Category Archives: Insurance

Safety and Legal Protection: How Dash Cams Help

A Dash Cam provides irrefutable video evidence to protect you against false accusations after an incident, road rage, drunk drivers, and insurance fraud. This video footage can also be used as evidence to help remove sly drivers off the roads and protecting everyone on the other hand.

The new advancements like dash cams, body cam glasses, and other recording tools have provided next-level security to law enforcement.

The demand for dashcam footage is increasing daily by police investigators as a shred of vital evidence for a severe car accident. These videos provide the essential evidence of any mishap and a great help in the investigation process. This shows how beneficial and important Dash Cam footage can be.

How to use a dashcam?

Dashcams or dashboard cameras are located on the windshield, without blocking your vision, and records everything happing is in front of your car. There’s no doubt that the demand will continue to rise, with many dash cams costing under $100 and the footage being captured becoming more relevant in court dealings.

How can we use dashcams in case of accidents?

Camera footage from dashcams is admissible as evidence in court, so long as the dashcam is not used to record a private activity. The clear advantage of dash cams is that they can easily provide irrefutable evidence of who was at fault during an accident without relying on independent eyewitnesses. This can cut out the ‘he-said-she-said’ scenario, which may burden your claim.

Dashcams could be used in the following ways :

Evidence In Case Of An Accident

This is the most common reason people use dash cams on their cars. In case of an accident, you have a recording of the whole incident, and you have the advantage to show the authorities what really happened and what should be done. 

A Slew Of Sophisticated Features

Today, dash cams have many useful features that make them extra essential for drivers and business owners. These state of the art dash cams have GPS integrated with them so you can accurately track where an incident occurred. Some have voice reminders and accelerometers that alert the driver that the vehicle is being driven unsafely. Other models may include live view facilities that allow fleet managers to watch the vehicle in real-time while driving down the road! These dash cams can use the internal SD card/hard drive removed and analyzed on other devices. 

Some of the more advanced units even have their own proprietary software to aid in the viewing and reporting the journey.

Business Managers and owners Can Track Their Vehicles Efficiently;

Businesses can considerably benefit from executing a dashcam system on their fleet vehicles. Several insurance companies give discounts, and some outright requiring the installations of dash cams to get an insurance policy. For instance, You have a car fleet and have a strict “no use of cell phones while driving a car” law.

 How do you actually enforce this law without personally being in every vehicle, with your drivers every day? It is impossible Without a dashcam. Well, if you plan on applying a profit that day, it is. If you employ technology, you will easily see who is and who isn’t following the company’s policy.

Help Stop Fraud

There are lots of shady drivers on the road nowadays that prey on the unprepared. These drivers intentionally cause accidents and say that the other person caused the crash to claim insurance money.

 By placing a dash cam on your cars or other automobiles, drivers can record their journey. If they encounter such drivers, you can easily prove that he intentionally did the accident for insurance claims. Driver and the owner will be safe from these insurance frauds.

Dash Cam Can Protect You From any Insurance Lawsuit.

Dashcams and other security equipment could help protect you in various ways if you are sued. If an incident occurs, having a Dash Cams installed in your car can ensure that every detail, like your vehicle’s speed, the crash’s angle, and surrounding driving conditions, will be available. With this information, insurance companies can investigate the incident’s cause and fault more efficiently and timely. 

Can you use your dashcam when you drive abroad?  

There are restrictions on dashcams or the video footage you record using one in many countries. This is usually due to privacy rules that restrict video or image capture of public members without their approval. So it would be best if you verified the laws of the respected country or countries you’ll be driving in.

Navigating through Malta’s Unrivalled Potential

Danielle Hermansen, of PKF Malta, discusses recent developments in the insurance market and latest event for promoting Malta, as a domicile of choice for European Captives in October 2016 – New York, the success of the industry’s latest events and what essential elements remain talking points across the financial landscape

  1. What was the event and why was it held?

PKF Malta sponsored a Captive Owners Summit on  31 October 2016, being the third initiative in its kind this year in New York. This event was one of a series of events in the PKF Malta calendar with the aim of promoting Malta as a domicile of choice. This Captive Owners Summit, organised by Captive Review, is a highly exclusive learning and networking event for US-based leading captive owners. It offered a unique opportunity to network and share ideas with industry peers in a safe and intimate environment where insurance buyers are proficient and lead the content.

The event was hosted at the prestigious Essex House, where an innovative approach to networking was introduced, having delegates attending a series of in-depth roundtable sessions. PKF Malta was invited to host the “Writing European Risk Through a Captive” during the full day event. The event was spread over 15 topics, for which PKF Malta had the privilege of hosting two round tables featuring European Risks. Other sought after topics included “Using Your Captive As a ProfitCentre ”, “Self-Procurement Taxes and Re-domestication Pressures” and “Bringing Multi-national Employee Benefits Into Your Captive”.

  1. How successful was the event? Why?

The round table linked to Writing European Risks, having the author as the speaker, discussed a number of pertinent points connected with insuring European risks. This pointed to a long list of benefits of Malta as a domicile of choice in Europe in particular in view of its Protected Cell Companies Legislation. Both roundtables where successful and in-depth discussions centred on how Cells may be used. Most of the Captive Owner representatives present were still in-tuned on using fronting arrangements for their European risks. Many where pleased to learn of an alternative solution to using fronters, namely that of creating insurance Cells in Malta to satisfy this purpose. Some were curious to know what they should look out for and finally what the benefits would be for them if they consider Malta. With fronting arrangements becoming more onerous and fronters in Europe becoming more choosy following Solvency II, this was seen as a viable option.

  1. Did Solvency II discussions feature in the Round Tables?

Solvency II was a heated topic amongst participants at the summit, surfacing repeatedly during both roundtables, including a discussion on the future ramifications of Brexit. Solvency II is the result of a decade of anticipation to the European Union’s harmonisation of laws governing the insurance industry. The new regime came into force in January 2016, with insurance companies across the EU having to submit their Day 1 and QRT Reporting to their respective regulators. It is accepted that insurers and insurance managers invested in human resources in order to embrace this new regime, while finding a way to justify the costs of implementing an internal model or alternatively scale down to the standard model. Once the emphasis on the new regulatory regime is fully embraced it is expected to become second nature to the day to day workflow, then one hopes that the benefits of solvency II will start being appreciated even more. One hopes that the risk based approach of solvency II will act as a catalyst for risk managers overseeing how capital is best allocated and hence more aligned to underwriting criteria.

