Post crisis expansion poses new risks for German risk managers

The bureaucratic obstacles are many and varied when medium-sized enterprises, that until now have been content with their local market, venture abroad and expand into other countries.

Mr Riehl noted a recent incident in which a medium-sized car component maker wanted to set up production in the US. However when trying to rent a plant building, it encountered serious complications. The landlord was only prepared to sign a lease for the premises if the company provided evidence of a third-party liability contract signed with a local insurer.

The German management team had never experienced such a demand but their insurance broker informed him that this is standard practice in many English-speaking countries.

And one key issue for managers is to make sure that their D&O cover includes activities in these countries, in order to shield themselves from claims from third-parties caused by faulty products.

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German companies, which are used to a slightly less demanding tort regime, have a lot of problems with this. “Many enterprises underestimate third-party liability requirements abroad,” said Peter Ullrich of broking firm Gossler, Gobert & Wolters. “Many family-owned companies, in particular, concentrate mainly on production. Insurance issues tend to be low on their list of priorities,” he said.

Many German enterprises that already operate abroad are not even aware if and how their subsidiaries abroad are insured because they don’t want to become involved. “That’s a risky business,” warned Mr Ullrich.

Companies that export without maintaining overseas subsidiaries often obtain cover from their German insurer. “However, claims are decided based on the local law of the country in question,” Mr Ullrich said. “If you want to export your products to the US or Canada where these stricter laws apply in relation to liability, then you should think beforehand about the insured limits.”

Many German enterprises still have to learn—some the hard way—that liability risks can become life-threatening if they do not have the right cover. This springs from the deep difference in the legal systems. Even though the EU has now unified some of the rules, there are huge differences in the way a German court and an English or US court decides over the same injury caused by a faulty product.

“Faulty or missing instructions for use or warning notices can lead to enormous compensation claims in the USA,” said Daniel Maurer, Chief Underwriting Officer, International P&C Middle Market at XL Insurance.

However, in Europe too the costs of a product recall in the motor industry can often run into millions, if parts of the electronic systems are faulty and interfere with motor function.

This is because of recently introduced product safety rules. They allow the authorities to withdraw products they consider unsafe easily from the market, said Mr Riehl of Südvers. “The legal environment has been tightened considerably, to the disadvantage of companies.”

German industry is reacting to this new situation. “Poor production quality has become a major issue in low-cost countries in Asia,” said Mr Riehl. “Many German companies close their plants and relocate them to areas that are closer to their home base.” In eastern Europe, for example, they have better control over production conditions.

Accidents at work is another area where German corporate culture and the global environment clashes and becomes a major risk. In Germany employees are covered by the statutory workers’ accident insurers and all employers pay a contribution, according to the numbers on their payroll. They are not required to buy individual workers’ compensation policies. Compensation is granted whether the employer is to blame or not.

The very different system in the UK, the US and France often baffles German employers, especially when it comes to paying for expensive workers’ compensation cover.

Mr Riehl also advises employers to take out special cover in countries in which employers’ liability is not a legal requirement. “Foreign companies in developing countries are often subjected to greedy compensation demands,” he said. Companies should thus ensure they have adequate insurance cover.

The admitted/non-admitted problem is not only an issue for smaller companies, but also for the big players.

Some countries such as Switzerland, Brazil and Russia do not permit foreign companies to write business there, if they are not registered locally. These countries fear the loss of premium policy taxes and less control over the insurance system. So, industry must cover its insurance needs through local insurers—even if they have an umbrella deal for global cover.

“This can lead to a situation where companies have great difficulty finding adequate insurance cover and service in countries which offer very little insurance options in the local market,“ said Mr Ullrich. This does not apply to Switzerland but is the case in Brazil and Russia.

Industrial insurers want to offer internationally valid liability insurance cover to medium-sized companies. To do this, they cooperate with brokers who have global networks and close contacts to local brokers.

Companies will conclude the main contract in Germany. Additional cover for plants in other countries can be arranged via the regional offices of the German insurer, if it exists, or through a partner network. It takes care of the diverse insurance needs. “Companies that produce in the US need a higher level of cover due to high liability claims,” said Hans-Georg Neumann, HDI-Gerling’s liability manager.