Issues to consider when investing in the U.S.

Investing in the United States

1. Insurance Legislation

The McCarran Ferguson Act 1945 transferred the regulation of insurance from the federal government to the states of the union. Consequently most insurance legislation is enacted at state level and the states are very keen to guard this prerogative. There are also some significant items of federal legislation affecting insurance which are described below.
Each state is responsible for its insurance regulation, but in order to prevent too much variation in the legislation thus introduced, the National Association of Insurance Commissioners (NAIC) also develops model laws. These are based on a consensus between insurers, regulators and other interested parties. The model law which results is then taken by each state and put before its legislators.
Each state legislature adapts the model law to suit the state's particular circumstances. While the legislation eventually enacted may differ from state to state, a degree of reciprocity between states facilitates interstate transactions, however.
Federal insurance legislation has been used to address issues that are too large or widespread for individual states to tackle efficiently, such as the threat of flood, terrorism or nuclear damage, or where interstate co-ordination is required. This was sufficient when state markets were more or less self-contained but the development of multi-state entities, insurers and intermediaries as well customers, has prompted federal legislation that dilutes the independence of the states to an extent and imposes a measure of uniformity on the regulation of insurance.

2. List of Compulsory Insurances

There are several items of federal legislation which establish a statutory requirement for insurance or financial responsibility as detailed below.

• Flood insurance within the National Flood Insurance Program is a condition of property loans from federally regulated lenders.
• Motor carriers (interstate bus companies, trucking companies) have to have minimum financial responsibility requirements for the interstate transport of passengers, cargo and hazardous materials.
• Air carriers liability - cover is required to receive a licence to act as an air carrier.
• Marine liability - vessels have to demonstrate financial responsibility to meet any liability incurred for death or injury to passengers or others on voyages to or from US ports.
• Space risks - liability cover is required in respect of launch or re-entry.
• Surety bonds - in 1935 the Miller Act was passed requiring performance and payment bonds for all public works with a contract value in excess of USD 100,000.
• There are also various compulsory insurances imposed at state level, as described below.
• Motor third party bodily injury and property damage. Many, but not all, states require drivers to have motor insurance (known as auto insurance in the US). All states have financial responsibility laws that require owners and operators of motor vehicles to furnish proof of financial responsibility, namely the ability to respond to liability for damages caused in an accident up to certain minimum dollar limits which vary by state.
• Workers' compensation insurance is compulsory in most, but not all, states.
• Medical malpractice for doctors, hospitals and healthcare providers is compulsory in some states.

3. Supplementary Information on Compulsory Insurances

Federal level

Flood insurance - the purchase of flood insurance and participation within the National Flood Insurance Program is a condition of property loans from federally regulated lenders and is also mandatory to obtain mortgages and similar loans, if located within special flood hazard areas.

Motor carriers liability - according to regulations issued by the Federal Motor Carrier Safety Administration (FMCSA), interstate bus companies, trucking companies or freight forwarders have minimum financial responsibility requirements for the interstate transport of passengers, cargo or hazardous materials which can be met by insurance or a surety bond. Minimum amounts are:

1. USD 5mn in respect of passenger vehicles with 16 seats or more; USD 1.5mn for vehicles with eight or more seats (including the driver's)
2. USD 750,000 in respect of freight vehicles of 10,001 pounds or more carrying non hazardous cargo; USD 5mn in respect of freight vehicles (regardless of weight) carrying hazardous cargo (explosives, poisonous gases, permitted radioactive materials); USD 1mn in respect of freight vehicles of 10,001 pounds or more carrying other hazardous cargoes as defined.

Air carriers liability - according to Title 49, Chapter 411, Section 41112 of the US Code, a certificate to provide air transportation as an air carrier is only issued if an approved insurance policy or self-insurance plan is filed. The policy or plan must be sufficient to pay for bodily injury to, or the death of, an individual or for loss of, or damage to, property of others, resulting from the operation or maintenance of the aircraft.

Air carriers, excluding US air taxi operators and Canadian charter air taxi operators, have to maintain the following amounts of cover:

1. third party aircraft accident liability cover for bodily injury to or death of persons other than passengers, and for damage to property, with minimum limits of USD 300,000 for any one person any one occurrence, and a total of USD 20mn per aircraft for each occurrence; for aircraft of not more than 60 seats or 18,000 pounds maximum payload capacity, carriers need only maintain coverage of USD 2mn per aircraft
2. a carrier providing air transportation for passengers must in addition to the cover outlined above maintain aircraft accident liability insurance cover for bodily injury to or death of aircraft passengers, with minimum limits of USD 300,000 for any one passenger, and a total per involved aircraft for each occurrence of USD 300,000 times 75% of the number of passenger seats in the aircraft.

Air carrier performance bonds - the carrier must also file a performance bond or equivalent security sufficient to ensure the carrier adequately will pay the passengers and shippers when the transportation the carrier agrees to provide is not provided.

