Tax consequences for firms using US subsidiary to secure D&O cover, warns Howden
Howden is warning that there is growing concern in the international D&O market over the number of non-US headquartered insureds utilising a subsidiary, or US postal address, to access the US insurance market in order to maximise potential savings.
In a recent Howden insight, Piers Davis, executive director of financial and professional lines at Howden Insurance Brokers, said: “On the surface this arrangement appears as an attractive option since it may allow clients to obtain even more competitive options than maybe obtainable internationally. Many firms who are US traded acquiring D&O insurance in this way expect their main litigation exposure to result from securities actions in the US, leaving them optimistic about any issues arising from an international claim.”
But he added: “However, at what cost? There is real potential for taxation consequences, coverage deficiencies in covering both the legal HQ and subsidiaries, not following the international nuances of local cover/law, regulatory scrutiny and complex claims payment issues.”
The three major concerns, according to Davis, are the payment of appropriate insurance premium taxes, regulatory action and the ability for an insurers to compliantly pay a claim and indemnify into an overseas territory. He noted that international regulatory action and scrutiny are likely to intensify as a result of inflation, geopolitical instability, surging energy prices and an increased focus on ESG.
He said the main concern is if a Side A / non-indemnifiable claim arose, which could lead to serious tax and licensing hurdles, and insurers might not be able to advance payment to a director at all. “Delays to or the inability to indemnify a Side A claim directly into an international territory could leave directors exposed at significant personal cost and without representation at the moment a D&O policy is most needed,” he explained.
He warned that the soft market and increased competition is leading to insurers chasing business and disregarding potential coverage, taxation, compliance or regulatory implications.
