search for beneficiaries, assist in gathering documentation, or arrange for housing or other accommodations in the wake of a loss?
  • Will the subsidiary be able to arrange for immediate medical treatment and evacuation?

Use caution when considering "Financial Interest Clauses"

In lieu of wording that covers a multinational’s subsidiaries around the world, some global policies incorporate a “financial interest clause,” which amends the policy to cover only the multinational’s financial interest in these worldwide subsidiaries.

The key feature of these clauses is that the parent company is the only legal entity actually covered under the global policy. The purpose of the clause is to avoid the regulatory concerns that can arise when a policy is not issued locally, if the local subsidiaries are not actually covered under the global policy, they are not part of the transaction and arguably not violating regulatory requirements applicable to local entities and residents.

However, financial interest clauses are not a panacea. While technically a multinational’s local subsidiaries may not be covered, regulators could potentially view defining financial interest by the amount of subsidiary loss as an attempt to evade local regulatory requirements. 

A financial interest clause may also give rise to uncertainty in quantifying a loss. While it is intended to cover the parent for an amount identical to that which the subsidiary would have been covered for had it been an insured under the policy, if not carefully defined, and the actual loss sustained by the subsidiary arguably does not equal the actual post-loss reduction in the subsidiary’s value to the parent, then recovery may be uncertain.

Lastly, even if the financial interest clause solves any regulatory issues, it may trigger undesirable or unforeseen tax consequences, regardless of whether the financial interest clause effectively removes the subsidiary as an insured.

For any assistance contact HDL

At HDL, our ability to design controlled master programs and secure local policies and service the needs of our multinational clients is virtually boundless. We have access to licensed insurers worldwide, with local representation in over 140 countries.

Contact HDL for more information.

The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact HDL.

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