Marine liability - under US Code Title 46 every owner or charterer of an American or foreign vessel accommodating 50 or more passengers, and embarking passengers at US ports, has to demonstrate financial responsibility (in the form of insurance, self insurance, surety bonds or other form) to meet any liability incurred for death or injury to passengers or others on voyages to or from US ports, for an amount based upon the number of passenger places on board the vessel, calculated as follows:

• USD 20,000 for each place up to and including 500; plus
• USD 15,000 for each additional place between 501 and 1,000; plus
• USD 10,000 for each additional place between 1,001 and 1,500; plus
• USD 5,000 for each passenger place in excess of 1,500.

Marine carrier performance bonds - the carrier must also file a performance bond or equivalent security sufficient to ensure the carrier will pay the passengers and shippers adequately when the transportation the carrier agrees to provide is not provided.

Oil pollution - under section 2704 and 2716 of the US Code Title 33 the responsible person for any vessel over 300 gross tons and using US waters must establish evidence of financial responsibility to meet the maximum amount of liability to which the responsible party could be subjected. Limits are based on an amount based on tonnage.

Space risks - when a launch or re-entry licence is issued under Title 49, chapter 701, Section 70112 of the US Code, the licensee must have liability insurance or demonstrate financial responsibility to compensate claims by (A) a third party for death, bodily injury, or property damage and (B) by the US government against a person for damage or loss to government property.
Minimum requirements are USD 500mn in respect of (A) and USD 100mn in respect of (B); or the maximum liability insurance available on the world market at reasonable cost if the amount is less than the applicable amounts.

Surety bonds
In 1935 the Miller Act was passed requiring performance and payment bonds for all public work with a contract value in excess of USD 100,000. Lower amounts might be required at the discretion of federal procurement officials.

State level

Many states require drivers to have motor insurance (known as auto insurance in the US). While insurance itself may not be mandatory, all states have financial responsibility laws that require owners and operators of motor vehicles to furnish proof of financial responsibility, that is the ability to respond to liability for damages caused in an accident up to certain minimum dollar limits which vary by state.
Most states require vehicle owners to meet these obligations by obtaining insurance cover for a minimum amount of bodily injury and property damage liability before they can legally drive. This is not compulsory insurance, as there are other means of complying in most states, but most drivers purchase automobile liability insurance even in those states where insurance is not compulsory. Alternative methods of compliance are the use of cash or government securities such as bonds.
Workers' compensation insurance is compulsory in all states except Texas, Wyoming, where it is only mandatory for high-risk occupations, and New Jersey, where it is elective. In New Jersey there has been a statutory presumption of compulsory inclusion in every contract of hire since 4 July 1911.
Some states have made it compulsory for doctors, hospitals and healthcare providers to have insurance for medical malpractice by making the cover a requirement for granting a licence to practice.
In 1935 the Miller Act was passed requiring performance and payment bonds for all public work with a contract value in excess of USD 100,000. Since then all 50 states plus the District of Columbia and Puerto Rico, as well as most local jurisdictions (mainly municipalities), have enacted legislation that requires bonds on public works, known as "Little Miller Acts". Most have thresholds of less than USD 100,000.

4. Non-Admitted Insurance Regulatory

Definition. Non-admitted insurance refers to the placing of insurance outside the regulatory system of the country in which the risk is located. A non-admitted insurance policy is one that may be issued abroad or the risk(s) may be included in a global master policy by an insurer unauthorised in that country. An authorised insurer is one which is permitted to do business in a country (or region) by the local supervisory authority. Please refer to the text below for the regulations that apply to non-admitted insurance for this country.

Unauthorised insurers cannot carry on insurance activity in the US. At the same time, there is nothing in the law which indicates that insurance must be purchased from locally authorised insurers with the exception of compulsory auto and workers' compensation and subject to restrictions (as set out below) and certain tax requirements. This is generally interpreted to mean that insurers can issue policies from outside the home state of the buyer with exceptions if approached by an out of state intermediary or directly by the buyer.

There are two types of non-admitted insurance as explained below.

Independently procured non-admitted insurance - where insurance of US risks is placed out of state.
Surplus line non-admitted business - where insureds access insurers outside the state's admitted insurance market but through surplus line brokers with eligible insurers.
The latter is an important element of the US insurance market. Each state has its own laws and regulations relating to this business, which is known as excess and surplus lines (E&S).

Legislation
In the 1897 case Allgeyer v Louisiana the US Supreme Court ruled that a citizen of a state has the right under the Fourteenth Amendment of the US constitution to contract for insurance with an unlicensed insurer as long as the contract is concluded outside of the state.
This case was decided before the McCarran-Ferguson Act in 1945 which clarified that the power to regulate and tax insurance is within the exclusive province of the states. The situation in Allgeyer was reinforced by State Board of Insurance v Todd Shipyards Corp in 1962. On appeal the Supreme Court maintained the principle established in that case putting emphasis on the following facts: the policy was negotiated and issued outside the state (Texas), the premium was paid outside the state and all losses were adjusted and paid outside the state. In addition the insurers were not licensed in Texas, had no offices or agents and did not solicit business there. The only connection with Texas was that the risk in question was located in that state.
Independent procurement or direct placement of insurance outside the home state is therefore exempt from regulation by that state provided that:

•  the insured placement is not through a resident agent or broker
• there is no involvement by the insurer in the state either in concluding or the performance of the insurance contract
• the transaction only takes place (or "principally" in the case of the State of New York) outside the state where is located.