  1. What other main topics featured in discussions?

Cyber risk was by far the most sought after topic of the day so that industry specialists offered their experiences on how best to handle this risk. While the majority noted that insurance was in place, they all agreed that the limits in place are by far too low to cover an actual full scale event. The debate evolved on the need for the risk managers to first see how they evaluate the cyber risk policy, then approach reinsurers accordingly, this albeit representing the ideal scenario achieved by some, possess better leverage in their negotiations with their reinsurers.

  1. How would you describe the overall experience of the Summit?

This event was well received and attracted a gathering of US-based risk and insurance professionals playing an integral role in directing their corporate captive. The event also attracted heads of State like the State of Vermont and Consultants and Risk Management specialists such as Spring and Beecher Carlson. More importantly, it also gave the opportunity for participants to meet a number of Captive Owners, Fortune Global 500 list, some in the top 100 list, who shared their invaluable experiences and innovation utilised in their Captives. Without any doubt, with the collaboration of Finance Malta, this event served as a platform to raise the profile of Malta as an insurance domicile, to establish leads of interest to set up in Europe and to create new contacts within the market. PKF Malta are pleased that the event created interest in placing Malta squarely on the radar considering the merits of other European options.

Part of the services PKF Malta offers includes a core Internal and External Audit service to the insurance industry, so we work closely with specialised service providers within the local industry. Being an integrated member firm of PKF International, we also work closely with 120 offices to deliver specialised technical solutions to the local insurance industry. We have the ability to give a tailor-made service which goes beyond mere compliance to provide a whole range of flexible services, the likes of which larger consultancies may find harder to achieve.

Earlier this year, PKF staff also attended the SIFMA – Insurance and Risk Linked Securities Conference in New York, taking the opportunity to discuss further the emerging trend concerning the ILS market in an effort to expand their products to cater for a more diverse range of cedents such as Captives. It goes without saying that the ILS provides a means by which the Captive may now also transfer its catastrophe risks, other than solely relying on the traditional reinsurers. This vehicle is still gathering momentum, in the same way that the non-traditional use of ILS’s for embryonic cat risks such as cyber risk and operational risk. It is evident that opportunities for growth in US market are ripe for Malta in its policy to partake of the growing market.

Path Act Makes Changes to Captive Insurance Tax Rules

Captive Insurance is a formalized corporate structure, whereby a business self-insures a portion of identified business risks, rather than purchasing coverage from the retail insurance marketplace. Insurance can be a very profitable business. However, as with any business or adjunct to an existing business, the insurance field contains many pitfalls. If the business of insurance is not undertaken in a carefully planned, managed, and professional manner, the result can have severe ramifications for the parent company.

Nearly every Fortune 1,000 US company owns a captive insurance company. Presently, the captive insurance industry is experiencing its greatest growth within “middle market” companies. These businesses are evaluating and deciding to form their own captive insurance company.

The US Congress recently passed the PATH tax act. The act includes changes to IRC 831(b), and these changes shall take effect on January 1, 2017. The Internal Revenue Code currently defines a small insurance company as:

  • A nonlife insurance company with net written premiums, or direct written premiums, not in excess of $1,200,000 in the tax year to be taxed, at regular corporate rates, only on taxable investment income, instead of being taxed on both investment and underwriting income. For tax years beginning after Dec. 31, 2016, the $1,200,000 maximum amount of annual premiums will be increased to $2,200,000. The $2,200,000 maximum amount of annual premiums will be adjusted for inflation. A specific election form must be attached to the US corporate tax return in the year the election is to take effect. The election can only be revoked with IRS permission.

For those insurance companies that are organized and domiciled outside of the United States that wish to make an election pursuant to IRC 831b, they must first file an election pursuant to IRC 953(d), and obtain IRS approval to be taxed as a US entity. Special compliance and filing rules must be followed in order to obtain IRS approval of the IRC 953(d) election.

An example of a pitfall to consider is that that the Internal Revenue Code or Regulations do not contain a definition of Property & Casualty in “Direct Written Premiums” or “Net Written Premiums”. “Presumably”, that definition is:

  •  “The gross amount of premiums received by a non-life insurance company for directly issued (not reinsurance) insurance policies and net assumed and ceded out reinsurance.

These are but two insurance terms or phrases that are not defined by the IRC or regulations; one must “infer” the definitions by analysing numerous court case decisions, IRS revenue rulings and Private Letter Rulings.

Of particular note: A company that elects to be taxed only on investment income pursuant to IRC 831(b) may not deduct underwriting losses. For this reason, companies that qualify for the alternative tax may prefer to forego the election and be taxed on both investment and underwriting income (and loss).

For the second year in a row, micro-captive insurance companies were listed on the “IRS Dirty Dozen” list of tax transactions to be “cognizant of”. Additionally, the IRS’s alert clearly states that the formation and use of a micro-captive insurance company is a “legitimate tax structure.”

Each and every captive insurance company, regardless of size, has very specific facts and circumstances that pertain to their insurance business activities. Accordingly, a complete feasibility study and analysis is absolutely necessary before entering into this endeavour. To do so without one is inviting calamity to have a seat at your executive board.

Another prime example of a common pitfall one must be aware of is that when electing IRC 831(b), the premiums written by all members of a controlled group are aggregated to determine the amount of premiums written by any member of the group. A 50% ownership test is used to determine if a controlled group exists.

In addition to the positive enhancement of the IRC 831(b), which increases the premium limit to $2,200,000 as of 1/1/2017, very specific diversification rules and requirements also go into effect.

For tax years beginning after December 31 2016, a diversification requirement will apply if a nonlife insurance company makes the IRC 831(b) election.

The diversification requirement will be met if:

  • An insurance company does not have more than 20% of the net premiums (or, if greater, direct premiums written) of the company for the taxable year, which is attributable to any one policyholder.

In determining the attribution of premiums to any policyholder, all policyholders who are related (within the meaning of Code Sec. 267(b) and Code Sec. 707(b) , or who are members of the same controlled group, will be treated as one policyholder.

