Coverage for Swine Flu a Concern for U.S Workers Abroad

With much of the news recently about Swine Flu affecting people who are traveling abroad for their job, I wanted to develop a quick post on for my clients and friends to remind them of insurance coverage that may already available to them for this matter.

Specifically, I have reminded them to review their international insurance policies, and familiarize themselves with the coverage afforded in the International (Foreign) Worker Compensation policy. Under the Employers' Liability and Workers Comp section, you should expect to find coverage for Endemic Disease contracted outside the United States. A definition of Endemic Disease found in the Chubb International Voluntary Workers Compensation policy [Form 11-02-0604 (Ed. 2-87)] "means an infectious disease, including diseases which are borne by air, arthropods (i.e., arachnids, crustaceans, insects), blood, food or water, provided that the disease: 1) is indigenous to a particular region outside the United States and Canada; or 2) occurs in epidemic proportion outside the United States and Canada." You should expect to find similar definitions in policies offered by other insurers.

Continuing to look at the same Chubb International WC policy, they state, "This insurance is intended to be primary for your covered employees whose bodily injuries arise out of and in the course of employment by you outside the United States and Canada or who contract endemic disease while in your employ outside the United States and Canada."

Additionally, all of these insurers offer access to travel assistance services offered by third parties, such as MedEx. Even if you are not a Client, you can visit their website and learn more about this outbreak, and useful tips, tools, and services they have available.

It is understandable for employers to be concerned about the well being of their employees and their company. A quick review of their policy with their broker or agent experienced with the international insurance solutions can help relieve some of their anxiety.

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.

Liability for Losses Caused by Foot and Mouth Outbreak in UK

(Not to Confused by 'Foot In Mouth' which sometimes afflicts us all.)

In a recent decision which is of interest to liability insurers, the court struck out claims brought by farmers against the operators of a research facility and the U.K.'s Department for Environment, Food and Rural Affairs ("DEFRA") following escape of the foot and mouth virus from the facility.

The first and second defendants ran a research facility at which amongst other things, investigations were undertaken into foot and mouth disease. The virus escaped from the compound and infected livestock in the region. The third defendant, DEFRA, was responsible for licensing and regulating the research site. The claimants alleged that the defendants were liable for the escape of the virus (in the case of the operators of the research facility) or for failure to regulate properly (in the case of DEFRA).

Certain of the claimants owned livestock which had been culled, either because they were infected or because it was suspected they were infected. These claims were settled. The livestock of the remaining claimants were not culled. There were however restrictions imposed on transporting livestock to other land, to market, to abattoirs etc. The remaining claimants claimed that they had suffered loss as a result of the restrictions, and sought to recover these amounts from the defendants. The defendants applied to strike the claims out.

The court upheld the defendants' application to have the claims struck out:

1. where the restrictions imposed caused the animals to pass the stage where they were in prime condition for sale (for example pigs which had become overweight), then there was a "real prospect" of the court concluding that this amounted to physical damage to those animals;

2. otherwise, the losses claimed were purely economic loss, since there was no physical damage to the livestock or the farmers' land;

3. in either case, there was no duty of care owed to the farmers to prevent the losses suffered; and

4. the remaining claims would therefore be struck out.

The decision serves to re-emphasize the fact that the courts in the U.K. are prepared to impose limits on the duties owed by wrongdoers especially where the loss suffered is purely economic, and especially where there is a real risk of an indeterminate liability, in other words, the "floodgates would be opened" if the claim was allowed. This is reassuring for liability insurers, and their insureds. It does, however, limit the ability farmers have to claim for pure economic losses arising out of foot and mouth outbreaks caused through fault on the part of a third party.

Further reading: D. Hare & Partners (a firm) & Others v Institute for Animal Health & Others [2009] EWHC 685

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.

No Water Increases Basic Property Risks

When I read the newspaper or hear a news report on a news channel, I always consider it through my prism of interest – be it geopolitical, global economic, or risk analysis.

An example is the following article which was recently reported by BBC. The lack of water supplies in countries like Mexico is not unusual. In fact, when analyzing the risk to property in Mexico, regardless of its location, oftentimes I am told that a property has a sprinkler system to protect against fire. Unfortunately, when further analysis is done, you discover that there is no reliable water sources, therefore the sprinkler system pipes are filled only with air.

The article concerns me because it points to an increase risk to a basic peril of fire in insurance policies, and risk analysts should be mindful of this increase of exposure.

