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Tax, Insolvency and Sanctions: Cross‑Border Exclusions That Can Impact Directors and Officers (D&O) Liability Insurance

Directors and officers (D&O) of multinational companies headquartered in the United States — particularly in corporate hubs like New York, Delaware, California and Texas — must understand how cross‑border exclusions for tax, insolvency and sanctions can erode D&O protection. Global operations expose individual directors to regulatory and enforcement actions in multiple jurisdictions; without careful program design, insurers can deny coverage based on local exclusions that apply outside the U.S. This article explains the key exclusions, real‑world impacts, pricing context and practical steps U.S. corporate boards and risk managers should take.

Why cross‑border exclusions matter for U.S. companies

  • Many U.S. multinationals incorporate or operate significant subsidiaries abroad. Enforcement actions, tax audits, bankruptcy proceedings and sanctions investigations may be brought in foreign courts.
  • D&O policies often have territorial and conduct exclusions or carve‑outs (e.g., for “fines, penalties, taxes” or “insolvency” and for “sanctions/embargoed jurisdictions”) that differ between the master policy and local policies.
  • Insurer defenses can include that alleged loss arose under a non‑covered local law or resulted from sanctioned activity, leading to denial of defense or indemnity — particularly where local mandatory social or administrative fines are excluded as “taxes” or “penalties.”

Sources indicate rising D&O scrutiny and claims activity worldwide. Market reports show D&O pricing pressure in recent years, pushing companies to pay more attention to coverage design and exclusions (see Marsh market commentary and Hiscox product pages for small business D&O offerings). For market context, see Marsh’s market update and Hiscox's D&O product information:

The three exclusion types explained

1. Tax exclusions

  • Typical wording: exclusions for “taxes, fines and penalties” or “loss arising from unpaid taxes.”
  • Cross‑border risk: A foreign revenue authority’s demand for unpaid VAT, customs duties or corporate taxes may be characterized as a non‑covered tax liability. In many jurisdictions, tax liabilities are prioritized in insolvency and claims against directors can follow (e.g., personal tax liabilities or payroll tax withholding claims).
  • Practical impact: Insurers may refuse indemnity for amounts deemed “taxes” even where the insured alleges mismanagement rather than tax evasion.

2. Insolvency / bankruptcy exclusions

  • Typical wording: exclusions for “liabilities arising from insolvency, liquidation, bankruptcy or receivership.”
  • Cross‑border risk: Local insolvency regimes (e.g., UK insolvency, EU member states, Latin America) often permit claims against directors for wrongful trading or preferential payments. If a D&O policy excludes insolvency‑related claims (or has sublimits), defense costs and settlements may be outside coverage.
  • Practical impact: In US‑led restructurings with foreign affiliates, inconsistent local exclusions can create coverage gaps — especially where local buy policies are required by regulation.

3. Sanctions / embargo exclusions

  • Typical wording: “losses arising from dealings with sanctioned persons or jurisdictions” or “where provision of cover would breach applicable economic sanctions laws.”
  • Cross‑border risk: Transactions that are legal in the U.S. may run afoul of EU, UK or OFAC sanctions if they involve sanctioned counterparties or restricted goods. Insurers may deny coverage where the underlying conduct touches a sanctions regime.
  • Practical impact: Defense costs can be excluded or require carve‑outs. Insurers increasingly require robust sanctions compliance programs as a condition of coverage.

How exclusions are applied in practice — table comparison

Exclusion Typical Wording Cross‑Border Example Likely Insurer Response
Tax “Any tax, fine or penalty” Spain VAT assessment against a U.S. subsidiary director Indemnity denied if assessed amount deemed tax; defense subject to carve‑out
Insolvency “Claims arising from insolvency proceedings” Brazilian insolvency trustee sues U.S. directors for fraudulent conveyance Coverage disputed; defense costs sometimes payable only if separate definition covers “derivative claims”
Sanctions “Losses where to provide cover would violate sanctions” EU freezes assets of a customer who later sues directors Coverage refused; insurer may require sanction screening and cooperation

Pricing context and examples (U.S. market focus)

D&O premium levels vary widely by company size, public/private status, industry and claims history. Recent market conditions (post‑2020 litigation and regulatory increases) have driven higher renewals in many sectors.

Representative market snapshots (U.S. context):

  • Small private company (revenue <$50M): primary D&O policies from carriers such as Hiscox, Travelers or Chubb often start at $250–$5,000 annually for very small firms, scaling to $10,000–$25,000 for larger mid‑market firms. (See Hiscox D&O product overview and Chubb D&O descriptions.)
  • Mid‑market U.S. private companies (revenue $50M–$1B): typical package primary and excess layers can produce premiums in the $25,000–$250,000+ range depending on limits and industry (financial services, life sciences and tech often higher).
  • Public companies: premiums vary dramatically — from low six‑figure levels for smaller public companies to millions for large-cap firms with significant exposure or securities class action risk. Market reports from brokers (Marsh/Aon) document double‑digit rate moves in volatility periods.

Note: these ranges are illustrative and depend on insurer, limit and retention. Consult brokers such as Marsh or Aon for firm‑specific quotations.

Practical steps to manage cross‑border exclusion risk

  1. Review master and local policy language

  2. Negotiate specific carve‑backs and defense covenants

    • Seek carve‑backs for defense costs, derivative claims, and “civil fines” where permitted.
    • Obtain insurer commitments to advance defense costs pending coverage disputes in foreign proceedings where possible.

  3. Local buy vs. master‑only decisions

  4. Sanctions and tax compliance programs

    • Strengthen sanctions screening, KYC and tax reporting. Underwriters increasingly expect documented compliance programs.

  5. Coordinate claims handling and counsel

  6. Use deductible/sublimit structuring

    • Where insurers insist on exclusions, negotiate higher limits or specific sublimits (e.g., for insolvency proceedings) to reduce uncovered exposure.

Case considerations for specific U.S. locations

  • New York / Delaware: Directors face heavy securities and breach‑of‑duty litigation; ensure U.S. securities claims are covered and that foreign exclusions won’t compromise U.S. defense funding.
  • California / Silicon Valley: Tech companies face cross‑border privacy, sanctions and export control risks; confirm coverage for cross‑border regulatory inquiries.
  • Texas / Houston: Energy companies must manage OFAC and sanctions exposure for international operations; sanctions exclusions are highly material.

Next steps for boards and risk managers

  • Conduct a gap analysis comparing master policy language with local policy wording in all jurisdictions where subsidiaries operate.
  • Ask your broker to model pricing impact of adding carve‑backs or advancing defense costs in foreign proceedings.
  • Obtain written insurer assurances (endorsements) addressing tax, insolvency and sanctions disputes where possible.

For further reading in this cluster on multinational D&O programs and managing jurisdictional issues, see:

References and market resources

If your company operates in high‑risk jurisdictions or is planning cross‑border expansion, prioritize a policy review with international D&O expertise and obtain tailored endorsements to address tax, insolvency and sanctions exclusions.

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