Under an alternative approach, the diversification requirement will be met if:

  • No person who holds an interest in the insurance company is a “specified holder” (see below) who holds (directly or indirectly) aggregate interests in the insurance company that is more than a “de minimis” (see below) percentage higher than the percentage of interests in the “specified assets” (see below) with respect to the insurance company held (directly or indirectly) by the specified holder.

For purposes of these rules:

  • (A) A “specified holder” is, with respect to any insurance company, any individual who holds (directly or indirectly) an interest in the insurance company and who is a spouse or lineal descendant (including by adoption) of an individual who holds an interest (directly or indirectly) in the specified assets with respect to the insurance company.
  • (B) “Specified assets” are, with respect to any insurance company, the trades or businesses, rights, or assets with respect to which the net written premiums (or direct written premiums) of the insurance company are paid.
  • (C) An indirect interest is any interest held through a trust, estate, partnership, or corporation.
  • (D) Except as otherwise provided by IRS in regulations or other guidance, 2% or less is treated as de minimis.

Illustration: In 2017,

  • A captive insurance company (“Captive”) will not meet the requirement that no more than 20% of its net (or direct) written premiums are attributable to any one policyholder.
  • Captive will have one policyholder, “Business,” certain of whose property and liability risks Captive covers (the specified assets), and Business will pay the captive $2 million in premiums in 2017.
  • Business will be owned 70% by a father (“Father”) and 30% by his son (“Son”). Captive will be owned 100% by Son (whether directly, or through a trust, estate, partnership, or corporation).
  • Son is Father’s lineal descendant.
  • Son, a specified holder, will have a non-de minimis percentage greater interest in Captive (100%) than in the specified assets with respect to Captive (30%). Therefore, Captive will be not eligible to elect to make the election. If, by contrast, all the facts were the same, except that Son will own 30% and Father will own 70% of Captive, Son would not have a non-de minimis percentage greater interest in Captive (30%) than in the specified assets with respect to Captive (30%). Therefore, Captive would meet the diversification requirement for eligibility to make the election. The same result would occur if Son will own less than 30% of the Captive (and Father more than 70%), and the other facts remained unchanged.

Every insurance company that will have an election in effect under IRC Sec 831(b) for any taxable year after 2016 will also have to furnish to the IRS, at the time and in the manner as the IRS prescribes, the information that the IRS will require with respect to the diversification requirements.

As a CPA with a depth and breadth of experience and knowledge in the matter, it is my considered opinion that a captive insurance company can be a powerful tool in the risk management and business strategy of a business. It is, and always has been, the intent of The United States Congress and The United States Treasury that the primary purpose and intent of a captive insurance company is to assist in the risk management of a business, but it is filled with many complex accounting, regulatory, tax, and business issues that require one to retain knowledgeable and experienced professionals to keep the company away from “land mines” and “pitfalls”.

Please feel free to contact me for clarification, direction, or dialogue on the subject of Captive Insurance for business or any other strategic compliance and planning questions and needs.

Malta as the domicile of choice for insurance vehicles in Europe

Danielle Hermansen from PKF Malta discusses how Malta can and is fully utilising its potential in the insurance industry.

PKF is supporting Finance Malta in its quest to promote Malta, by organising a conference on the 29th March 2016 which will focus on what Malta can offer to US Captives seeking to tap into their European risks. It will showcase benefits of setting up in Malta as the domicile of choice.

Finance Malta, as a private/public partnership is geared to promote the sector, mindful that it faces tough competition fielded by established jurisdictions, yet it succeeds to attract international companies seeking an alternative EU jurisdiction traditionally offered by tried and tested places such as Dublin and Guernsey.

The conference venue is the prestigious Bar Association building located at 42 West 44th Street in New York, USA.

One may well ask, with so much competition, what can Malta offer in this sector which sets it apart from other centres such as the Isle of Man, Channel Islands, Gibraltar and the Caribbean stalwarts such as Bermuda, Barbados and Cayman Islands? The answer is: flexible and fair regulation, a competitive fiscal regime, over 70 double tax agreements and all the financial services support available at a high professional level.

It is common knowledge that an insurance vehicle domiciled in an EU member state can provide cover for risks across the entire EU, subject to local regulatory requirements and thanks to this facility, most captives take advantage of the EEA freedom of passporting to write insurance directly without the need of a fronter.

Malta can be said to have a firm advantage for insurance companies continuing and/or seeking to establish themselves in Europe.

Malta with its respectable number of 62 insurance companies, nine affiliated, 12 PCC’s with 27 cells and eight insurers of domestic origin, is pushing ahead to attract quality not quantity, but of course the numbers are important and no effort is to be spared to expand the internal market. It goes without saying that, a number of jurisdictions, are active to pursue captive owners and reinsurance companies encouraging them to redomicile, so one may ask in the context of Malta, why are the numbers so modest and what can be done to overcome the challenge to attract more investors.

The answer is that as an EU member state and EIOPA member, Malta has contributed to the development of Solvency II and its expertise has grown thanks to the open dialogue with the local one-stop shop authority (MFSA).

A US captive owner wanting to set up an insurance vehicle to insure its European risks or enter the insurance linked securities market, will find that it is mandatory to set up in Europe. They can easily set up vehicles including cells as fronting facilities in Malta in order to reduce their EEA fronting costs and reinsure back to the US.

Typically, a non-EU captive would use a licensed insurance company as the fronter, to write business in EU and the captive will then reinsure the fronter. However, this has its disadvantages. There are no general guidelines in EU domiciles which limits or controls the amount and type of collateral that must be provided to a fronting insurance company. This collateral is trapped money which may be utilised elsewhere, so many do find that the cost of setting up a cell in a EU domicile would be more competitive, whilst ensuring full control on it as a risk management tool.

Captive owners therefore need to assess which solution is best to reduce the amount of collateral that become trapped and the ongoing costs of fronting arrangements. It is common to expect that the demand for collateral will be driven by the fronter’s requirements, based on its own risk assessment and invariably will be a matter of commercial negotiation between the parties. It is also a common knowledge that fronting partners assess offshore differently to onshore captives.