Water cut off in Mexican capital

Mexico City officials have shut down a main pipeline providing fresh water to millions of residents because reserves have fallen to record low levels.

The closure, due to last 36 hours, will affect five million people, or a quarter of the city's population.

Unusually low rainfall last year and major leakage are blamed for leaving reservoirs less than half full.

Hundreds of water trucks have been deployed in the areas worst affected by the cuts.

The local government says it will carry out emergency repairs to the water supply network.

More than 50% of the water carried by the pipeline leaks out before it reaches its destination.

This is the third time the capital has faced such a drastic form of water rationing this year, the BBC's Stephen Gibbs in Mexico City reports.

It has been deliberately timed to coincide with Easter weekend, when many residents, or at least those who can afford to, leave the city, our correspondent says.

Mexico City was once a floating city, built on a spectacular chain of volcanic lakes, and flooding used to be its main environmental threat.

But since the lakes were finally drained in the 1960s, the city has been struggling with its water supply, our correspondent says.

Piracy Whose Risk Is It Anyway?

The problem of piracy has once again made the news in the United States with this week's taking of the Maersk Alabama, but had actually recently hit new heights in Somalia with the hijacking of Faina and Sirius Star earlier this year. With the latter, we are talking of insured values of up $100m for the cargo and up to $150m for the hull, at a time when insurers are already under pressure. This is and always has been a problem for London, given that, ultimately, a large proportion of the assets at risk are likely to be insured or reinsured in London. Working with a colleague in London, I wanted to offer the following to you:

Since Hicks v Palington in 1590, it has been assumed that ransom payments are a subject for general average contribution. That seems fair, although the contributing parties should perhaps logically include P&I insurers, which will have a strong interest in releasing the crew and in preventing any major pollution incidents, and sue and labor expenses could well be covered in the relevant P&I rules/cover in any event. The clubs' worst case scenario might include a deliberate pollution incident by 'suicide' pirates just off the beautiful beaches of the Seychelles, for example. Alternatively, it is not difficult to foresee the taking of a cruiseship where the lives of more than 1,000 people could be at risk. So far the legal liability of P&I interests to contribute to ransom payments by way of general average has not been tested in the English Courts, but such a dispute cannot be far off, particularly where, for example, the insurer is not from the international group and the liability is potentially huge. So much for P&I, but there are plenty of other insurers that might be liable in a piracy, including cargo insurers, loss of hire insurers, and, for the vessel, hull or war risks insurers.

It is clear that the ICC(A) cargo clauses cover piracy, and that the (B) and (C) clauses do not (unless additional cover is purchased). The position there is very clear. The same, however, cannot be said in relation to coverage of ransom in respect of the vessel itself, even though ITCH 1983 or 1995 expressly covers 'piracy'.

Assuming that these attacks are covered as 'piracy', then ransom payments (arguably along with all the other expenses involved in dropping off the ransom and recovering the vessel) should be recoverable as a 'sue and labor' expense (to avoid a total loss caused by piracy).

The issue is whether on certain facts this will be excluded from the hull insurance but instead falls on war risks. The issue might be fairly irrelevant in cases such as Sirius Star where it is understood that the hull and war risks underwriters are the same.

However, it is easy to imagine future cases where high-value vessels such as this have the hull and war risks placed with separate underwriters. Further, it is common for there to be no deductible for war risks (compared with a hefty deductible for hull), and likewise there might be separate warranties, such as a warranty not to sail within, say, 250 miles of the Somalian coast, which may only be incorporated in one or other cover.

The ITCH clauses clearly cover 'piracy', but exclude loss or expense "caused by... any terrorist or any person acting from a political motive" (the 'Strikes' exclusion). Likewise they exclude loss or expense "caused by any weapon of war and caused by any person acting maliciously or from a political motive" (the 'Malicious Acts' exclusion).

It is also stated in ITCH that these exclusions "shall be paramount and shall override anything contained in this insurance inconsistent therewith". There is then an express buy back for these exclusions in the institute war and strikes clauses. The purpose of the drafters is clearly that piracy falls on the hull rather than the war risks underwriters, but it could be that this is not the case on certain facts. The Joint Hull and War Committees' 2005 wordings, which are rarely used, place piracy risks squarely on the war risks cover, so the concern relates to the traditionally used 1983 and 1995 wordings, where it could be argued that the position is less clear.

