Guest Post: European D&O Market Primed for Robust Growth

New laws put corporate directors at risk, sparking demand for protection.

Directors of European companies are more likely than ever to be sued by disgruntled shareholders, according to a new report from Advisen Ltd. As a result, directors and officers liability (D&O) insurance is one of the fastest growing insurance products in Europe, and sales will continue to increase at a brisk pace in the coming years.

Accounting scandals and corporate governance shortfalls have led to new laws across Europe requiring greater transparency and heightened shareholder protections. Additionally, legal systems have been reformed to give shareholders unprecedented access to the courts. These governance and legal reforms expose directors to greater liability, and lawsuits naming companies and their directors have increased throughout Europe. Some recent suits have settled for hundreds of millions of Euros.

"The United States is still the world's preferred venue for litigating shareholder lawsuits, but more and more suits are being brought in European courts," said John Molka III, the author of the report. "Increasingly, directors of European companies are demanding insurance protection. The US D&O market has shrunk during the recession, but premium volume is up sharply in Europe."

Securities regulators across Europe have stepped up enforcement activities in recent years, further exposing corporate directors to liability. Regulators across the globe are sharing information and coordinating investigations, putting additional pressure on multinational corporations. Investigations and other enforcement activities not only are costly for companies, they also can spark shareholder suits.

"Underwriters clearly are concerned about the heightened exposure to claims, but at the same time the threat of regulatory investigations and shareholder suits is creating unprecedented demand for D&O insurance," observed Dave Bradford, executive vice president of Advisen. "Most of the largest European companies now buy coverage, and a growing number of mid-size firms are recognizing that they too are potential litigation targets. We expect to see double-digit growth in D&O premium volumes in the coming years, driven by both rate increases and a windfall of new companies seeking to purchase D&O insurance."

Advisen's 20-page report, European D&O Insurance Market to Benefit from Governance and Legal Reforms, tracks the latest developments in legislation, regulation and litigation reform across Europe, and shows how the rapidly shifting management liability landscape is transforming the D&O market. It offers management liability brokers and underwriters a unique pan-European perspective on the D&O market, while presenting actionable information on a country-by-country basis for marketing, sales, product development and strategic planning purposes. The report is essential reading for risk managers of any company with European operations to understand the emerging liability picture and how the rapidly escalating risks faced by their firms' directors and officers vary by country.

European D&O Insurance Market to Benefit from Governance and Legal Reforms can be purchased for $499 at The Advisen Corner, http://corner.advisen.com/reports_topical_european_do.html.

From European Court -- Period of Sickness Occurring During Holiday

(This information was provided to me by the solicitor firm CMS Cameron McKenna LLP in London.)

The European Court of Justice ("ECJ") has held in Pereda v Madrid Movilidad, that employees who are sick during scheduled annual leave should be permitted to reallocate their holidays, even into the next holiday year.

In 2007, Mr Pereda was injured and he requested his employer to allocate a new period of paid annual leave on the ground that he had been on sick leave during the period of annual leave originally allocated to him. His employer rejected the request. The ECJ ruled that his period of sick leave should not have counted towards his holiday time on the basis that employees are entitled to a minimum period of 4 weeks paid annual leave under the Working Time Directive ("WTD"). The ECJ emphasized the right of employees to a period of actual rest for relaxation and leisure during annual leave, as opposed to sick leave during which an employee is recovering.

This decision is a new interpretation of the WTD; following the ECJ and the House of Lords' recent rulings on the Stringer case that holiday continues to accrue during sick leave. The House of Lords decision in Stringer means that a worker is entitled to take paid annual leave even though they are not at work due to extended sick leave.  The question of what would happen if sickness coincided with scheduled leave was not addressed in the Stringer case. Although unlikely to be welcomed by employers, the ECJ's ruling in Pereda has helpful addressed this void however it remains unclear whether employees will be able to claim retrospectively.

As a result of the decision on Pereda, employers should be prepared to manage attempts by workers to exploit the ECJ's decision. A worker could effectively increase their entitlement to annual leave by alleging that they were sick whilst on holiday. Strict requirements on supporting medical evidence should be enforced to avoid abuse.

