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Global developments affecting D&O

liability overseas Protecting executives with

Side A-only policies

2 Global developments affecting D&O liability overseas: Protecting executives with local, Side A-only policies

Table of contents

Chapter 1 Added protection through local Side A-only policies 3

Chapter 2 D&O risk, loss trends 5

Chapter 3 Foreign corporate indemnification rules 9

Chapter 4 Non-admitted insurance 11

Chapter 5 Implications 14

3Global developments affecting D&O liability overseas: Protecting executives with local, Side A-only policies

Added protection through local Side A-only policies

U.S. multinationals’ foreign directors and officers face a much rockier liability, legal and regulatory environment than they did a decade ago, raising questions about how well some organizations actually are protecting their overseas executives.

For decades, risk managers have safeguarded the wealth of those executives by covering them under master global D&O insurance policies written in the United States. A position not uncommon among U.S. risk managers is that since either their organizations have never faced a foreign D&O liability loss or their global coverage responded adequately to a loss years ago, then their foreign executives are protected.

But because of the evolution of litigation, insurance laws and regulations in many foreign jurisdictions, traditionally orchestrated global coverages hardly guarantee ironclad protection for foreign executives today. Several factors—distinct yet inextricably intertwined—figure prominently in the new face of foreign D&O liability and insurance protection:

• Securitiesclass-actioncasesoverseasarefarmorecostlythanmanyriskmanagersmayrealize, and a series of court rulings effectively have established securities class-action-like procedures for investors in 32 European countries.

• Derivative-actionawardsandsettlementshaveballoonedoverseasinrecentyears,andforeign executives have had to defend themselves against far more dogged regulatory scrutiny.

• Manyforeigncountriesexplicitly—andsomenotsoclearly—prohibitcompaniesfromindemnifying their executives for D&O losses and defense costs.

• Numerousforeignjurisdictionsbarnon-admittedinsurance,andlegalexpertsdonotalways agree with each other about what the regulations in some countries mandate.

• Spurredbyenduringpooreconomicconditionsandaninfluential,ifnotbinding,European court ruling, foreign insurance and banking regulators are increasingly looking for insurance transactions that do not strictly comply with local laws and regulations. The fallout can range from costly fines and taxes to the loss of coverage for foreign executives.

A few, and often all, of those factors are in play in many foreign jurisdictions. When they are, a traditional master global D&O policy—with Side A and Side B insuring provisions—could leave foreign executives with a far weaker financial backstop than they had counted on as they face staggering judgments or settlements as well as hefty defense costs. Indeed, the executives could find themselves with no asset protection.

In those jurisdictions, only a robust, locally written Side A-only D&O liability insurance policy would protect foreign executives’ assets for various reasons, including:

• OnlySideAcoveragecanrespondtoaderivative-actionlossandrelated defense costs.

Chapter 1

Because of the evolution of litigation,

insurance laws and regulations in

foreign jurisdictions, traditional global

coverages don’t guarantee ironclad

protection for foreign executives today.


• Intheforeignjurisdictionsthatbarcorporateindemnificationofexecutives’defensecosts and losses, executives with Side A-only insurance can recover their losses and defense expenses directly from their insurer.

• AvarietyofproblemsatthecorporateparentlevelcouldprecludetheSideAinsuringprovision of its global D&O policy from responding to a loss overseas.

• A locally written Side A-only policy can cover an executive’s loss when local regulations bar a parent company’s non-admitted global D&O insurance from responding.

A more detailed mapping of the D&O liability, legal and regulatory landscape overseas highlights the importance of evaluating how well an organization is protecting its foreign executives.

It is a critical examination for those organizations already procuring D&O insurance to protect their overseas executives, as well as others contemplating purchasing the coverage for the first time.

Forexample,undertheEuropeanCommission’sAlternativeInvestmentFundManagersDirective, the funds for highly sophisticated institutional and individual investors for the first time must either purchase commercial coverage or develop a self-insurance mechanism that meets prescribed D&O and errors and omissions liability insuring requirements.1 Currently, many of these funds are neither insured nor self-insured. And many companies that do purchase insurance, cover their European risks under global policies written in the United States.2

1.TheAlternativeInvestmentFundManagersDirective. (February 2013). Ernst & Young.

2.HeidiLawson,member,Mintz,Levin,Cohn,Ferris, Glovsky and Popeo P.C., Boston. Interview commentary on Aug. 15, 2013.