What exactly is piracy? The classic definition of a pirate is in Republic of Bolivia v Indemnity Mutual Mar Ass Co Ltd (1909), which is "a man who is plundering indiscriminately for his own ends, and not a man who is simply operating against the property of a particular state for a public end, the end of establishing a government, although that act may be illegal and even criminal, and although he may not be acting on behalf of a society which is politically organised."

It should be borne in mind, however, that this was an old case, on the f.c&s. (free of capture and seizure) clauses, and modern day pirates are different, especially in the context of Somalia.

It seems that no one has produced any evidence that the acts of piracy that have taken place to date out of Somalia have been carried out for political purposes, but there is a fine line between these latest acts and acts of terrorism, which as above fall clearly on the war risks cover. At the very least, the problem might arise where the motives are a mixture of financial and political. With the sums at stake, one assumes that it is only a matter of time before evidence of political motives surfaces, no matter how dangerous it is to obtain that evidence.

In circumstances where warlords are raising huge sums of money, in a country where there has been no organized government for many years, it is not difficult to imagine ransom monies being channeled into weaponry purchased with the specific aim of gaining political control in Somalia, for example. Evidence of that would be very likely to trigger the 'Strikes' (or terrorism) exclusion in ITCH 83 or 95, passing the whole problem onto war risks.

Further, other difficulties could arise such as the ransom payment being illegal under English law under the Proceeds of Crime Act if, at the time the ransom was paid, the paying parties had reasonable belief that the organization being paid was a terrorist one.

It is also conceivable that a hull insurer could seek to rely on the malicious acts exclusion, which would also put this risk, unwittingly perhaps, onto war risks. It is not difficult to articulate the behavior of the Somalian warlords who are behind these attacks as malicious in the extreme, and clearly they are using weapons that can be described as weapons of war. This point also seems to have been untested in the English Courts.

Against this backdrop of uncertainty, where delays and wranglings with insurers can literally mean the difference between life and death, it is not difficult to see why a proliferation of bespoke kidnap and ransom covers are suddenly being offered to shipowners, although many will have thought they already had this cover through their hull insurance.

Buying a specialised additional cover is one solution for the shipowner, but the likely long-term solution for the London market and its customers is to end the debate by making all forms of piracy, politically motivated or otherwise, a clear subject of the war risks cover, thus joining forces with the approach taken by most of the wordings drafted by London's competing markets. Until then, the ticking time bombs out there might not only be those in the hands of Somalian pirates.

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.

Tax authorities and insurance regulators scrutinise Freedom of Services insurance

I recently came across this article written by Mr. Richard Asquith of BNA International in the United Kingdom, who is an expert on the Insurance Premium Tax. What caught my attention with this article in particular is the clarity he gives to this very complicated issue. He exposes some very real issues that are going to face insurers who insist on writing global programs, yet ignore their obligation to comply with the rules of taxing authorities.

As I read this piece, it also reminded me of some issues that have been raised by my partners in the Europe. Namely, when the controlling, global company insists on charging a minimum premium for a substantial exposure in a country, this upsets the local insurers in that country. These local insurers are becoming more active in alerting the taxing authorities, and therefore making it extremely important to be in compliance. Otherwise the Clients are the ones who will be given the tax bill, and I can assure you that this will be an unpleasant conversation.

Mr. Asquith's article is as follows:

About the Author

Richard Asquith is the Managing Director of TMF VAT & IPT Services in the United Kingdom, which assists with IPT compliance through 79 worldwide offices. The TMF Group is a global independent management and accounting outsourcing firm.

Since the opening of the European insurance markets to cross-border competition, insurers have successfully developed new multi-territory insurance programmes tailored to the needs of globalisation. Whilst initially neglected by foreign tax authorities, in the last 18 months, they have been actively catching up on missed revenue opportunities. In addition, local insurance regulators are now showing signs of enforcing strict compliance rules on in-bound carriers to provide a level playing field for their own native insurers.

I. How insurance premium tax works ("IPT")

IPT, a global tax on insurance premium contracts, is administered in many ways. Most countries apply a percentage of the total premium, often including broker fees, to calculate the tax due. The time of the tax liability, "tax point", varies – for example when the premium is paid, or when the policy matures.

