Globalization has inspired the development of cross-border business activities, as companies across several industries seek new markets for their goods and services. The dynamic rewards have been accompanied by a corresponding increase in novel risks, and those who rely on traditional risk assessment mechanisms have often been left unnecessarily exposed.
In the latest installment of a traveling series on Cross-Border Insurance Coverage Issues for Policyholders, Walter J. Andrews and Sergio F. Oehninger of Hunton & Williams LLP, in partnership with Lockton Companies, recently presented to Atlanta business leaders and risk assessment professionals about identifying these novel risks and offering strategic advice on how to best minimize them. We have several events planned for the near future, so please stay tuned for when we come to your city.
Cross-border activities give rise to novel risks.
Several categories of novel risks may arise from taking your business across a border or into international waters in search of new markets for your goods and services.
- Cyber-exposures stem from data breaches and often involve a mix of third-party liabilities and first-party losses. Sony Pictures Entertainment recently settled a class action brought by former employees whose personal data was stolen during a North Korean cyberattack led against the film studio in response to the release of the Seth Rogen film The Interview. Moreover, the US government has faced several coordinated attacks from China seeking federal employee data, and US Director of National Intelligence James Clapper considers Russia to be America’s biggest cyberthreat. Policyholders facing similar threats might seek coverage under their Cyber Risk Insurance policies.
- Third-party liabilities include claims brought against a company by consumers, customers or other third parties for bodily injury, property damage, pollution, and other losses allegedly caused by its activities or products. Mexican nationals have recently brought a Delaware lawsuit against a US helicopter manufacturer alleging product defects that led to a helicopter crash in Mexico, while a Vietnamese woman has filed suit in France against US chemical companies that manufactured Agent Orange for injuries she allegedly suffered from exposure to the defoliant. Policyholders facing similar actions might seek coverage under Commercial General Liability (“CGL”) policies.
- First-party losses include claims brought by the policyholder for losses suffered by the company. The Russia-Ukraine conflict has led to regional instability and economic sanctions that will put US and European business interests at risk in the coming years. Cargo ships passing near Somalia and through Southeast Asia face a serious risk of piracy and kidnapping. Policyholders facing similar threats might seek coverage under Political Risk Insurance (“PRI”) or Kidnap, Ransom, & Extortion (“K&R”) policies.
Proper planning requires bespoke structuring.
Multinationals must consider the unique aspects of their business and their target markets to pinpoint their ideal risk management structure. Cross-border insurance professionals commonly recommend one of three structures to minimize international risk exposure.
- A global policy approach is centralized. The parent company purchases a single insurance policy in its home country to cover the parent company, its subsidiaries, joint ventures, and cross-border interests.
- A locally-issued policy approach is decentralized. The parent company purchases a stand-alone policy in each country where it conducts business. The coverage terms and limits are tailored to the local needs, laws, and customs of each individual country.
- A controlled master program uses a mix of global and locally-issued policies to leverage their respective advantages. The parent company supplements a global policy with local policies for territories where it conducts business, and fills local coverage gaps with a Differences in Conditions (“DIC”) or Differences in Limits (“DIL”) policy.