L O C K T O N C O M P A N I E S , L L P

Directors and Officers Liability Insurance Global Programmes

October 2012

WHY GO GLOBALIf a particular territory does not allow directors to be indemnified by the company, attempting to use a prohibited insurance policy to pass funds to an insured person may not be possible. In addition, a capital injection by the parent company to the local subsidiary or director may be looked upon by the relevant local authorities as income and subject to taxes. Currency exchange difference can also be problematic.

Some emerging economies have the strictest legislation and the local regulatory environment seems to be ever changing. This can lead to a level of uncertainty with clients.

Going global, in the majority of cases, consists of working closely with one carrier who utilises their offices and partners around the world to put into place local compliant policies in the requested territories.

Working closely with the insurer and broker, a risk manager would be able to assess the need for local policies in the countries that their company does business. Building a programme that suits the needs of the company and its directors, covering the relevant risk exposures, provides clients with a policy for the local directors’ personal protection and in the event of a claim, the ability to pay defense costs for the local directors quickly in the local jurisdiction.

Premiums for each local policy are allocated based upon a risk assessment by the insurer. This may be based upon asset size or a more detailed underwriting submission that has to be provided to insurers. Dependent on jurisdiction, there may be requirements of certain documentation to be supplied, in some cases prior to inception.

Tax authorities are taking a much more prominent role when assessing companies’ tax liabilities. If an insurance policy is in place covering the local entity, the expectation by these authorities is that taxes should therefore be paid locally. Having an accurate risk allocated premium demonstrates to the authorities that the current applicable taxes are being paid. FIRST STEPSWorking from the bottom to the top

Lockton works with its clients in a way that assesses a number of specific factors before deciding on the need for a global programme.

The first is reviewing the structure of the company and the territories in which its subsidiaries are located, then consider the relevant risk exposure that our clients face in these territories.

INTRODUCTION

For any company that has a global footprint, irrespective of its size, the same risk applies. The use of prohibited non-admitted insurers and payment of insurance premium tax can bring about a breach of regulations in various territories across the globe.

This is a risk that some companies take knowingly and others not so. However, when the insurance placement in question is Directors & Officers Liability, various risks should be considered in detail before proceeding with a non-compliant programme.

The solution to a non-compliant D&O programme is a globally compliant placement with an insurer that has the relevant capabilities to issue locally placed policies, administer premium taxes and provide indemnification and claims payments on the ground for the local directors.

Combining this with the company’s risk appetite or risk philosophy, Lockton can begin the process of implementing a globally compliant D&O policy.

How much is enough?

One of the most common questions that we are asked by our clients is ‘how much limit should we buy?’ In respect to D&O liability insurance various aspects have to be considered before making an informed decision.

1. The Company’s Risk Philosophy Lockton look to fully understand our clients risk philosophy

and inherent needs in regard to the level of protection required.

2. Geographical Territory Exposure Some of the questions that will need to be answered are as

follows:- Where are your global operations?- What is the size of your global operations?- Are there local directors?- What is the size of assets/revenues of the local subsidiary? These various factors determine what Local Policies are required and to what level coverage should be put into place.

3. Local Regulatory and Claims environmentOnce we understand the territories that our clients are in we can then review the local regulations and requirements. Other factors to consider focus on any recent claims trends that we or insurers have seen in those particular territories.

4. CostDependent on the size of the limit the premium rates will vary. It is typical for insurers to allocate premium from the global master policy to the local policy. However, it should be expected that in addition to any premium costs, additional services fees are charged for each policy.

FINANCIAL INTEREST CLAUSEThis clause attempts to address the issue of Difference in Condition (DIC) and Difference in Limit (DIL). Simply, this is where a local policy is exhausted and relies on the master to provide DIL cover, or if the local policy fails to respond, a DIC response is obtained from the global policy.

In these cases the parent company claims at the master policy level, representing the parent company’s loss of financial interest in its subsidiary. Importantly this means that the subsidiary must make a claim to the parent company, in doing so the master policy can be triggered to respond to this financial interest.

RISk MANAGERSWhat to know, what to ask and what to look out for

Risk Managers need to take a prominent role in deciding whether to implement a global programme, but to do this the adage

‘fail to prepare is to prepare to fail’ is never more true. Risk Managers need to ensure they understand the requirements of implementing a globally complaint policy in a smooth and timely manner.

1. Information, in addition to the usual submission is required. This can include proposal forms and reports and accounts of the local subsidiary.

• Clarify early exactly what information is required.

2. Premium and tax for local policies can be paid centrally through the master policy and locally. This is dependent on the insurer used and which territories these are.

• Understand which territories require local payment.

3. Some territories are cash before cover, meaning the insurer must receive premium before cover can be incepted.

• Understand which territories these are.

4. A global programme cannot be done in the last few weeks of a renewal. The process must begin three months prior to renewal, especially the first year of placing local policies. The first year is always the most challenging!