This is a potential market which Malta needs to tap into, to establish itself as one of the domiciles of choice within Europe for captive insurance and reinsurance companies. Operating from Malta, means utilising the freedom to provide services to companies that operate between EU member states, thus it can insure or provide insurance services to the vast European insurance market.

Malta can be said to have a firm advantage for insurance companies because it enjoys the enviable position in the entire EU to provide Protected Cell Companies, Cells that do not suffer additional financial costs associated with both establishing and running of an insurance vehicle. The island is fully equipped to cater for PCC structures, since we have been the forerunners and only full EU member to have legislated these structures in the Solvency II arena in Europe, and one might add will continue to introduce innovative products in the near future. The PCC concept has also been taken further to include insurance intermediaries and now SCC (Securitisation Cell Companies).

Setting up and running these companies in Malta is reputed to be on average 60% less compared to other EU jurisdictions.

Malta has proven itself, by the existence of a growing captive and (re)insurance industry, this also thanks to its openly accessible regulator, who has been proactive in understanding the needs of the insurance business community and embraces regulatory innovation.

For sponsorship opportunities or to attend this event, kindly contact Anna Golis, Research & Development Manager on [email protected] or call us on +356 21 484 373.

Biography: Danielle Hermansen has been in the insurance industry for 15 years, working both as an underwriter and broker, specialising in commercial business. She has recently worked in the captive insurance management industry and is well versed in the process of setting up insurance vehicles.

PKF Malta has a dedicated insurance team providing specialized services and technical solutions. We will be your partner in setting up your Solvency Two compliant insurance vehicle in Malta, from the initial feasibility stages to meeting with the regulator, financial projections, license application and selection of service providers as required.

PKF’s advice is tailored to each client, going beyond mere compliance to incorporate a whole range of flexible services. Services such as internal or external audit, financial reporting, and risk management advice, give your business the edge you need to manage effectively and achieve your objectives.

Providing for valid hold harmless covenants in favor of directors in Italy.

In doing business are commonly set up hold harmless (or indemnity) covenants to protect directors against actions initiated by the company managed by them, company’s shareholders or any third party, in relation to the activities carried out by directors in their office. Such covenants are entered into at the beginning, in the meanwhile or at the end of a corporate management office or in connection with extraordinary operations (such as, by way of example, M&A transactions) as well. It is, therefore, of importance to examine the constituent elements and the extent of the validity of hold harmless covenants.

Under Italian law such covenants are not specifically envisaged in the Civil Code, nor in any other law or regulation, whilst they are qualified atypical guarantees to be considered valid in case interests worthy of protection are pursued pursuant to articles 1322 (Freedom of contract), 1343 (Unlawful consideration) and 1418 (Causes of nullity of the contract) of the Italian Civil Code.

Therefore, in the Italian system, it is firstly necessary to ascertain if limits of public policy exist to the eligibility of atypical guarantees (or atypical contracts / hold harmless covenants). To this regards, it is commonly accepted that it is contrary to the public policy only the covenant to indemnify a party from damages deriving from its willful misconduct (or damages related to intentional abuse). As a consequence, a valid hold harmless covenant may be entered into in all cases in which a guarantor assumes damages or liabilities arising from negligent or grossly negligent actions of the guaranteed towards third parties.

Nevertheless, it has to be considered that in case the indemnity covenant refers to the liability of the guaranteed for acts committed by itself against the guarantor such indemnity cannot cover grossly negligent actions, because the exemption in advance between creditor (guarantor) and debtor (guaranteed) from responsibility for grossly negligent actions (or for willful misconduct) is forbidden pursuant to article 1229 of the Italian Civil Code.

Given the above, it is necessary to check whether the above considerations may also apply as regards the hold harmless covenant to cover the consequences of criminal or administrative illegal actions.

Regarding the violation of criminal laws, the above criteria apply, for which the indemnity is invalid only if the responsibility of the person indemnified was caused by his/her willful misconduct. To this regards it is worthy to mention that it is not admissible a hold harmless covenant to protect the directors who committed the crime of false accounting as envisaged by article 2621 of the Italian Civil Code, which is by nature a fraudulent offense (see article 2621 of the Italian Civil Code, as amended by Law May 27, 2015, no. 69; see also Court of Cassation on June 16, 2015, no. 33774).

With respect, however, to the breach of administrative provisions of law, it has to be noted that, in application of secondary legislation that regulates the insurance sector, it is not valid any form of indemnity to cover risks relating to the imposition of administrative fines. This is because such an indemnity agreement would deprive the power of reaction of the State towards the administrative offenses provided for by provisions for the protection of the public interest. Nevertheless, an exception to this principle is made by fiscal rules, by which for cases of infringement carried out without fraud or gross negligence, the individual, the company, the association or the entity may assume the debt of the person (director) responsible of the infringement (usually, the CEO or the director charged with the responsibility of Tax compliance) (see Article 11, section 6 of the legislative Decree December 18, 1997, no. 472, as subsequently amended).

An important aspect for the purposes of setting up a valid hold harmless covenant is represented by providing for a determined or determinable object. In fact, it could be argued that a wide hold harmless covenant – with no indication of a specific event or behavior from which future liability might arise – may be held invalid for conflict with Article 1346 of the Italian Civil Code, by which the object of the contract has to be possible, lawful, determined or determinable.

A valid and enforceable indemnity, therefore, requires that the facts from which the liability (or the debt or the damage) can arise are indicated and well-specified so that the potential extent of the risk can be defined economically. These facts can be represented by any act, fact or circumstance, to the extent they are determined or determinable: such as behaviors that are related to the duties of the person to be indemnified or activities carried out by the latter, breaches of any nature, facts or acts concerning specific sectors, provided they are not committed with fraudulent behavior (nor with gross negligence, in case the acts covered by the indemnity covenant are committed by the guaranteed towards the guarantor).

An additional element to be necessary for the validity of the hold harmless covenant – except the cases (difficult to implement concretely) in which the liability or debt positions are well-specified and well-limited – is represented, then, by the determination or determinability of a maximum amount for the assumption of debt.

