At a glance
- Increasing globalisation, Brexit and the prospect of new UK/US trade deals are growing incentives for trade with the US
- Trading in US markets can provide significant opportunities, along with fresh risks to mitigate
- We explore the important risk, insurance and compliance considerations
As the pace of globalisation accelerates, many organisations are expanding their supply chains, outsourcing job roles and establishing bases overseas.
With the UK’s decision to leave the EU, and positive noises being made by both sides about the prospect of UK/US trade deals, many organisations will be thinking about expanding trade with the USA.
While this is a positive move for many, there are a number of important risk, insurance and compliance considerations to make before taking the plunge.
We explore the risks and challenges, and how Zurich can provide support.
Unfamiliar legal and regulatory environment
According to Mark Pennock, Head of Property Underwriting, Commercial Insurance UK at Zurich: “The fundamental difference between the US and the rest of the world is how they deal with loss.
“Where we are used to the ‘proximate’ cause of loss in the UK, in the US, the important factor is the ‘direct’ cause. In the case of Hurricane Katrina in 2005, for example, the proximate cause of loss was the hurricane. However the direct cause of much of the loss was the breaking of the levies and the subsequent flooding.”
This is an important distinction that can work either to favour or disadvantage the insured. In the case of Hurricane Katrina, policyholders will have had separate limits and deductibles for both the hurricane and the flood. This can be helpful in the event of large claim, but in the case of a small loss, policyholders will be paying two deductibles and will be less likely to approach limits.
“There are also differences around deductibles themselves”, explains Mark. “In the case of natural catastrophes, there is normally a percentage deductible as well as a monetary deductible.”
“If a customer’s values were $100m, they could pay a $5m deductible, plus the normal deductible of $1m.”
The terms ‘excess’ and ‘deductible’ are often used interchangeably in the UK. However in the US, insurers have a duty to defend claims that are less than the deductible, despite not being required to pay the insured.
The US also has a reputation for being a particularly litigious society. While the increase in no-win-no-fee legal representation has become more familiar in the UK over recent years, the potential high cost of lawsuits in the US needs to be considered. In one ongoing, high profile case, a California jury has ordered Johnson & Johnson to pay $417m to a cancer sufferer who claims a link to the company’s talcum powder products. The company is currently facing 4,500 similar claims in the US.
Brokers and their customers need to keep in mind that policies placed in the UK will be tailored to English law. Just because a policy has worldwide territorial scope, this does not mean it will necessarily pay out in the US. A property policy designed for UK law is highly unlikely to mention earthquakes or provide adequate cover.
Federal excise tax, which is imposed on premium payments to offshore insurers (4% on direct premiums), should also be taken into account when customers start covering risk in the US.
There are significant differences between the UK and US when it comes to the insurance regulatory landscape. We can provide support for organisations looking at US expansion through our Multinational Insurance Application (Zurich MIA), a global regulatory and tax database, designed to help both customers and brokers to stay compliant.
Differences from state to state
As Mark explains: “In the US, each state is like its own country from a legal and insurance standpoint.” While there are similarities between states, the differences can be substantial in some areas, and Zurich offers policy wordings filed for each state individually.
There can be substantial state-to-state differences when it comes to litigation and the level of compensation payouts awarded to claimants. The differences can be stark enough to encourage some claimants to embark on ‘forum shopping’, where they aim to have their case tried in a state thought more likely to offer a favourable judgement.
According to Brendan Donlon, International Programme Manger, Real Estate at Zurich: “One of the biggest changes when customers move internationally is the introduction of natural catastrophes.” This is particularly true in a landmass as large and geographically varied as the US.
In the UK, natural catastrophes are primarily limited to serious flooding. However, an expansion into the US opens up the risk of everything from tornados to earthquakes.
Zurich’s Risk Room – available for customers and brokers – can help model the political, infrastructure and natural risks involved with expansion into any of 174 countries, including the US.
“As with an expansion into any new and unfamiliar territory, it is important that customers come to Zurich at an early stage of the planning process,” explains Brendan.
With increasing numbers of organisations likely to embark on trade outside Europe, our international expertise and tools can help manage international expansion and provide support.
For more information, please get in touch with your local Zurich contact.