D&O risk, loss trends Chapter 2

The common perception among risk managers is that D&O liability risk exposure is significantly smaller overseas than in the United States. However, figures from insurance intelligence consultant Advisen Ltd. illustrate that the overseas risk is far from benign. Advisen examined individual awards and settlements, not the sum liability resulting from multiple cases against a company and its executives.3

The 10 costliest securities class-action cases overseas range in award and settlement value from $63.2 million to $396.4 million (see Exhibit 1). All of those cases were resolved from 2007 through mid-2013, with three of them wrapping up between June 2012 and June 2013.

In the United States, six of the 10-largest individual cases exceeded $1 billion, and the largest was a nearly $2.98 billion settlement with Tyco International Ltd. The seventh- through 10th-largest cases were settlements ranging from $675 million to $960 million.

Even so, legal restrictions limit securities-related collective-action litigation in many countries outsideoftheUnitedStates.ManyEuropeancountriesandIndia,forexample,permitonlycollective actions in which organizations represent allegedly harmed consumers.

The Amsterdam Court of Appeal, however, has given something that approaches class-action status to securities investors throughout the EU, Switzerland and European EconomicAreamembercountriesIceland,LiechtensteinandNorway.4, 5

A Dutch law that is unique in Europe allows an alleged wrongdoer to enter an arrangement with an organization representing a group of harmed interests, even before members of the group have filed individual litigation. Any settlement the two sides reach is then subject to approval by the Amsterdam Court, which will consider any objections. If the court approves the settlement, the harmed interests who have not opted out of the arrangement are bound to the deal.

The Amsterdam Court ruled in 2010 that this mechanism may resolve the securities claims filed against Swiss reinsurer Converium Holding (Switzerland) A.G. by plaintiffs residing throughout the EEA and in Switzerland, as long as the class includes Dutch plaintiffs.

On January 17, 2012, the Amsterdam Court approved a settlement that would pay $58.4milliontoabout12,000plaintiffs—only200ofwhomresideintheNetherlands.

3. Advisen Ltd. research.

4. Dutch Court Decision Has Significant Implications for Securities Class Actions. (Jan. 24, 2012). Willkie Farr & Gallagher L.L.P.

5. Converium/SCOR Securities Litigation: In Precedent-SettingMove,DutchCourtDeclaresInternational Collective Settlements Binding. (Jan. 30, 2012). Bernstein Litowitz Berger & Grossman L.L.P.

In the United States, six of the

10-largest individual cases exceeded

$1 billion, and the largest was a nearly

$2.98 billion settlement with Tyco

International Ltd.


Securities Class ActionCompany Name Status Year of Final

AdjudicationAmount ($) Jurisdiction

Location

UnileverN.V. Settled 03/13/07 396,435,018 Germany

Biovail Corp Settled 09/15/08 138,000,000 Canada

Centro Properties Settled 06/19/12 133,923,000 Australia

Aristocrat Leisure Ltd Settled 08/28/08 124,029,000 Australia

NationalAustralia Bank Ltd

Settled 06/10/13 119,754,100 Australia

BrookfieldMultiplexGroup


BrookfieldMultiplexConstructions Pty Ltd


MacquarieGroupLimited Settled 03/15/13 82,500,000 Australia

Livedoor Co., ltd. Award 05/21/09 81,000,000 Japan

Livedoor Co., ltd. Settled 12/24/10 63,241,358 Japan

Sons of Gwalla Ltd Settled 01/31/07 55,528,566 Australia

OZMineralsLimited Settled 07/01/11 41,932,390 Australia

Atlas cold Storage Income Trust

Settled 10/02/08 37,682,500 Canada

Awb Ltd Settled 04/27/10 36,653,200 Australia

YbmMagnexInternational Inc

Settled 05/02/02 25,480,420 Canada

OZMineralsLimited Settled 07/01/11 22,578,940 Australia

MichiganFidelityAcceptance Corporation

Settled 01/25/07 21,000,000 Canada

Arctic Glacier Income Fund

Settled 06/01/12 13,345,900 Canada

CP Ships (UK) Limited Settled 02/03/10 12,800,000 Canada

NelbarFinancialCorp. Settled 11/27/01 10,610,808 Canada

Gildan Activewear Inc. Settled 03/01/11 7,500,000 Canada

Gildan Activewear Inc. Settled 02/24/11 7,500,000 Canada

CVTechnologiesInc. Settled 08/05/10 7,100,000 Canada

Bre-XMineralsLtd Settled 05/30/13 5,200,000 Canada

Southwestern Resources Corp

Settled 11/17/08 5,175,833 Canada

In the United States, six of the

10-largest individual cases exceeded

$1 billion, and the largest was a nearly

$2.98 billion settlement with Tyco

International Ltd.