To this regards, it is however necessary to keep in mind that, if responsibility, damages or debt positions could not be determined to certain economic extents, the provision of a cap that defines the boundaries of the economic value of the indemnity is to be considered necessary on the basis of the application of the principle of public policy, imperative, envisaged by Article 1938 of the Italian Civil Code on the guarantee related to future or conditional obligations, according to which if the object of the contract (indemnity) is a future obligation, it is necessary that a maximum amount is set up (see A. Franchi, Il contratto di manleva e la manleva verso gli amministratori, in Contratto e Impresa, 2006, page 187; A. Franchi, La responsabilità degli amministratori di S.p.A. e gli strumenti di esonero da responsabilità, Milan, 2014; Court of Rome on December 18, 2002; Court of Cassation on January 26, 2010, no. 1520; Court of Cassation on September 23, 2015, no. 18777).

In this regard, it is clear that this principle also applies to the hold harmless covenant, due that by entering into such a type of contract (atypical guarantee) the guarantor, as we have seen, is to take on future liabilities that may be unknown or unpredictable.

Moreover, it should, then, be noted that it is in the interest of the guarantor to set a cap, in order, on the one hand, of being able to determine with certainty the possible future economic expenditure and, on the other hand, also resorting to the possible insurance coverage of risks arising from the agreed hold harmless covenant.

Brazil – Hiring of Insurance Abroad; Regulations and Restrictions

The possibility of hiring insurance abroad by Brazilian individuals or companies is restricted according to Brazilian Federal Legislation, rules of the Superintendence of Private Insurance (“SUSEP”) and the Private Insurance National Board (Conselho Nacional de Seguros Privados) (“CNSP”), normative entity of insurance activities in Brazil.

Federal Regulations

Currently, the terms and conditions for hiring of insurance abroad by Brazilian domiciled individuals or entities are regulated by Complementary Law No. 126, dated January 15th, 2007 (“LCP No. 126”).

From a Brazilian legal perspective, it is of utmost importance to review the terms and conditions of the respective insurance agreement in order to determine whether or not Brazilian regulations which foresee restrictions on the hiring of insurance abroad are applicable to a specific case.

When reviewing an insurance agreement to be hired abroad it is relevant to analyze the following issues: (i) if the insurance contractor is domiciled in Brazil, (ii) if the insurance agreement is formalized with an insurance company that does not operate in Brazil, and (iii) if the subject-matter of the insurance is related to a person resident and domiciled in Brazil, as well as the risks covered.

Article 19 of LCP No. 126 determines that certain types of insurance must be exclusively hired in Brazil, such as (i) mandatory insurance foreseen under Brazilian laws and regulations; and (ii) insurance hired by individuals or entities resident in Brazil which subject-matter is the protection against local risks.

Exception to such general rules is made to the events foreseen under article 20 of said Law, as follows:

  • “Article 20:  The hiring of insurances abroad by individuals resident in Brazil or by entities domiciled in national territory is restricted to the following situations:
  • I – coverage of risks to which no insurance is offered in Brazil, considering that such hiring does not represent violation of the applicable regulations;
  • II – coverage of risks abroad in which the insured party is an individual resident in Brazil, to whom the effectiveness of the hired insurance is limited, exclusively, to the period in which the insured party is abroad;
  • III – insurances which are the subject-matter of international agreements and treaties acknowledged by the National Congress; and
  • IV – insurance which have already been hired abroad, according to the then applicable regulations, on the date of publication of this Complementary Law.
  •  Sole paragraph.  Entities may hire insurance abroad to cover risks abroad, informing such hiring to the Brazilian insurance supervising entity within the term and under conditions specified by the respective Brazilian regulatory insurance entity.”

CNSP, through Resolution No. 197/2008, ratified the exceptions for the hiring of insurances abroad, foreseen in article 20 of LCP No. 126 and mentioned-above and, still, authorized the hiring, abroad, of insurances covering hulls, machinery and civil liability for vessels registered under the so-called Brazilian Special Registry (Registro Especial Brasileiro – REB).

A Brazilian entity or individual must first search for an available insurance offered in Brazil before hiring insurance abroad. Lack of coverage for the risks in Brazil must be evidenced by the Brazilian individual or entity upon obtaining denial by local insurance companies for the risk coverage, according to SUSEP´s applicable regulations, or upon issuance of a denial letter by a class representative entity.

As a general rule, only if there is no similar insurance coverage available in Brazil may the individual or entity resident in Brazil hire the insurance abroad to cover risks in Brazil.

Compliance and Inspection

CNSP Resolution No. 197/2008 mentioned above is regulated by the Circular No. 392 of 2009 issued by SUSEP, which regulated, among other issues, the possibility of hiring insurance in foreign currency, which is limited to certain risks; the inspection of compliance with the applicable rules and the existence of penalties applicable to entities which fail to comply therewith.

SUSEP, as a supervisory institution may, according to articles 10 to 16 of its Circular No. 392, demand, at any time, certain documents described in these articles in order to assure that the risks cannot be covered by insurances offered in Brazil, among other legal requirements. This “supervisory power” is described in article 10 of the Circular No. 392, as follows:

  • “Article 10 : As set forth in the above article, SUSEP will be able to, at any time, require to the insured and / or to the respective insurance broker the documents that prove the compliance with the current regulations for the hiring of insurance abroad.
  • Sole paragraph: The non-presentation of documentation described in the above article subjects the insured and / or his intermediary, when resident and domiciled in Brazil, the applicable penalties, in the terms of the current legislation and regulation.”  

Among the documents which may be required by SUSEP are copies of the formal consultations submitted to 10 (ten) Brazilian insurance companies which operate in the respective insurance segment and the answers obtained from such insurance companies. Alternatively, SUSEP may accept consultations made by the class representative entity to all Brazilian insurance companies containing all the necessary information related to the risk to be covered. Issuance of the denial letter by the referred representative entity may only be issued if no Brazilian insurance company formalizes its intention to cover the risk or if the entity only receives negative answers from the insurance companies.

For purposes of the insurance hired abroad for hulls, machinery and civil liability for vessels registered under the Brazilian Special Registry (Registro Especial Brasileiro – REB) foreseen under item V, article 5, of CNSP Resolution No. 197/2008, whenever the Brazilian insurance market does not offer prices compatible with the international market, SUSEP may, at any time, require copies of the formal consultations submitted to 5 (five) Brazilian insurance companies which operate in the respective insurance segment, the answers obtained from such insurance companies and the answers from foreign insurance companies and their respective prices for the insurance to be hired abroad.


