US listed foreign filers risk D&O exposure to regulatory, tax and coverage issues9th January 2023
The London market has long been known for its ability to handle complex and multinational risks across product lines. Recent hard market conditions in the D&O market however, driven by years of losses, may have persuaded US listed foreign filers to look for lower premiums outside of London but this could be storing up problems for many businesses and their directors.
Whilst not something new, US listed foreign filers placing their D&O program in the US domestic insurance market has increased; often using a subsidiary address or ‘care of’ address in the US as the top policyholder and endorsing the true HQ address into the policy. This practice may leave companies vulnerable to a range of issues from regulatory fines due to non-payment of insurance taxes, through to the possible inability to make payment for an otherwise covered claim into a non-US address or person,” says David Mulvaney. Senior D&O Underwriter at Hiscox London Market.
“London has an increased number of primary, low excess and Side A markets able and willing to write foreign filer business, so not only is London a compliant option but also a competitive one.” says Mulvaney.
“The vulnerability offers Lloyd’s and the London market a competitive advantage as a robust, compliant and long-term solution for US listed foreign filers,” Mulvaney adds. “London has an increased number of primary, low excess and Side A markets able and willing to write foreign filer business, so not only is London a compliant option but also a competitive one.”
Tax break or tax liability?
With many economies teetering on the brink of recession, governments and regulatory bodies are looking for ways to generate new streams of revenue. One way of doing that is to target uncollected insurance premium tax on D&O programmes. Back in the early 2000s, the EU court made a ruling that Kvaerner had an insurance tax liability regardless of its European subsidiary paying through its parent for its insurance cover. The firm had not purchased admitted insurance and was therefore liable for the additional taxes. “It’s easy to see how this ruling / case law could be applied today to a US listed foreign filer headquartered in Europe which had decided to place its D&O insurance through an insufficiently licensed carrier, perhaps using a US subsidiary address with the European HQ endorsed,” says Mulvaney. “Whilst this is an older case, it’s still relevant today.”
“Consider also that as an alternative to imposing the tax retrospectively on to the premium, it may be deducted from any claim settlement itself. These could be significant amounts given some European tax rates are in excess of 20% and more troublesome still when this could be a Side A payment made to an individual under a D&O policy,” says Mulvaney. The tax problem would not, he adds, be an issue if the policy had been bought through Lloyd’s of London and Lloyd’s Europe given its direct licensing throughout the EEA which makes it a compliant option in the scenarios listed above. “Side A or Side A DIC is the real lifeboat protection for a D&O, likely triggered in catastrophic or high-profile event, so D&Os need to know the claim payment can be made when they need it.”
“Paying local premium taxes fairly and correctly is one of the most important aspects of any international D&O placement; it’s one of the critical things that interests all regulators,” adds Andy Brett, Joint head of North American Professional Lines, Practice Leader for D&O, FI and M&A - Miller Insurance Brokers. “London markets are experienced in working with foreign filers on this issue and are able to process many of the locally applicable taxes.”
Buying D&O cover through an incorrect address might not just risk a tax liability in a company’s home jurisdiction either; there could also be coverage issues. Side A and Side A DIC which covers non-indemnifiable loss for D&Os as opposed to the entity itself, are especially vulnerable. Side A DIC policies placed using an incorrect address could lead to payment issues, says Mulvaney: “Payment for Side A loss will need to be made directly into the relevant director’s bank account and any attempt to pay by either a foreign unlicensed carrier (due to tax reasons), a local subsidiary or branch of a global insurer, might not be possible given the risk of possible regulatory fines. The tax amount may even be deducted from the claim payment itself leaving the director potentially financially exposed at the worst possible time.”
London has good Side A DIC options for US headquartered multinationals with foreign subsidiaries. “Most Lloyd’s Side A DIC wordings contain a provision which will drop down into territories where Lloyd’s is licensed and local carriers may not be, giving foreign subsidiary D&Os peace of mind,” says Mulvaney.
