The Hole in Global D&O

What used to be known as "American-style" class action litigation is rapidly becoming the global norm. That's particularly true in Europe, where a broad swath of countries including Denmark, Germany, the Netherlands, and the United Kingdom have recently enacted laws making it easier for shareholders to bring collective suits against corporations. Class action rules are also gaining ground in Asia. South Korea and Taiwan now provide legal mechanisms for group litigation of securities fraud claims. China's New Company Law, which came into effect in 2006, grants shareholders the ability to enforce a range of new rights through derivative and direct lawsuits.

To mitigate these risks, the vast majority of U.S.-based multinationals rely on global coverage extended from the D&O policies they purchase for U.S. exposures. In a new survey from professional services firm Towers Perrin, only 3 percent of participants with international operations said that their organization has purchased separate D&O coverage for individual countries.

That worries Michael Turk, senior consultant with Towers Perrin, because many countries require that D&O policies be filed with locally licensed carriers. Policies that don't meet that criterion -- "non-admitted" policies -- are not permitted to pay claims, regardless of the policy language. And that could leave local directors and officers exposed.

"A number of companies that didn't buy a local policy before are now doing so," says Turk, "but that raises other questions -- What does the policy cover? How broad is it relative to the U.S. program, and so on -- so it can get pretty complex as to how you actually implement the coverage you need in that country. The survey results showed that organizations are not, for the most part, addressing these issues just yet."

D&O is not the only line of coverage that's affected by local jurisdictions' admittance rules. General liability, for example, faces some of the same issues, notes Dave Bradford, executive vice president of Advisen Ltd. in New York City. "For years, some insurance policies have provided worldwide coverage, and then the question arises: How does that apply to countries where the legislation requires local policies?"

On the D&O side, non-U.S. exposures have generally not been considered as significant as those that arise within the United States. But that's starting to change. "It's an issue that has grown and become more visible as more countries have changed their laws to allow class action activities that would never have been allowed before outside of the United States," says Turk.

U.S.-based multinationals should carefully examine the risks, understand the local requirements and then determine the best approach for providing the coverage, says Turk. Some U.S.-based insurers may be able to issue local policies in the key jurisdictions that an organization needs to cover. But the key is to be aware of the risks. "Over the next few years, companies are going to want to be addressing this exposure much more carefully than they have in the past," he says.

See the full Towers Perrin report "Directors and Officers Liability: 2007 Survey of Insurance Purchasing and Claim Trends" here (requires free registration).