5. Risk managers must open communication channels with the local subsidiaries early, identifying who is the contact point at each local office.

• You must supply full contact details of the local entity and representative.

6. A territory where there is more than one subsidiary may require more than one local policy. Both broker and Risk Manager should review the corporate structure chart and note any territory that may need more than one policy.

7. The master policy can provide DIC/DIL cover to the local policy when the local policy is either exhausted through payment of a claim or does not respond. A financial interest clause is added to the master policy.

8. Your Global Insurer is the key – ability to issue policies along with a framework in place to service the policies and respond to claims notifications provides peace of mind to your directors.

9. Coverage must match as closely as possible that of the master policy.

10. Cost – understand that additional premium and servicing costs will be incurred. However, economies of scale assist in managing cost as a global programme is a lower cost than subsidiaries placing their own D&O policies via a local broker.

October 2012 D&O Liability Insurance Global Programme

THE LOCkTON APPROACHOur 5 step process is as follows:

Phase 1 – Risk Philosophy

The first phase is for Lockton to fully understand our client’s risk philosophy and if a global programme is the right step for them.

Phase 2 - The footprint

Lockton will review the territories that our client participates in and provide a break down on the local policy requirements and more importantly the information requirements. In addition, we advise on the premium and tax payment conditions.

Phase 3 - Insurer Relationship:

The Insurer – Client – Broker relationship is paramount to any global programme. Communication needs to be open and transparent with dialogue between all essential parties to meet the requirements of the client in respect of the programme structure and coverage.

Choosing the right insurer is an important discussion. There is a growing number of insurers with a global offering. However, in our experience, there are only a few that provide the service and expertise required. Lockton works closely with its clients to get this decision right first time and where issues arise, our long term insurer relationships have assisted to find solutions quickly and efficiently.

Phase 4 - Information Requirements:

The placement process has to start early, in particular in the first year of placing a global programme. Lockton provides its clients with a detailed list of the information required.

Phase 5 - The Placement:

To enable the client to inform their local contacts, we request insurers to quote at least four weeks prior to inception, this must include local premium and service fee requirements.

The reason to have this in place early is so that all offices required to pay premium directly to insurers (or via the local broker) are ready to do so at inception or as close to inception as possible. This is even more relevant in territories that apply cash before coverage legislation.

Once the placement is finalised local policies are issued to the local subsidiary and if required, copies are sent to Lockton and our clients.

CONCLUSIONThe strict legislation that regulatory bodies throughout the globe are implementing leads to wide ranging issues for our clients. Therefore, it is even more important for our clients to consider risks that their directors face in territories that they do business in. The key consideration is: ‘how would a local director be defended in the event of a claim?’ If the parent company’s D&O policy cannot pay into that territory because they are a non-admitted insurer, then Global Policy Placement must be considered.

Working closely with insurers who can provide admitted policies in territories across the world, Lockton has been able to design and implement globally compliant D&O policies for it’s clients, thus providing them with the comfort that a director or officer is protected irrespective of what territory they reside in.

October 2012 D&O Liability Insurance Global Programme

“Risk Managers need to take a prominent role in deciding whether

to have a global programme put into place.”

Ray PallettSenior Vice PresidentT: 020 7933 2770E: ray.pallett@uk.lockton.com

Allison HollernSenior Vice President T: 020 7933 2957E: allison.hollern@uk.lockton.com

Stephen AmbidgePartnerT: 020 7933 2466E: stephen.ambidge@uk.lockton.com

FINANCIAL RISk CONTACTS

OUR ExPERTISE AND SERVICE AT LOCkTON

At Lockton we have a specialty in placement and management

of global policies for all types of businesses. We assist clients

with their insurance programmes providing bespoke policies

designed to cover the relevant risk exposures that they face.

We also participate as needed with clients to explain the

underlying risks, relevant claims and regulatory environment.

Given our experience, we can provide valuable benchmarking

information to assist in the discussions about limits and

retentions.

LOCkTON CORPORATE OVERVIEW

Lockton is the world’s largest, privately owned insurance broker.

With more than 4,400 people, Lockton delivers seamless service

to companies of all sizes, as well as to individual clients. The

company was founded Kansas City, Missouri, USA in 1966, and

has grown to become the tenth largest insurance brokerage

firm in the world.

Lockton service teams can be found on four continents and in

major cities in the United States, United Kingdom, Ireland, Latin

America, Middle East, Asia and Australia.

In combination with Lockton Global and our Partnership Brokers,

Lockton has the ability to service clients from 157 local offices

in 135 countries.

For more information in respect to Global D&O Policy placements.

Please contact a member of the Financial Risks team.

Financial RisksA division of Lockton Companies LLP. Authorised and regulated by the Financial Services Authority. A Lloyd’s broker Registered in England & Wales at The St Botolph Building, 138 Houndsditch, London, EC3A 7AG.Company No. OC353198LLP 590 - Oct 12www.lockton.com

October 2012 D&O Liability Insurance Global Programme