June 2007 | Commentary | Risks and Rewards

Buying Insurance: Domestic or Foreign?

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Q: I am a logistics operator who handles inbound and outbound shipments for partners around the world. I am currently reviewing insurance options to ensure that my cargo and company are protected against accidents or damages that may occur during transit. My broker recently sent a proposal that fits my needs, but I feel uncomfortable because the broker uses a non-U.S. insurance company. What if it refuses to pay a claim? What if it goes bankrupt? How do I protect myself?

A: The United States has a well-developed insurance industry comprised of companies that can address the needs of most business enterprises. So it may come as a surprise that certain types of international trade insurance are often placed with insurers located outside the United States.

Both historical and commercial reasons explain this. Since the days of mercantilism, steamship lines have insured their shipside risks with insurers known as protection and indemnity (P&I) clubs. Only one P&I club operates in the United States, so the majority of steamship lines are insured with foreign P&I clubs.

Conversely, because of the huge volume of goods transported within the United States and abroad, many American insurers offer cargo insurance for loss or damage during transit.

Shippers running worldwide operations face the challenge of insuring their companies for professional and operational liabilities both within the United States and throughout the world. They need insurers that understand their industry, provide seamless insurance programs, and possess the resources to handle global claims.

Unfortunately, only a small pool of insurers offers coverage for these complicated risks.

When a particular type of insurance is not readily available, many buyers look to the international insurance market for cover. This may seem risky, but safeguards exist.

State Your Differences

Each U.S. state regulates its own insurance industry. Although laws differ from state to state, certain concepts are common to all states.

Every state, for instance, considers an insurer to be "domestic" if it is either constituted or licensed with an office in that state. Insurers domiciled in other U.S. states or other countries are considered foreign or alien. These insurers are known by various names such as "non-admitted", "excess lines", or "surplus lines."

These insurers must qualify separately with each state for authority to offer insurance in that state. Non-domestic insurers are not less capable than domestic insurers; if a company opts to use one, it simply means the desired insurance is not otherwise available in the state where the company operates.

Domestic insurers contribute to their state's solvency funds, which are earmarked for paying bankruptcy claims. While foreign insurers do not normally contribute to a state's fund, they sometimes establish separate funds with the National Association of Insurance Commissioners, an organization recognized by all states.

Check with the Agencies

The best way to measure the quality of an insurer—domestic or foreign—is to check its agency ratings. Agencies assign insurers a series of letters, similar to a school grade, based on their financial strength. An insurer that receives any variation of an "A" rating is usually financially solvent.

Ultimately, whether your company chooses a domestic insurer or one based in another country, your broker should conduct background checks as part of its analysis. If the broker feels it can meet your requirements with a properly qualified and financially sound insurer, you can be confident that your interests will be protected.

Have a liability question or concern? I will try to help. Please send your questions to me via e-mail at: dan.negron@thomasmiller.com.

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