Financial Interest Insurance: A Key Consideration for Companies with Global Risks

International expansion can be a viable and rewarding way for companies to grow their customer and supplier bases. From a global insurance perspective, one of the most challenging aspects of doing business in different countries is the need to comply with each country’s varying insurance laws and regulations. Even though contracts, currencies and goods travel across borders, insurance coverage may not. Businesses that combine global insurance with financial interest insurance can address this challenge and may benefit from more robust protection of their foreign business interests.

An often overlooked component of obtaining global insurance is the need for multinational companies to protect subsidiaries, joint ventures and the parent company’s other business interests in foreign jurisdictions. Virtually every country has steep fines and penalties if the parent company tries to insure those foreign interests through a carrier not licensed in the local jurisdiction.

Companies must often choose between obtaining insurance in each country where they do business or self-insuring. While these approaches can provide adequate coverage, they can place a large burden on the home country’s risk manager. Even the most experienced risk manager may miss necessary insurance coverages in their attempt to obtain and compare insurance plans across multiple foreign countries. And, multiple plans often carry the potential for a significantly higher cost. One solution companies  can consider is financial interest insurance.

Financial interest insurance is a type of coverage that can insure the parent company for its financial loss arising from a loss incurred by a subsidiary. To trigger it, the subsidiary’s loss must be one that otherwise would be covered under the parent company’s policy but isn’t because the parent company’s policy was issued by an insurer that is unlicensed in the subsidiary’s jurisdiction.

With financial interest insurance, even though the subsidiary isn’t directly covered, the parent company may still recover losses. The reason financial interest coverage may be triggered is because a parent company has economic, strategic and operational interests in their foreign subsidiaries. For the parent company, the insurable loss is financial interest in its foreign operations.

There can be tax-related complications when it comes to financial interest insurance. When your policy pays for damages, the foreign country where your entity is located in is likely to require you to pay taxes on the payment. Unless your policy covers the taxes as well as damages, a loss could still have a big negative impact on the bottom line of your business. That’s because the taxes will cut into your policy payout, leaving your foreign entity and parent company less than whole after a loss.

Carefully read insurance policies to ensure tax payments are covered. If you have questions, speak with an insurance agent or company representative with experience in coverage for foreign entities. It may also be helpful to check with your tax advisor to understand the tax implications to your business of insurance payments for business losses in foreign countries to make sure a policy will provide you with adequate protection.

As you consider financial interest insurance, ask the following five questions so you get the right protection for your business:

1. Which foreign entities can generate a financial interest loss? Before you purchase a policy, you’ll want more policy specifics:
   • Does it include only subsidiaries or wholly owned entities, as well? 
   • Would a loss at a joint venture, sister company or indirect ownership situation be covered?
   • What about situations where the parent company is contractually obligated to indemnify or insure a foreign operating entity even if there is no direct ownership interest?
   • How will claims be handled – locally or from outside the jurisdiction?
2. Does your financial interest insurance cover defense costs? Asking your agent or insurance provider about this will help ensure you won’t just be covered for direct losses, but also for potentially costly legal expenses.
3. Does your financial interest coverage have its own dedicated limit? Securing financial interest protection with its own limit is important. It may help you prevent not having enough coverage when it comes time to make a claim because your business policy limit was reached on other claims.
4. Does our financial interest policy cover foreign taxes on claim payments? Insurance claim payments could be taxed by foreign countries. Tax levies, if not covered by your insurance, could have a negative financial impact.
5. Is your carrier able to refer you to in-country legal experts? It can be challenging to find specialized legal support in some countries. It will help knowing your insurer can connect you with the legal help you need when facing an international crisis.

Securing the right coverage for your foreign entities helps protect your business against the risks posed by doing business internationally.