Business abroad, revisited
Editor's note: This article is part two of a two-part series on steps management should take prior to expanding their business into foreign countries. Look for part one on Page 34 of the October 2010 issue of Glass Magazine.
In part one of this article series on how to properly prepare for expansion into foreign markets, we examined the importance of researching foreign countries' business and legal climates, employment laws, tax policies and cultural customs. Here, we will look at the insurance issues companies should investigate prior to beginning work overseas.
Finding the right insurance broker
A good insurance broker will have access to information about international insurance issues and might also have a relationship with one or more local insurance brokers in the country a firm is exploring. The right insurance broker can help navigate the various ways to buy insurance in a given country, and will understand what coverage is mandatory.
Many firms that operate overseas start with a foreign package policy. This type of policy might fulfill a firm's insurance requirements or serve as a conduit to local policies. Typically, a foreign package will include coverage such as hired and non-owned auto, general liability, workers compensation, and kidnap and ransom.
Many policies—including professional liability—purport to offer worldwide coverage. However, be sure to confirm that the local jurisdiction your company will operate in considers such coverage valid.
Some basic terminology
There are some basic terms you'll need to understand foreign insurance transactions. An insurance program in any given country might involve some or all of the following:
- Admitted insurer: This is an insurer licensed and permitted, by law, to sell insurance in the country. It could be an insurer actually domiciled in that country, or an insurer domiciled elsewhere that has been approved by the country's insurance regulatory body.
- Nonadmitted insurer: This is an insurer neither licensed nor registered to sell insurance in the country. Some countries allow you to purchase insurance from a nonadmitted insurer; others do not.
- Fronting: This is when an insurance policy is issued by insurer A, but insurer B actually provides the coverage and pays the claims through insurer A. In international insurance, this often consists of a U.S. insurer providing insurance through an admitted local insurer.
Mandatory and optional coverage
Most countries have mandatory coverage requirements, but they are not necessarily the same as those in the United States. For example, workers compensation insurance is compulsory in Botswana, but not in Cambodia. Fire and earthquake insurance is required for common parts of apartment blocks in Colombia, but South Africa does not require any property coverage. Further, some mandatory coverage—most commonly workers compensation or its equivalent—is government-run, and private insurance is not permitted.
Generally, whatever coverage you purchase in the United States is available in other countries. A knowledgeable insurance broker can help identify appropriate forms for specialty insurance coverage, determine whether a firm will need Defense Base Act coverage—required for almost any contract with an agency of the U.S. government for work outside the United States—and identify the appropriate limits for kidnap and ransom coverage.
Maintaining a consistent insurance program
A firm's domestic insurance program reflects legal requirements in the United States and the particular states in which it operates; it also reflects the firm's philosophy about what risks to insure and what risks to retain. Just as a domestic insurance program reflects a firm's philosophy of risk, so should its international insurance program.
That said, it is not always possible to match limit for limit, coverage for coverage, between policies available in the United States and elsewhere. To maintain a consistent insurance program domestically and abroad, consider difference in conditions (DIC) and difference in limits (DIL) policies. A number of insurers that operate internationally can provide this type of coverage.
A DIC policy fills in coverage gaps. For example, a firm's U.S. property coverage might include flood and earthquake, but its foreign property coverage might not. A DIC policy will fill in this difference in conditions between the two policies.
A DIL policy will fill in gaps in limits. For example, if a firm's U.S. general liability policy provides $1 million per occurrence, but the firm is only able to purchase $500,000 per occurrence in a foreign country, a DIL policy will fill in this difference in limits between the two policies.
In some cases, the basic policies that a firm purchases in the United States—including a foreign package policy—might also provide DIC/DIL coverage for foreign operations.
In closing, there are good and bad opportunities for the design and construction community beyond our borders. The trick is finding the gold and avoiding the fool's gold: a venture that will cost a firm more than it will make.
Whether a foreign opportunity will work for a firm depends on many factors, and finding the right advisor can make all the difference between success and failure. Once a firm makes the decision to accept a project in another country, it is critical to ensure all of its insurance and risk management needs will be met. Here, an insurance broker can make or break the deal.