For most territories, the insurer is responsible for administering IPT. This includes the calculation of the tax, and the collection and settlement of liabilities to each relevant tax authority. However, in most countries, the policyholder is next in line for the tax liability. Should the contract issuer fail to take care of the IPT, then the tax authorities are able to pursue the insured party. For buyers of global programmes, this is becoming a hot issue. Often brokers are confused with the complexities of IPT compliance. This is being picked-up by the tax authorities, who are seeing the policyholder as an easier target for any IPT that is due. As described below, they are now taking direct action in a number of countries.

On top of premium tax, insurance contracts also attract a number of parafiscal charges. These represent additional levies to be settled alongside the IPT, and vary hugely from country-to-country. Again, the insurer, working with the broker, should take care of these. The complexity in this area comes from understanding the variety of taxes, to whom they are payable and how to settle. For example, many taxes can only be paid from a bank account in country – a huge administrative burden on international programmes.

II. Where is IPT due?

Historically, the international IPT liability was assumed to fall due within the territory where the policy was written. In this case, IPT was calculated locally, and paid over to tax authorities all too willing not to challenge this presumption.

The European Union, under its Freedom of Services regime, was amongst the first trade block to review this issue. In its 2nd Non-Life Directive, it clarified the location of the taxable insurance supply as to where the risk was to be located. Therefore, the risks on global insurance programmes had to be allocated by country, and the relevant IPT rules and rates applied.

In 2001, this principle was tested in the European Court of Justice. The Kvaerner Case has come to be cited as a defining moment in the international insurance premium tax market. Kvaerner, a large Scandinavian engineering company, purchased an international insurance plan in the London insurance markets. At the time of writing the contract, the UK IPT rules were applied. This case was brought by the Dutch tax office, which believed that it was due IPT, under its rules, for the Kvaerner risks located in the Netherlands. This case went all the way to the ECJ, which found in favour of the Dutch tax authorities.

Crucially, in addition to illuminating the principle of the location of the IPT liability, the ECJ also stated that Kvaerner, as the policyholder, was liable for the IPT. This put the policyholder directly in the sights of the tax authorities. Since then, there has been a rush by policy issuers and risk managers to ensure that any IPT is properly allocated and accounted for.

Building on the Dutch Kvaerner Case, other tax authorities are looking towards IPT as an additional source of revenue. In 2007, the UK tax authorities brought hearings against DSG (the old "Dixons Group") around its insurance cover provided from the Isle of Man. HMRC attempted to use Kvaerner to demonstrate a UK IPT liability where the Isle of Man issued cover applied to UK-located risks. Whilst DSG escaped on a technical issue, it showed the willingness of the tax authorities to apply Kvaerner. Another recent case of note is Homeserve, where the UK taxman successfully applied IPT on an "arrangement" fee for domestic emergency home cover.

III. European IPT compliance

The EU operates the world's largest trade block. For a number of the European-wide taxes such as VAT, it issues governing legislation and Directives. However, it has no such interest in IPT even though many of its member states now charge IPT on foreign-generated risk programmes. This means there can be large differences in rates, methodologies and timings of taxes between countries.

Some 30 European countries now permit foreign insurers to provide cover in their countries without a local branch or subsidiary. This is provided under Europe's Freedom of Services ("FOS") regime, which has its roots in the EU's original Treaty of Rome. For insurers wishing to use FOS, they simply need to apply for local passporting rights from their local insurance regulatory. This requires the assistance of their home insurance regulator. Often, insurers are obliged to appoint a local fiscal representative who is responsible for reporting and payment of any IPT due.

At present, it is almost entirely "Western" Europe where FOS insurers face an IPT regime. With the exception of Slovenia, there is no IPT on FOS premiums further to the east. This will change as the countries are encouraged by the World Bank and IMF to mature their insurance tax systems. Nevertheless, insurers may still face parafiscal charges, such as fire brigade charges in Hungary.

Many Non-European insurers can often write business across the region on a non-admitted basis. However, the tax authorities often then view the policyholder as liable in the first instance. This has important implications, as we will see below.

IV. International IPT

For global insurance programmes outside of the US and Europe, IPT compliance is tied-up with local insurance regulation. For many global programmes, if there is a local underlying policy, compliance with local tax is taken care of by the local agent/broker. No problem.

However, many insurers still work on a non-admitted basis internationally – despite it being illegal in a number of countries, e.g. Brazil. Since most countries' regulators and legislation actually ignores non-admitted contracts, tax has been overlooked too.

To cover the policyholders' potential IPT liability, it may be required to include a clause indemnifying the insured against any foreign taxes.