The judgment is immediately effective for public sector employers but private sector workers may not be able to benefit from this decision until the Government amends the Working Time Regulations.  Most employers therefore have time to consider their policies and perhaps even implement changes before the law changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Sentences of up to 10 years for Insurers or Brokers breaching Export Control Order

The International Traffic in Arm Regulations ("ITAR") should be well understood by those who operate in the United States. However, if you operate in the UK, you need to also be cognizant of the Export Control Order.

The Export Control Order 2008 is intended to restrict the international movement of arms or other military goods, and penalties for breaching these trade controls can be severe and include an unlimited fine as well as a prison sentence of up to 10 years. Insurers and brokers are caught by the Order if they are involved in insuring, or arranging insurance, in relation to actions prohibited under the terms of the Order.

The Export Control Order is enforced by H.M. Customs & Excise and came into effect on 6th April 2009. Insurance companies and brokers will be expected to comply with the Order, and must have structures in place to ensure that the Order is not being breached. Breaches of the Order can result in criminal penalties being imposed on individual underwriters and brokers as well as their employers, including imprisonment for up to 10 years or unlimited fines.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chinese Drywall and Product Liability in China

Recent article from Associated Press (Click here) discusses the issue of Chinese manufacturers ignoring the suits brought against them in the U.S. courts for the products that allege a flood of defective Chinese drywall was sent into the United States after a string of hurricanes in 2004 and 2005. The material is known to decay, creating corrosive chemicals and fumes.

This should not be a shock to anyone who has any dealings with commercial insurance placements in global markets. According to Axco Insurance Information Services Ltd in London, their report on the Product Liability market in China is as follows:

According to official figures from the China Insurance Regulatory Commission ("CIRC"), product liability premiums were around $142.84 million in 2006.

Because of low profit margins and low legal awareness, product liability insurance is rarely purchased in China. Most business is represented by export liability policies, but these are only purchased at the insistence of overseas buyers and normally have indemnity limits of less than $5 million. According to research by Chubb in 2006, only 4% of Chinese exports are insured, the vast majority of overseas buyers apparently accepting the fact that manufacturers' margins are too thin to include an allowance for product liability insurance. There is also the technical difficulty that export liability policies are subject to Chinese law, which means that in some cases US court judgments might not be enforceable against Chinese exporters or their insurers.

The variable quality of Chinese manufactures has been highlighted over the last 12 months by a series of product recalls in the US. Harmful chemicals have been found in toothpaste, seafood and pet food, whilst toys have been found to present toxicity and choking hazards. These problems have led to state-sponsored improvements in risk management rather than increased take-up of product liability or product recall insurance.

Because of lack of experience, reinsurance capacity and overseas claims handling facilities, domestic insurers take second place to the foreign branches in the export liability market. Leading product liability insurers include AIG, Chubb, Huatai (supported by ACE) and Allianz.

Product Liability Legislation

The Product Quantity and Quality Law, effective from 1 September 1993, made sellers and manufacturers strictly liable for injuries resulting from defective products. The law does not apply to unprocessed goods such as fish and defines a defect as "unreasonable danger existing in a product or a product not in conformity with the applicable health and safety standards of the state". Sellers are entitled to recover from manufacturers. Manufacturers can rely on a "state of the art" defence.

The Consumer Rights Protection Law, effective from 1 January 1994, allows a plaintiff to claim against the owner of an exhibition hall or leased premises if the exhibitor or tenant from whom the defective product was purchased cannot be traced. If a consumer is injured as a result of inaccurate advertising, damages can be claimed from the advertising agency if the latter cannot supply the name of the advertiser. Punitive damages are available if the plaintiff can establish fraud.

The concept of product liability is in its infancy in China, unlike the U.S., UK and other countries where the laws and history are more mature. I have to believe that the plaintiff attorneys understood this risk when they took on this action in the courts, and now their need to chase the money around the globe was a worst case scenario for them.

Too often commercial businesses in the U.S. assume that everyone in this global economy are subject to many of the same rules, and therefore insure their risks in similar fashion. There is nothing further from the truth, and this is why it is critical for any business with exposures to overseas risks should have advisors, including their insurance broker, who understand the markets in which they have these exposures.