Compulsory PI cover spreads around the world

The ACE report, published in collaboration with the international law firm Kennedys, reveals that new legal requirements expose increasing numbers of international firms to the risk of professional negligence, misrepresentation, or breach of duty claims when operating both at home and abroad. The report, 'Structuring multinational insurance programmes - issues for risk and insurance managers to consider when insuring professional indemnity risks across borders,' sets out some key questions for risk managers and insurance buyers to ask themselves, including: Which jurisdictions apply? What scope of professional services does the organisation provide? Who needs to be insured? What are the key elements of a PI insurance programme for our organisation? How should a multinational PI insurance programme best be structured? Has the role of excess insurance been considered? hideOne of the authors, Grant Cairns, Regional Financial Lines Manager for Europe, Eurasia and Africa at ACE, said: "Across many parts of the world, the requirements for key professions to carry PI insurance have been increasing. As a result, astute risk and insurance managers at global professional services firms are rightly seeking to apply their experience gained in structuring multinational insurance solutions for traditional classes of business to PI insurance." Mr Cairns said that ACE was seeing more interest among clients and brokers in taking a comprehensive multinational approach to PI risk across a range of professions. He pointed out that in ACE's research with multinational risk managers in Europe last year professional indemnity was one of the top five areas that they believe creates the biggest multinational exposures for their companies today. "If this seems surprising at first, it only reflects how the landscape has changed recently, with more jurisdictions mandating PI insurance for more professions," said Mr Cairns. It also reflects the experience that many companies have in implementing multinational programmes for other risk classes, and as a result many astute risk and insurance managers are now asking the same questions about PI as they do for other risks, importantly including around the need for local policies." ACE's research showed that 38% would consider integrating their PI insurance into a multinational programme structure (only casualty was higher at 42%). US exposures Given the legal system and litigiousness in the US, US exposures certainly require special attention, said Mr Cairns, but he said there is no reason why they cannot effectively be incorporated into a multinational programme as long as they fit with the insurer's risk appetite. "For most European risk managers working with an EU-based insurer, the reality is that their PI exposures in the US may require a local, admitted policy. The specific limit requirements needs can be addressed up front during the design of the programme and managed as part of a single, integrated multinational solution," he explained. One area that is often under consideration with multinational programmes is the use of financial interest clauses. As Suresh Krishnan, Executive Vice President, Global Accounts Division for ACE Overseas General, explained: "The clause plays a role when there is an insurable interest between, and among, the entity procuring the insurance and the entities that benefit from the insurance, and is evident because of an ownership, legal or contractual obligation between and among the parties insured. Most jurisdictions in Europe, and around the world, recognise insurable interests in ownership (whether property or shareholding), legal or contractual obligations." In order for this to apply to PI insurance, said Mr Krishnan, the following questions should be asked, and the responses used to determine how local policies and/or excess DIC/DIL policies respond to covered claims: a) What professional services are provided? Are the professional services same in each of the countries, or do these differ from country to country? b) What are the legal requirements for PI insurance in our home country, and in each of the other countries in which we offer services? This question addresses whether a local policy is compulsory before offering services. c) What is the corporate structure of the organisation? Is it a corporation, a joint venture, a partnership? d) What agreements if any govern the corporate structure in terms of cost sharing and capital management? Does this include the procurement of insurance and sharing of costs connected to it? e) This leads to the question of understanding what is the best multinational insurance solution for the corporate structure and how costs attributed to the structure are allocated or shared (both in terms of premium and claims). f) And this ultimately leads to the question of when a covered claim is made at the headquarter level, what issues must be considered when the claims proceeds are remitted to the local country where the loss has occurred. Design limitations The report concluded that it is important to understand that local insurance laws apply equally to primary and excess insurance, whether purchased at the parent/headquarter level or otherwise. "It must be recognised that, while certain structures - such as overseas excess/DIC-DIL towers combined with local policies - provide the highest level of coverage certainty, they have limitations when not designed appropriately. Questions about local defence and indemnity payments should be at the forefront of any discussion to manage performance expectations," said the report. It added that when entering into local contracts, "it is important to determine what are the local limits expected by counterparties for conducting business or what are the limits purchased by local organisations when conducting similar business. This means that, when drafting coverage clauses for primary or excess policies or when providing local certificates of insurance, multinational organisations (and their risk and insurance managers, their brokers and insurers) should take care in adopting wording that avoids redefinition, unavailability of limits locally and other undesired consequences." Finally, the report noted, "it is important to collaborate with a broker and insurer that have truly international expertise and servicing capabilities, as well as with internal and external tax, finance and legal specialists. This combination enables the parties to work together to plan and document a clear risk financing strategy that is complemented by an appropriate transfer of excess risk, and to ensure the multinational insurance programme achieves performance certainty."

Compulsory PI cover spreads around the world

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