EXHIBIT 1: Securities Class Action Adjudications

Advisen Ltd. research


Company Name Status Year of Final Adjudication

Amount ($) Jurisdiction Location

Trukcell Iletisim Hizmet Award 09/30/11 932,000,000 Turkey

Samsung Electronics Co Ltd

Settled 02/01/02 68,514,007 South Korea

Hyundai Securities Co Ltd Settled 02/14/10 34,379,900 South Korea

ResearchinMotionLtd Settled 11/05/07 16,114,655 Canada

Bank Hapoalim Limited Settled 05/20/07 7,792,420 Israel

Meanwhile,inits2010Morrisonvs.NationalAustralianBankdecision,theU.S.SupremeCourt severely limited the ability of foreign investors to pursue securities fraud claims in the United States.6

Combined,theAmsterdamCourt’srulingsandtheMorrisondecisiongiveEuropeaninvestors a powerful platform and incentive to pursue class-action-like securities fraud claims unlike they have had before.

Even before those developments, however, foreign companies have been socked by costly derivative-action D&O awards and settlements.7

For example, the five largest U.S. derivative-action cases resulted in court awards or settlements ranging from $150 million to nearly $2.88 billion.

Outside of the United States, the five largest derivative-action cases resulted in court awards or settlements ranging from $7.8 million to $932 million. Four of those cases wereresolvedfairlyrecently—betweenMayof2007andSeptemberof2011.Theremaining case—the second-largest at $68.5 million—was settled in February 2002 in South Korea, where the third-largest derivative action also was filed. Plaintiffs filed the other three cases in Canada, Israel and Turkey (see Exhibit 2).

That means a Side A-only policy is unimpeded from responding to foreign executives’ D&O losses even if the global policy’s limits have been expended or a bankruptcy court is overseeing the U.S. parent company.

While their frequency and severity lags behind the largest U.S. derivative-action losses, the foreign awards and settlements are not insignificant. The defense cost for directors and officers in those types of cases also often top six figures.

6.Morrisonvs.NationalAustralianBank.(June24, 2010) U.S. Supreme Court.

7. Advisen Ltd. research.

EXHIBIT 2: Top 5 Derivative Shareholder Adjudications

Advisen Ltd. research


At the same time, spurred by years of weak economic conditions, regulators overseas are more aggressively pursuing companies and their executives for allegedly violating various national regulations. The fines and settlements, which typically are not disclosed publicly, can be significant—as are defense costs.8, 9

Meanwhile,severalcountrieswheremanymultinationalshaveoperationsarestrengthening their corporate governance and D&O liability laws.

For example, Hong Kong has updated its regulations, which become effective in 2014. Among other things, the updated regulations address directors’ duty of care and liabilities.10 India is in the process of updating its Companies Act to address accountability, transparency, fraud, money laundering and corporate governance.11

In addition, Japan’s parliament recently passed tougher laws against insider trading, bringing the country’s regulations closer in line to international standards.12

8. Lee Lindsay, managing director and international product adviser at Aon Financial Services Group. Interview commentary on Aug. 5, 2013.

9. Dan A. Bailey, partner at Bailey Cavalieri L.L.C. Interview commentary on Aug. 6, 2013.

10. Hong Kong Companies Ordinance Part 10-Division 1-Subdivision 1 Section 453. Retrieved on Aug. 19, 2013, from www.cr.gov.hk

11. The Companies Bill, 2012. Retrieved on Aug. 19, 2013, from www.mca.gov.in

12. Ignaki, Kana. (June 12, 2013). Japan Toughens Insider-Trading Law. The Wall Street Journal.

Spurred by years of weak economic

conditions, regulators overseas are more

aggressively pursuing companies and

their executives for various violations.


Foreign corporate indemnification rules

Whether the Amsterdam Appeal Court and the U.S. Supreme Court rulings lead to a multitude of class-action-like securities fraud cases in Europe or just a few, a global D&O program might not adequately protect foreign executives in many countries.

Indeed, the Side B insuring provision of a global D&O policy likely offers no protection to foreign executives.

In the United States, state law typically permits organizations to indemnify executives for their securities fraud defense costs and settlements. The organizations then seek reimbursement under the D&O policies’ Side B insuring provisions. Indemnification laws vary somewhat from state to state, but corporate indemnification rights are relatively broad nationwide.

Outside the United States, the indemnification picture is far more restrictive.13, 14, 15

Legal experts interpret the insurance laws and regulations in several European and South American countries as barring corporate indemnification. The Side B insuring provision is an irrelevant coverage in those jurisdictions.