The Law Decree No. 73 of 1966, amended by LCP No. 126 has established what penalties will be applied if an insurance is hired in violation of the insurance, coinsurance and reinsurance regulations.

Article 113 of said Law Decree states that: “the individual or entity that performed operations of insurance, coinsurance or reinsurance without proper authorization in the Country or abroad will be subject to a penalty equal to the amount insured or reinsured”.

Therefore, any Brazilian resident – individual or entity — who hired insurance abroad for covering risks in Brazil in violation of the applicable regulations shall be subject to a fine in an amount corresponding to the amount insured.

Growing Demand for Warranty & Indemnity Insurance in Danish M&A Transactions

Until recently, warranty & indemnity insurance (W&I insurance) was only rarely used in Danish M&A transactions but due to faster underwriting processes and lower insurance premiums, we see a tendency towards an increased use of W&I insurance.

W&I insurance covers the economic loss suffered by a company where the warranties and indemnifications given in connection with an M&A transaction turns out to be incorrect. Both the buyer and the seller can take out an insurance policy, but the insurance coverage will differ depending on who takes out the insurance. This is described in more detail below.

Sell-Side and Buy-Side Policies

The sell-side policy is taken out by the seller and covers the potential liability of the seller as a result of breach of a given warranty or indemnity in the share sale and purchase agreement (the SPA). In sell-side policies, the seller often assigns its potential claim on the insurance company to the buyer. In a sell-side policy, breach of a given warranty or indemnity caused by seller’s fraudulent behaviour is not covered by the insurance policy. Hence, the buyer can only claim for damages from the seller in case hereof.

The buy-side policy is taken out by the buyer and covers the buyer’s potential claim against the seller in case of breach of the agreed warranties. The buy-side policy has the advantage that seller’s breach of a warranty caused by seller’s fraudulent behaviour is covered by the W&I insurance and the buyer’s coverage is therefore broader with a buy-side policy than with a sell-side policy. In our experience the predominant part of W&I insurance for Danish transactions are taken out as buy-side policies – presumably due to the broader coverage of the buy-side policy.

In both sell-side and buy-side policies the insurance company usually waives its right of recourse against the seller unless the breach of the warranty in question is a result of seller’s fraudulent behaviour.

Reasons for Choosing W&I Insurance in M&A transactions  

First of all, taking out W&I insurance limits the seller’s liability towards the buyer as the insurance company, as above mentioned, in most policies will waive its right of recourse against the seller, thereby providing for a “clean exit” for the seller.

However, W&I insurance is also an alternative to the general holdback mechanisms used in most SPA’s, e.g. to hold in escrow a certain amount of the purchase price for a specific period of time or using claw-back clauses in the SPA. Hence, one of the main reasons for a seller to take out W&I insurance in an M&A transaction is that the purchase price will be at the disposal of the seller immediately after closing. This is particularly relevant in M&A transactions where the seller is a PE fund as the fund can distribute the full purchase price to its limited partners after closing. Another advantage of W&I insurance is that the seller’s investment possibilities will increase compared to the limited investment possibilities in an escrow arrangement. Given the current low interest rates, the premium payable to the insurance company can be financed by the margin between the yield of a low risk investment compared to the interest paid by the relevant bank managing the escrow account.

There are also several reasons for the buyer’s interest in taking out W&I insurance. Firstly, coverage of a W&I insurance may cause the seller to undertake more warranties and indemnities and increase the cap and survival limitations in such warranties, which will eventually increase the purchase price or allow for a smoother negotiation of the deal. Secondly, by taking out W&I insurance the risk of seller’s insolvency is transferred to the insurance company. Thirdly, in an auction process the buyer can make its offer more attractive to the seller by including W&I insurance in the offer, giving the seller the above-mentioned advantages compared to offers comprising holdback mechanisms.

A mutual reason for both the seller and the buyer to take out W&I insurance arises where the seller holds a certain part of the shares in the company post transaction. In this case the W&I insurance eliminates the rather precarious situation where the buyer must initiate proceedings against a co-owner of the acquired company to pursue the buyer’s rightful claim arising out of a seller’s breach of the warranties in the SPA concluded between the parties.

Insurable Warranties and Limitation of Scope of Coverage provided by Insurance companies

Ideally, the W&I insurance policy mirrors the warranties in the SPA between the seller and the buyer as all risks are thereby transferred from the contracting parties to the insurance company (in excess of the retention amount).

For regulatory and commercial reasons, insurance companies do not underwrite all risks represented in the warranty catalogue of an SPA. Certain toxic risks, as e.g. transfer pricing issues and issues related to pension underfunding, are usually not underwritten by insurance companies. For commercial reasons, forward-looking warranties are generally not insurable.

In addition, we have also experienced an examples of unwillingness on the part of insurance companies to cover certain warranties given in relation to directors’ and employees’ potential violations of the U.S. Foreign Corrupt Practices Act of 1977 and the UK Anti Bribery Act 2010.

Despite insurance companies’ above-mentioned unwillingness to underwrite certain risks arising from the warranty catalogue of the SPA, there is a tendency towards improved coverage and insurance companies generally exclude less warranties just as a growing number of policies are taken out on back-to-back terms with the SPA.

Retentions and De Minimis claim thresholds

In order for the parties to have “skin in the game” and to ensure that the parties do not agree on excessive warranties and indemnities, the insurance coverage is usually limited in the insurance policy by way of a retention clause and a de minimis claim threshold. The retention is the amount which a claim, or if agreed in the policy; the cumulated claims, must exceed in order for the insured party to be entitled to insurance cover. The de minimis claim threshold defines the amount a single claim must exceed in order to be included in the loss calculation.

Generally, the retention amount is approx. 1 percent of the enterprise value but moving downwards. In real estate transactions, the retention amount may be significantly lower.

When negotiating the SPA the parties must agree on which party is to bear the risk of the claim or cumulated claims not meeting the retention threshold in the insurance policy. In our experience, depending on the circumstances and the parties’ leverage in the negotiations, both buyers and sellers undertake to bear the risk of the retention threshold not being met.

Ideally, the retention in the W&I insurance policy and the de minimis claim threshold match the deductible and the de minimis claim threshold agreed in the SPA.