“Most Lloyd’s Side A DIC wordings contain a provision which will drop down into territories where Lloyd’s is licensed and local carriers may not be, giving foreign subsidiary D&Os peace of mind,” says Mulvaney.
Financial interest clauses (FINC) are also more limited with regards to Side A D&O says Mulvaney: “What is essential for a FINC to work is a relationship between the insured and the person/entity that is exposed to loss, such that if the latter suffers loss, the former does so too. With Side A, if a director of a subsidiary gets sued and it is a country where the subsidiary is not allowed to indemnify the director, the relationship is detached as the company of which they are a director is not the one incurring the loss.” In addition, pass on of payments may also breach local regulations regarding indemnification or the insured may not even pass on the payment, Mulvaney adds.
“If the policy cannot be paid due to licencing and/or regulatory issues then the individual cannot be expected to pay the defence and settlement costs,” says David Ritchie, Head of Financial and Professional Risks, AJG who also warns: “If these risks have not been suitably disclosed to the insured and insured persons then the individual would rightly expect to claim these monies from the insurance broker.”
D&O claims: not just a US thing
Many foreign filers often choose to buy D&O cover through their US subsidiary believing that they are more likely to face a D&O related claim in that jurisdiction. But whilst a large portion of exposure for an international company listed in the US sits with a US securities class action or regulatory investigation, there are many complex claims that can exist outside of the US. “Germany has a history of large D&O claims and complex settlements,” says Lawrence Prince, D&O Underwriter at Hiscox London Market, “often using a ‘limits shaving’ agreement through the tower, meaning even high excess carriers are very much at risk.”
Additionally, Prince adds, German premium tax is one of the more complex tax environments within Europe as well as being one of the higher percentage rates at 19%. Also, the definition of what constitutes a German risk for tax purposes also differs depending on whether the insurer is EEA or non-EEA. “A policy with an EEA insurer (such as via Lloyd’s Europe) will not incur any German IPT on premium attributable to a non-EEA subsidiary. It’s also worth noting that the German tax code treats foreign subsidiaries and branches differently,” says Prince.
A policy with an EEA insurer (such as via Lloyd’s Europe) will not incur any German IPT on premium attributable to a non-EEA subsidiary. It’s also worth noting that the German tax code treats foreign subsidiaries and branches differently,” says Prince.
Whilst there are only a handful of dual-listed Australian (ASX-listed) companies that have a US listing, these are especially vulnerable to securities class actions in both jurisdictions. “Aside from correct and proper handling and processing of Australian premium taxes given direct licences through Lloyd’s, London has an established history of paying and handling Australian D&O claims and most syndicates will have long standing relationships with top tier Australian law firms on the ground,” says Prince who also cautions: “Whilst Australian Premium taxes are lower than some territories, long-standing hard market conditions means these can still be large amounts leading to potentially high tax liability.”
Israel is another interesting territory – traditionally home to a large number of US-listed tech and biotech companies – with its own unique claims environment says Mulvaney: “We have seen both class actions and derivative actions in Israel so, given the potential for both Side A and Side B/C claims, it’s important to ensure proper licensing so claims can be paid quickly.”
“London and Lloyd’s have a great history of paying claims across the globe,” adds Prince, “whether it’s across North America, Europe, Australia or territories further afield such as South America or Asia.” A positive view of Lloyd’s and London shared by Alon Miller, Managing Director, Guest Krieger, who says: “There is no market that comes close in offering the capacity, expertise, and experience of navigating the intricacies of placing the D&O programs of a US-listed Israeli domiciled client and the London Market remains at the forefront of developing new solutions to meet the changing needs of our clients. “
Peace of mind
Ultimately, choosing to buy D&O cover using an incorrect address could leave US listed foreign filers with more problems than any perceived advantage in rate, says Mulvaney: “With London and US markets increasingly closer matched in terms of pricing, foreign filers can take advantage of a D&O policy through London and Lloyd’s which is fully compliant and offers peace of mind.”