In many additional countries across the globe, insurance laws and regulations do not provideanyclearguidanceaboutcorporateindemnification.Norusuallyarethereany court rulings to rely on, because of the dearth of D&O liability litigation in those countries.Andinmanyjurisdictions,courtrulingsarenotprecedential.Notaddinganyclaritytothematter,legalexpertshavereachedconflictingopinionsaboutthepermissibility of corporate indemnification in those countries, including Brazil, Italy and China. All of this means there is no certainty that a company could protect its executives in those jurisdictions until after they face a loss.

Even in some countries where corporate indemnification is allowed, companies cannot advance defense costs until after adjudication of the case is over and the executive has been found innocent. If a settlement is reached, however, no indemnification is permitted.

In both of those scenarios, Side B coverage would be important.

Of course, that still leaves the Side A insuring provision of those traditional global policies in effect. But tapping policy limits through that provision also could be problematic for a variety of reasons.

For example, a parent company’s losses stateside or in another part of the world could have already exhausted the global policy’s limits.

Chapter 3

Legal experts interpret the insurance

laws and regulations in several European

and South American countries as

barring corporate indemnification.

13. Lindsay.

14. Lawson.

15. Bailey.


Even if those limits are at full strength, they still might be unavailable if the parent company has developed severe financial problems. U.S. bankruptcy courts typically freeze theD&Opolicyofafinanciallyflounderingcompany,becausethepolicyisconsidereda corporate asset. Courts cannot separate the Side A insuring provision from the Side B provision, because the two share policy limits.

Because a Side A-only policy would respond directly to directors and officers, U.S. bankruptcy courts do not consider that type of policy a corporate asset. That means a Side A-only policy is unimpeded from responding to foreign executives’ D&O losses even if the global policy’s limits have been expended or a bankruptcy court is overseeing the U.S. parent company.


Non-admitted insurance Chapter 4

Intact global D&O policy limits and a financially sound parent company, however, still do not ensure protection for foreign executives under a global policy’s Side A insuring provision.

Unlike in the United States, where non-admitted insurance has long been permitted and federal law recently has further eased restrictions on purchasing the coverage, many countries around the world do not allow it. According to Axco Insurance Services, Ltd. (Axco), a couple dozen countries worldwide—mostly in Europe—allow non-admitted insurance. But some legal experts say there are fewer.

In those countries that do not permit non-admitted insurance, neither the Side A nor the Side B insuring provision of a parent company’s global D&O policy written in the United States can respond and cover foreign executives’ losses and defense costs.

In still more countries, insurance laws and regulations on the permissibility of non-admittedinsurancearevague,andcaselawisnon-existent,leadingtoconflictinglegalinterpretations.17, 18, 19 Just like the unclear laws and regulations on the permissibility of corporate indemnification, murky non-admitted insurance rules offer no coverage certainty to foreign executives.

In all of those countries—many of which also bar corporate indemnification—only a locally written Side A D&O insurance policy would provide foreign executives certain protection.

While Europe’s insurance regulations at first glance indicate that a master global D&O insurance program written in the United States would be perfectly acceptable, in reality there are some knotty problems making those global programs comply with local insurance regulations across the EEA.

Under insurance regulations across Europe, which comply with the EU’s third non-life insurance directive, all EEA countries accept as valid an insurance contract written by a licensed insurer in another EEA country. This freedom-of-service insurance policy can be tied to a master global D&O policy written in the United States, thereby eliminating the need for a U.S. parent company to purchase local policies in every EEA country where the parent has D&O liability exposure, many insurance attorneys agree.

However, U.S. risk managers are not relieved from the responsibility of ensuring that theirglobalprogramscomplywiththenumerousdifferent—andsometimesconflicting—insuring issues in each EEA country. For example, some countries bar insured vs. insured claims; yet in Germany, a company’s supervisory board has a duty to file a claim against its organization’s management board if the latter has acted in a manner that has harmed the company.

Rather than attempting to meet that daunting—and perhaps impossible—regulatory challenge, risk managers could guarantee their program is regulatory compliant by purchasing a local Side A-only policy in every EEA country where the parent company has D&O liability exposure. Those local policies need provide only $1 million or $2 million limits of coverage, which should be ample in most cases.

16. Axco.

17. Lindsay.

18. Lawson.

19. Bailey.

20.Non-lifeinsurance:ThirdDirective.Retrieved Aug. 20, 2013, from http://europa.eu

21. Lindsay.


NO

NO,withoutpriorapproval

YES

YES, but limited

Non-Admitted Insurance Allowed:

BERMUDA

GEORGIAKYRGYZ REPUBLIC

GIBRALTAR

PALESTINIAN TERRITORIES

CAYMAN ISLANDSBRITISH VIRGIN ISLANDS

COSTA RICA

ISLE OF MAN

GUERNSEY

MONACO

HONG KONG

MACAU

SINGAPORE

TAIWAN

BERMUDA


GIBRALTAR



COSTA RICA

ISLE OF MAN

GUERNSEY

MONACO

HONG KONG

MACAU

SINGAPORE

TAIWAN

In those countries that do not permit non-admitted insurance, neither the Side A nor the Side B insuring provision of a parent company’s global D&O policy written in the U.S. can respond and cover foreign executives’ losses and defense costs.