V. International tax authorities take note

In the past year or two, IPT has become a "soft" target for foreign tax authorities. Primarily, this is because of the increase in global programmes, fuelled by risk managers attempting to simplify their insurance cover and realise cost savings. A further reason is the pressure felt by national insurers from their global competitors who have been writing premiums across borders. The national insurers, via their local insurance associations, have been pressuring their tax offices to step-up IPT audits.

On a regular basis, new examples of the direct action of the tax authorities emerge. In both Austria and Germany, the tax authorities have been contacting the large global insurers asking for details of international programmes, and confirmation of how the IPT is being administered. In France, there are cases of the direct tax authorities co-operating with their IPT colleagues on identifying policyholders whose tax is non-compliant.

All of this activity is now showing up on the compliance and risk manager's radar – this is no wonder with them fearing that they may have to meet any fiscal shortfall. Most of the large corporations are now asking their insurers to provide clear documentary evidence of the management and settlement of foreign IPT. The largest groups have gone further, and are requiring indemnity against any international insurance premium tax. This is leading to a scramble by insurance auditors looking to spot any unresolved historic charges.

VI. A new, improved mutual assistance directive

For any serious level of co-operation to be undertaken between the European tax authorities, there has needed to be a more rigid set of guidelines for the sharing of data. In the past, it has been all too easy for insurers to be vague about their cross-border activities (even with the best of intentions) as long as foreign tax authorities were unable to cross-check activities with each other.

The EU's original answer to this problem was the Mutual Assistance Directive, which was intended to enable rapid exchange of data and activities on companies between the varying tax authorities. It also included measures to facilitate bringing legal proceedings on behalf of each other. However, it proved unwieldy and underused. There is no doubt that its ineffectiveness contributed to the neglect of IPT on cross-border insurance outlined above.

To help combat this, the Directive was redrafted in the Summer of 2008. This has now tightened up many of the loopholes in the old document. The only question mark now hanging over this otherwise potentially effective tool is workload: insurance centres such as the United Kingdom and Ireland are already deluged by enquiries from other European tax offices.

VII. Insurance regulators toughen up

Whilst few welcome unscheduled visits or even fines from the tax authorities, many insurers seemed to be willing to ride out the risks. Often this was simply down to the low levels of coverage and low risk of immaterial fines. Many managers within the insurance carriers simply had too many other bigger issues to handle.

However, this outlook is going to have to change quickly if the trend for the foreign insurance regulators to get involved with tax compliance continues. It was inevitable that regulators would at some point become more demanding on compliance for Freedom of Services insurers. What seems to be driving a new wave of audits from the regulators are local insurance associations pushing for a more level playing field for their members who are being squeezed by large global insurers moving into their markets.

An interesting case is Italy. A source of huge frustration for insurers has been the inability to get satisfactory "closure" on historic non-compliance in Italy. As with VAT, the Italian tax authorities seemed to be unwilling to accept back filings or confirm payments. However, the Italian insurance regulator has this year been taking a much stricter view. They are insisting on a complete record of all back filings be completed and filed. This can result in hours of work for insurers, and unwelcome questions from the regulator on procedures.

It is apparent that the tax authorities are much more willing to pass over cases of non-compliance to the local insurance regulator. Switzerland features highly in this regard. Many insurers, particularly from North America, have been correctly calculating Swiss Stamp Duties (there is no IPT in Switzerland) when quoting for global programmes. They have then charged this on to the insured – often believing they can pay over the IPT directly to the authorities on behalf of their policyholder. However, in Switzerland, it is often the insured party that must report the tax due. When approaching the tax authorities, such cases may be passed through to the regulator. Global insurers issuing multi-territory programmes centrally, but with local branches are particularly vulnerable to the regulators' wrath in these situations.

Given the ultra sensitivity of insurers to their market reputation, the fear of crossing swords with insurance regulators is certainly going to drive IPT compliance back to the centre of everyone's attention.

VIII. Conclusion

The complex variations in international IPT regulations and rates have often meant that insurers and risk managers have elected to ignore any tax liabilities. However, the foreign taxman and insurance regulator is now forcing a re-think as he seeks to catch-up on outstanding liabilities. With the policyholders now increasingly worried about their liability exposure, it is becoming vital for insurers to tackle this issue.

Anyone who does not may be the next to take a call from the tax authorities or regulators.