 
This means for example that US exposures may be added to a schedule of locations under a master insurance policy covering a number of countries.
Many states' insurance statutes permit so-called industrial insureds to obtain insurance from an unauthorised insurer without having to leave the state to do so or having to follow E&S procedures, but many states have no such provisions. Although the definition varies from state to state, an industrial insured is typically defined as one with at least USD 25,000 in annual premium expenditure, a minimum number of employees (at least 25) and a full-time risk manager/insurance buyer or consultant.
As regards marine and transportation, the statutes of the majority of states provide some type of ocean marine and transportation exemption. Most provide a complete exemption for "ocean marine" but these exemptions do not always extend to aviation or transport risks generally.
Although exempt from regulation, insurance independently procured is not always exempt from taxation and most states apply a direct procurement tax on the premium, for which payment is the responsibility of the insured; about a dozen states do not.
In addition to direct procurement tax, if insurance is obtained from a company outside the US, federal excise tax (FET) (according to the Internal Revenue Code: Sec. 4371 Imposition of tax) may be due, unless a tax treaty is in force between the US and the insurer's domicile.
The law is silent on the freedom of buyers and/or intermediaries to purchase insurance outside the country.

Insurers
The following compulsory insurances may not be placed on a non admitted basis:

• auto liability: auto insurance insured in one state is generally valid throughout the US and operates on a difference-in-limits basis; if the limits in another (''foreign'') state exceed those purchased in the home state of the driver, the insurer will cover the difference
• workers' compensation.

According to regulations issued by the Federal Motor Carrier Safety Administration (FMCSA), interstate bus companies, trucking companies or freight forwarders have minimum financial responsibility requirements for the interstate transport of passengers, cargo or hazardous materials which can be met by insurance or a surety bond. Acceptable insurance or surety companies may be either admitted or non-admitted (an excess or surplus lines insurer) in the US.
Local Risk Definition. There is no local risk definition.
Exchange Controls. Currency exchange control is not an issue for non-admitted placements.
Tax. Premiums paid to insurers outside the country are tax deductible for the buyer.
Multinationals. There is no legislation relating specifically to multinational insurance programmes or multinational insurers and such insurances and insurers are subject to the same rules as all other insurances and insurers.
Difference in Limits (DIC)/Difference in Conditions (DIL). US legislation does not address the use of global difference in conditions/difference in limits covers or excess layers above a primary local policy.
Premium Taxes. As regards taxation, the considerations under Legislation in this section apply. Full details of the taxes applicable to non-admitted business are shown in the table within the section on Taxation.

Buyers
Insurance buyers are free to place their business with non-admitted insurers abroad (with the exception of compulsory insurances) subject to the comments set out in the Summary section of this part of the report.
Premiums paid to insurers outside the country are tax deductible for the buyer and there are no tax implications for the payment of claims into the US.
Direct procurement of insurance by the buyer does not avoid the need to pay premium tax but while regulations on this also vary from state to state, the tax rate is generally the same as the surplus lines tax rate but the tax is payable by the insured.
If placing business outside the US, buyers may have to pay federal excise tax (FET), according to the Internal Revenue Code: Sec. 4371 Imposition of tax, unless a tax treaty is in force between the US and the insurer's domicile.

Intermediaries
Intermediaries (brokers or agents) have to be authorised to do insurance business.
Intermediaries are allowed to place business with foreign non-admitted insurers subject to the constraints set out in the Legislation part of this section. Intermediaries involved in domestic non-admitted placements (excess and surplus - E&S) have to be registered with the state.)
Brokers involved in domestic non-admitted placements have to warn buyers that their insurer is not subject to local supervision .

5. Market Practice

While foreign non-admitted insurance is possible, it is usually easier to use locally-licensed insurance carriers which can issue the necessary evidence of the existence of property insurance or issue a certificate that casualty insurance is in effect. In the US it is a common requirement for property insurance to be arranged as one of the terms of a bank loan or liability insurance to be in place as a contractual obligation, and in these cases local state (admitted) insurers are preferred. Banks and parties to a contract prefer to know that, in the event of a claim, the insurer is locally supervised and regulated.

6. Fines/Penalties

The penalties for tax evasion vary from state to state but can be severe.

Acquiring Targets in the United States

Foreign acquirers of U.S.-based firms face a number of risks unique to the United States, ranging from statutory requirements for workers’ compensation and auto liability, to environmental liability, to self-insurance obligations with surety and collateral requirements. Such cross-border deals present two major challenges from a risk management standpoint: managing future risks (i.e., determining the optimum structure and integration of the programs postclose) and properly addressing the target’s pre-close legacy liabilities. Addressing these challenges all starts with understanding the target’s risk profile, total cost of risk, legacy liabilities and historical insurance assets. Read more HERE.

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