Growing Demand for W&I Insurance in the Danish M&A Market

In general, we experience an increased use of W&I insurance in both Danish and Scandinavian M&A transactions.

We believe that the increased use is a result of lower premiums and a faster underwriting process but that it is also driven by the growing awareness of the product. W&I insurance is used both in PE fund transactions but also in other transactions. While a substantial number of the W&I insurances have been driven by PE funds we have also seen a number of other reasons, e.g. succession on seller side, seller retaining part ownership of target, etc.

Decrease in Premium Prices

In general, the premiums charged by insurance companies have decreased significantly as the market is maturing and along with the maturing market, insurance companies are getting more comfortable pricing risks arising from warranties in SPAs. Within a 4-year period, we have experienced a 50 per cent decrease in premium prices. The premium charged by insurance companies is generally within a margin of 1-2.5 per cent of the insured amount.

W&I Claim Handling – the Unanswered Question

Albeit the maturing market, we have yet to see how claims arising out of W&I insurance policies governed by Danish law will be handled. The majority of insurance companies operating within the field of W&I insurance also operate in more mature but still comparable W&I insurance markets as e.g. the Swedish and Norwegian markets. Hence, we foresee that insurance companies’ claim handling will be carried out similarly to such markets in case of claims arising out of W&I insurance policies taken out in Danish M&A transactions.


Possession Is Still 9/10ths Of The Law

The Superior Court has released a decision dealing with whether an owner of an ATV can be held vicariously liable for a driver’s negligence, even though no consent was given to operate the vehicle.

In Fernandes v Araujo, Fernandes was seriously injured while a passenger on an ATV. The ATV was owned by Carlos Almeida and insured by Allstate. Eliana Araujo was the driver of the ATV; she had a G1 licence at the time of the accident.

Carlos was fixing a fence on his farm with some of his friends, including Eliana. Carlos told Eliana that she could drive the ATV on the farm, while Carlos’ cousin, Jean Paul, told Eliana not to leave the farm on the ATV. Carlos did not expressly forbid Eliana and Fernandes to leave the farm, although later he said if Eliana and Fernandes had asked him to leave the property he would have said no.

Eliana and Fernandes left the property to drive over to a nearby farm on a public road without permission. While returning back from the nearby farm, the ATV rolled over and Fernandes was seriously injured.

Allstate brought two summary judgment motions: the first dealt with whether Allstate was liable to provide insurance coverage when the owner of the ATV did not give his consent for Eliana and Fenandes to drive it.

The second summary judgment motion asked the court to dismiss Eliana’s third party claim because she was operating the ATV without the owner’s consent and was operating the ATV contrary to Statutory Condition (4.1) of O.Reg 777/93, which states that an insured shall not operate, drive or permit another person to operate or drive a vehicle unless they are authorized by law to do so.

Allstate’s motion in the main action was dismissed and was granted in the third party action.

In the main action, the judge relied on the Court of Appeal’s decision in Finlayson v. GMAC Leasco Ltd. In Finlayson, the Court of Appeal held that vicarious liability under section 192(1) of the Highway Traffic Act is based on possession, not operation, of a vehicle, following an old line of authority (Thomson v. Bouchier). In Finlayson, it was stated that if an owner gives possession of a vehicle to another, and the owner expressly prohibits that person from operating the vehicle, the owner is nonetheless vicariously liable for the negligent operation of that vehicle.

The judge had to reconcile this decision with the Court of Appeal’s decision in Newman v. Terdik. In Newman, Terdik was a tobacco owner who gave his worker permission to use the defendant’s automobile to travel down a laneway between two tobacco farms, but was expressly forbidden from driving on the highway. The worker drove on the highway where he hit the plaintiff, Newman, who sustained injuries. The Court of Appeal held that the worker did not have possession of the vehicle with consent; therefore, Terdik was not vicariously liable. The Court of Appeal found that possession is a fluid concept; it can change from rightful to wrongful possession or to possession with or without consent.

The judge found that Newman was distinguishable because Carlos did not expressly impose any restrictions on Eliana’s operation of the vehicle; he gave her possession of that vehicle. The fact that Carlos’ cousin expressly forbid Araujo from leaving the property could not be attributed to Carlos. However, the judge went further, stating that Newman may be wrongly decided as it did not follow Thompson v. Bourchier.

Accordingly, the judge found that there was consent as Carlos gave Eliana possession of the ATV.

With regard to the third party action, the judge held that Araujo was not licensed to drive an ATV because she was not authorized by law to drive it. Section 18 of O.Reg 316/03 states that a driver of an off-road vehicle requires a valid A, B, C, D, E, F, G, G2, M, or M2 driver’s licence. Further, section 32(1) of the Highway Traffic Act states that no person shall operate a vehicle on a highway unless they hold a valid licence.  Finally, Statutory Condition 4.1 states that an insured shall not operate, drive or permit another person to operate or drive a vehicle unless they are authorized by law to do so.

Araujo was operating the ATV with a G1 licence, and therefore, the judge found that she breached Statutory Condition 4.1 under the Allstate policy.

This decision confirms that vicarious liability is based on possession, not operation. Even if a person is expressly prohibited by the owner from operating the vehicle, the owner will be found vicariously liable if possession has been granted. The fact that a driver of a vehicle is operating without the owner’s consent is irrelevant if the owner has given possession of the vehicle to the other party.

See Fernandes v Araujo 2014 ONSC 6432 (CanLII)

Texas Federal Court Clarifies Broad Scope Of Professional Liability Policies For Lawyers

Lawyers may be surprised to learn that lawsuits brought by clients challenging something other than purely legal advice or advocacy—such as billing—may not be covered by their professional liability policies. Interpreting the phrases “professional services” and “legal services” in such policies narrowly, courts in some jurisdictions—including Texas—have historically limited professional liability coverage to claims based on the provision of legal advice or advocacy, not from more administrative tasks like billing and fee setting. However, a new trend seems to be developing in Texas, where courts are increasingly recognizing that, even if non-legal services rendered by a law firm are arguably not “professional services” themselves, they are sufficiently related to professional services to be covered by professional liability policies.

