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FOCUS ON CLAUSES: The FINC

Global programmes are the norm these days.

In fact, it’s exceptional to come across a policy that is not called upon to give international coverage given the globalisation of business in the last three decades.  That doesn’t mean providing this cover is easy!  You will all be aware of licensing and tax issues that arise and there are pitfalls for the unwary.  The Financial Interest Clause (“FINC”) in the wording is one device used to overcome some of these challenges.


I could write a very long piece about this but instead take a look at the general pointers below and watch out for my session on LinkedIn with the D&O Training Hub in the Summer in relation to D&O global programmes.


  • You have established there are multiple Risk Locations (Lloyd’s Crystal has detailed information about risk location and is a great resource).



  • You have also established that in some of those Risk Locations non-admitted insurance is permitted and in some it is not permitted (AXCO is a great resource for this if you do not have expertise in-house).  It’s this latter category (“non-admitted non-permitted”) that presents the challenge. 


  • The insurer may have explicitly stated in the main programme that whilst cover is provided on a “global” basis it will only actually be provided where it is permitted to provide cover.


How do you provide coverage in non-admitted non-permitted Risk Locations?

 

  • Local policies tied in with the main programme – the most reliable option but adds to the cost and may be disproportionate with the risk in some places. May not be able to provide enough limit for some risk locations.


  • Establish a separate non-interlocked programme in each place – this can provide significant cover where needed but will be very expensive.


  • Use a FINC clause - insure the parent company / policyholder’s financial interest in those risk locations using a FINC clause on the main programme.  It is not widely tested, and the insurance pay-out does not go to the risk location that suffered the event giving rise to a loss.

 

What are the considerations for the FINC clause?

 

  • The parent company/policyholder needs to have a financial interest in the risk location – this is usually via a corporate ownership structure but may be something else depending on applicable law. This can be a challenge where the Insured in such risk location is a natural person (eg in Side A D&O).


  • The parent/policyholder needs to be in a territory where the insurer is licensed or is permitted to provide non-admitted insurance.

 

The FINC should make clear:

 

  • Cover is for the policyholder/parent with the financial interest and explain what the financial interest is.


  • It applies to the non-admitted non-permitted locations (ideally saying exactly where but this may not be practical) and explain there is otherwise no cover in those locations.


  • Claims in the affected locations will be adjusted via the policyholder/parent and not directly with the affected risk location.


  • The covered loss will be paid to the policyholder/parent as Insured.

 

The FINC may be part of a more general “International Exposures” clause in the main programme which wraps around any local policies on a DIC/DIL basis.  DIC/DIL cover in the affected risk locations that have local policies should also be only on a FINC basis.

 

Finally, you must align the tax allocation – the FINC is insurance of the policyholder/parent and so IPT should be allocated to the parent/policyholder’s risk location and NOT to the affected risk locations.


Hopefully this is helpful. If in any doubt speak to your in-house global programme/regulatory people. Good luck!

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