Directors' and Officers' liability insurance (D&O)
The location of risk is defined by the country where the insured is located at inception.
If the insured is a corporate body, the risk is located in the country where the corporate body purchasing the insurance is established, if that corporate body is entitled to make claims under the contract. This is not affected by the insured directors themselves being individually habitually resident in another country.
If the insured is an individual, the risk is located in the country where they are resident at inception.
Example
A UK company takes out D&O cover for the directors of a UK company and its Australian subsidiary. Two of the directors of the UK company are also directors of the Australian subsidiary. The UK Insurance Premium Tax (IPT) position is as follows:
- Premium attributable to individuals who are directors of the UK company only – taxable.
- Premium attributable to individuals who are directors of the Australian company only – exempt from UK IPT.
- Premium attributable to individuals who are directors of both companies – the premium has to be apportioned and the part attributable to the UK company is subject to UK IPT.
The establishments are the company and its Australian subsidiary, not its directors. There is also an exposure to tax in relation to the Australian risk that must be addressed.
Employers’ liability and workers’ compensation insurance
The risk is located in the country where the insured business has establishments at which insured employees are employed.
Example
A UK company takes out an employer's liability policy to cover employees working on two fixed oil rigs. One oil rig is within the twelve mile nautical limit and the other is outside. The oil rigs are establishments; one is a UK establishment and the other a non-UK establishment. The premium needs to be apportioned. The proportion relating to the rig which is outside territorial waters is exempt but the balance is taxable.
The catering for employees working on the rigs is sub-contracted to a separate catering company. This catering company takes out an employer's liability policy to cover its own employees while they are working on the rig. The rig is also an establishment for the catering company as it carries on business activities there by virtue of its catering contract with the oil company. The proportion of the premium relating to the rig which is outside territorial waters is exempt but the balance is taxable.
Product liability insurance
The risk is located in the country where the manufacturer’s business most closely associated with the risk is established.
This applies to product liability insurance covering a manufacturer’s risk in relation to aircraft, vessels and spare parts. For regulatory and tax purposes such risks are not aviation or marine risks but are treated as 'general liability', as they are not directly linked to the operation of the aircraft or vessel.
Countries to which products are exported do not determine the location of risk, if the insured does not have an establishment in those countries.
Example
A UK company manufactures a product for a US subsidiary. Although the product is sold in the US, the UK parent takes out product liability protection to cover the liability of its subsidiary. The US subsidiary is considered to be the business establishment as a purchaser will potentially sue this company rather than the UK parent. The premium is therefore not subject to UK Insurance Premium Tax (IPT).
The position will be different though if there is no US subsidiary and the products are sold from the UK. The product liability cover can only protect the UK company, so the premium is subject to UK IPT.
Professional indemnity insurance
The risk is located in the country where the insured’s business is established.
If the insured is an individual person, who is covered for activities in a country other than that of their usual business address, the location of risk will depend on the circumstances of the case:
- If the activities in the other country are incidental to their main business activities, the risk is located in the country of the insured’s usual business address.
- If the main purpose of the contract is to cover the insured whilst they are in the other country, or to provide cover that is compulsory in the other country, the risk is located in the other country.
Other general liability insurance
The location of risk is determined by the insured’s location. If the insured is an individual, their location is the jurisdiction in which they are domiciled. If the insured is a corporate body, their location is the jurisdiction in which their main establishment is located. “Other general liability” includes public liability, energy non-marine liability and fidelity & bankers’ insurance.
Global contracts
A Global contract is a contract insuring risks located in more than one country.
Global contracts – D&O insurance
A D&O insurance contract is a global contract if:
- It covers directors and staff members of more than one company and those companies have their head offices in different countries.
- It covers directors and staff members working in more than one country. For example, a contract may be taken out by a single company with a head office in the UK and branch offices in France and Germany. If the coverage includes senior staff members managing and based in these branch offices, this is a global contract.
Rules for D&O insurance, covering matters such as ability of a company to indemnify its directors, and the acceptability of non-admitted coverage or of “claims made” wordings vary from country to country. A global D&O insurance contract can therefore give rise to international legal and regulatory issues.
Global contracts – general liability insurance
A general liability insurance contract is a global contract if it is taken out by a corporate body and covers individuals employed by, or otherwise associated with, other corporate bodies or other establishments as well. The contract may refer to specific named entities or may state that individuals employed by all subsidiaries, associated companies, branches (or other forms of establishment) are covered under the policy.
When identifying the location of risk for a contract covering a single corporate entity its branch structure and other types of establishment associated with the risk should be considered even if they are not specifically referred to in the contract. “Establishments” are discussed in detail here.
Premium apportionment
A global contract may give rise to regulatory and tax exposures in different jurisdictions. Compliance with these requirements requires the overall premium to be apportioned between the countries in which risks are located. Guidance on premium apportionment is provided here.