A professional liability policy typically provides coverage for claims “arising out of” the provision of “professional services.” In a 2012 case, Shore Chan Bragalone Depumpo LLP v. Greenwich Ins. Co., the Northern District of Texas adhered to the narrow interpretation of “professional services” that has long been applied in Texas, limiting coverage to claims relating to services consisting of legal advice or advocacy. But the court did not end its analysis there, as is often the case. It next examined the phrase “arising out of,” observing that it was a broad term, requiring only a causal relationship between a claim and a “professional service” to trigger coverage. The underlying dispute in Shore Chan centered on an agreement between the underlying plaintiffs and the policyholder, a law firm, to share fees generated by referrals provided to the law firm by the underlying plaintiffs. Because the fee dispute would not have arisen but for the policyholder’s provision of legal services, the court concluded that the insurer had a duty to defend its insured against the claim.

Two weeks ago, in what may signal a trend, the Northern District of Texas applied the same analysis and again found coverage under the more expansive interpretation of a professional liability policy in Shamoun & Norman, LLP v. Ironshore Indem., Inc. In the underlying action, the policyholder, the Shamoun Norman law firm, sued a former client for allegedly failing to pay the law firm certain performance bonuses. The former client then brought claims against the law firm, alleging that the bonus arrangement violated the firm’s fiduciary duty to its client.

Although the Shamoun court found that the term “professional services” does not include the practice of billing clients, it observed that determining whether conduct is a “professional service” is only half of the analysis required in determining whether there is coverage. A court must also determine whether a claim “arises out of” professional services. In interpreting that phrase, the Shamoun court looked to Texas Supreme Court precedent which holds that the “arise out of” means that there is a causal connection or relation, often referred to as “but for” causation, not necessarily direct or proximate causation. Applying the “but-for” standard, the court held that were it not for the law firm’s attorney-client relationship with its former client, there would not have been a claim alleging breach of fiduciary duty, and therefore, the claim “arose out of” the firm’s provision of professional services, triggering the insurer’s duty to defend against the claim.

This is the right result. Strictly limiting coverage only to claims that allege error or negligence in legal advocacy or advice, as the Shamoun court points out, misinterprets policy language in one of two ways. It either ascribes no meaning to the phrase “arising out of,” which would violate the rule that an interpretation of a contract that renders certain language surplusage is disfavored, or it assigns an overly restrictive interpretation of the phrase which demands a more direct connection between the underlying claim and provision of “professional services” more akin to proximate, rather than but-for, causation. In Shore Chan and Shamoun, the Northern District of Texas has taken significant steps in bringing the scope of coverage under professional liability policies back in line with policyholders’ expectations.

Texas Federal Court Clarifies Broad Scope of Professional Liability Policies for Lawyers

In-Patient Hospitalization And “Minimum Value” Under The ACA


  • The IRS, DOL and HHS issue guidance on calculating minimum value under the Affordable Care Act for plans not offering substantial coverage for in-patient hospitalization or physician services.
  • Employers need to review plans for hospitalization and related physician care services and reassess whether their plans provide “minimum value.”

The Patient Protection and Affordable Care Act – more commonly known as the Affordable Care Act (ACA) – imposes many requirements on group health plans, including, among others, that plans must provide “minimum value” (MV) in accordance with the Internal Revenue Code1 (Code). The MV rules require that group health plans cover at least 60 percent of the benefit costs provided under the plan. If a covered plan does not provide MV, a participant is eligible for coverage in a healthcare exchange and may be entitled to a premium tax credit. If the plan of a covered employer does not provide MV, the employer will have to pay a fine of $3,000 for every full-time employee under the ACA that obtains coverage in an exchange and receives a premium tax credit.

Employers, brokers and advisors working with group plans recently determined that plans providing limited or no hospitalization and related physician services met the requirements for MV, according to the minimum value calculator provided by the applicable government agencies. After discovering this defect, the government agencies issued Notice 2014-69 to correct this problem and provide limited transition relief.

Notice 2014-69 Addresses the MV Shortfalls

Notice 2014-69 provides the following:

  1. The Internal Revenue Service (IRS), the Department of Labor (DOL), and the Department of Health and Human Services (HHS) will issue final regulations that will correct the MV calculator so that plans not providing substantial in-patient hospitalization or physician services (or both) will not pass the MV requirements.
  2. It is anticipated that the final regulations will take effect in 2015 immediately upon issuance and apply to 2015 plan years.
  3. Notably, Notice 2014-69 indicates that agencies “anticipate” that the final regulations will exempt employers from applicable ACA penalties for the pending plan year if the employer’s plan is a so-called “Pre-November 4, 2014 Plan.”
  4. Employees covered by a plan not providing a proper level of in-patient hospitalization/physician services will continue to be eligible for a premium tax credit under Section 36B of the Code regardless of whether the applicable plan provides MV under the defective MV calculator and without regard to whether the plan is a Pre-November 4, 2014 Plan.

A Pre-November 4, 2014 Plan is a plan that meets all of the following criteria:

  1. An employer entered into a binding written commitment to adopt or has begun enrolling employees in a plan prior to November 4, 2014.
  2. The employer relied on the defective MV Calculator in its design.
  3. The plan’s terms as in effect on November 3, 2014, are not otherwise modified.
  4. The plan year begins no later than March 1, 2015.

Notice 2014-69 indicates the final regulations will be applicable in 2015 and only Pre-November 4, 2014 Plans will escape the application of the final regulations. Based on the pending impact of the final regulations, employers should proceed with great care in assessing whether their respective plans meet the Pre-November 4, 2014 Plan requirements and whether changes to their plans to incorporate substantial in-patient hospitalization/physician services can still be made. Finally, Notice 2014-69 also provides that employers are obligated to correct or modify any employee/participant disclosures that indicate plans with inadequate in-patient hospitalization/physician services provide MV in light of Notice 2014-69.

Action Items to Be Compliant with Notice 2014-69

Employers should take the following steps in light of Notice 2014-69:

  1. Review applicable plans to determine whether substantial in-patient hospitalization/physician services are provided under their plans.
  2. If substantial in-patient hospitalization/physician services are not provided under their plans, determine whether the plans are Pre-November 4, 2014 Plans.
  3. Assess whether defective plans that are not Pre-November 4, 2014 Plans can be modified quickly to incorporate substantial in-patient hospitalization/physician services.


1.Section 36B(c)(2)(C)(ii)