However, to ensure that their foreign executives are adequately protected in the event of larger losses, the local Side A-only policies can be tied into a parent company’s master global program. If the local policies have difference-in-limits and difference-in-condition features, then foreign executives would have broader coverage through the tie-in to the master program if their monetary losses exceed the local policy’s limits or the local policy does not cover the type of claim the executives face.

EXHIBIT 3: Global regulation of admitted vs. non-admitted D&O insurance


BERMUDA


GIBRALTAR



COSTA RICA

ISLE OF MAN

GUERNSEY

MONACO

HONG KONG

MACAU

SINGAPORE

TAIWAN

BERMUDA


GIBRALTAR



COSTA RICA

ISLE OF MAN

GUERNSEY

MONACO

HONG KONG

MACAU

SINGAPORE

TAIWAN

Axco Insurance Information Services, Ltd. 2013.


ImplicationsChapter 5

The cost of not properly assessing an organization’s foreign D&O liability risk can be material. It could lead to regulatory fines, unanticipated premium taxes and income tax assessments against the U.S. parent company and its overseas unit, or uninsured losses that could threaten foreign executives’ wealth.

Those very real possibilities arise from a 2001 EU Court of Justice ruling in a nonlife insurance premium tax case that not only is precedential in Europe but also has influencedinsuranceregulatorsworldwide.22 23 24

The case examined whether London-based Kvaerner P.L.C., which had covered a Dutch subsidiary under a global professional liability insurance program, was required to pay a premiumtaxintheNetherlandseventhoughthecoveragewasnotpurchasedthere.25 The court ruled that Kvaerner—now TH Global Ltd.—was obligated to pay a premium tax on the portion of its global program that covered its Dutch risk.

The ruling has several implications for every U.S. multinational, whether it has operations only in Europe or globally.

In every EEA country where risk is covered under a master global program, the organization owes premium taxes, and regulators will seek them. However, a local broker or local insurer typically has to remit those. But since neither would be used in a global program, there is no mechanism to pay the premium tax, which then can lead to some serious problems26:

• Ifaglobalprogramunderwriterpaysalosstoaparentcompanyratherthanitsforeign unit, those proceeds are subject to taxation domestically and then again overseas if the parent moves the funds to its unit.

• Aforeignregulatormightbartheparentfrommovingfundstoitsunitifthattransaction would violate the parent’s maximum allowable investment in the unit.

• IfthelossoverseaswasstrictlyaSideAloss,asmanyare,aninsurerlikelywouldnotagree to pay the U.S. parent company, because the parent did not sustain any loss and companies cannot recover under Side A.

Those problems might not have developed if the foreign unit and its executives were covered by a locally written Side A-only policy.

Locally written Side A policies may not be necessary to protect executives in every foreign jurisdiction where a U.S.-based multinational operates. But given the D&O liability risk foreign executives face, the restrictions on corporate indemnification overseas, and the roadblocks that underwriters of global programs and multinationals face in efficiently moving insurance proceeds to foreign executives, a Side A-only policy can clearly be the best D&O insurance approach in many countries around the world.

22. Lindsay.

23. Lawson.

24. Bailey.

25. Kvaerner P.L.C. vs. Staatssecretaris van Financien. (June 14, 2001). European Court of Justice. EU: Case C-191/99. WestLaw [2001] ECR I-4447.

26. Lawson.

A Side-A only policy can clearly be the

best D&O insurance approach in many

countries around the world.


The information in this publication was compiled from sources believed to be reliable for informational purposes only. All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. We trust that you will customize these samples to reflectyourownoperationsandbelievethatthesesamplesmayserveasahelpfulplatformforthisendeavor.Anyandallinformationcontainedhereinis not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and sample policies and procedures,includinganyinformation,methodsorsafetysuggestionscontainedherein.Moreover,Zurichremindsyouthatthiscannotbeassumedtocontainevery acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances. The subject matter of this publication is not tied to any specific insurance product nor will adopting these policies and procedures ensure coverage under any insurance policy.

Zurich1400 American Lane, Schaumburg, Illinois 60196-1056800 382 2150 www.zurichna.com©2013 Zurich American Insurance CorporationA

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