The purpose of this article will be to illustrate some of the coverages afforded by difference in conditions policies that are written for international accounts. As there is no set coverage provided for difference in conditions (DIC), no detailed analysis will be given here. Each insurer develops and issues its own form(s), so it is necessary to examine each insurer's DIC contract to determine if coverage is provided for all of the exposures mentioned in this article. We will discuss, in general terms, coverage provisions that apply to several insurers' DIC contracts. You will need to check with any insurer you use to determine if its DIC's provisions are similar to those illustrated here.
Difference in DIC forms
Difference in conditions coverage has been written in the United States for at least three decades. U.S. DIC, in general, applies only to property losses such as real and personal property losses. A common use of DIC in the United States is to provide coverage for more perils than those covered by a primary insurance program. Historically, several of the very large highly protected risk (HPR) markets did not provide insurance on a "risk of direct physical loss" basis. DIC was used to augment the coverages provided by the HPR markets and other sources of property insurance.
The DIC is characterized by the absence of a coinsurance clause and coverage for perils not otherwise insurable, such as flood and earthquake. It is possible to see a DIC contract provide coverage for different limits on the perils of flood and earthquake with a third limit applying to covered perils other than flood and earthquake. An example might be a DIC contract with $50 million overall limit, $30 million on earthquake and $10 million on flood.
What we have just discussed is typical of DIC written in the United States. DIC written on an international basis is different.
Difference in conditions (DIC) written on an international basis can provide property coverage in a fashion very similar to what we described for DIC U.S. coverages. However, international DIC can also provide coverage for auto, workers compensation, general liability, crime, business income, political risks, ocean marine, boiler and machinery, and inland marine.
The need for DIC that provides coverage over all those lines of insurance is a result of the coverages, lack of coverages, and laws in various countries. In general, United States firms that have property, real or personal, in a foreign country will buy property insurance from insurers domiciled in a given country. This insurance is bought locally as part of the United States firm's overall effort to be considered as a good corporate citizen in that country. Insurance from the foreign insurer may not be as broad as similar coverage purchased in the United States. For example, the insurance purchased abroad may have a 100% coinsurance clause (this is almost mandatory in many foreign countries), no coverage for property in the open and no coverage for loss by theft. Many times the restricted coverage is dictated by a government of a foreign country. International difference in conditions is used to protect against the provisions of a foreign insurer's policy that is not as broad as typical United States property coverage.
Admitted insurers need to use the forms and rates that are approved by the insurance authorities in that jurisdiction or country. A nonadmitted carrier does not file its forms or rates with insurance authorities. Much of the difference in conditions coverage is written on a nonadmitted basis. By providing coverage on a nonadmitted basis, the DIC can provide the broad coverages that admitted carriers are prohibited from issuing.
Auto
The laws in effect at the place the accident occurs impact many auto coverages. In one country, the law states that the maximum bodily injury limit payment is $5,000 per person. As the law has set the maximum limit at $5,000, no insurer will write limits that are higher than $5,000. There is no such limit imposed on bodily injury claim settlements in the United States. For instance, two U.S. citizens are in that country and one negligently injures the other. As they are both from this country and there on a temporary assignment, it is possible for the lawsuit to be brought in the United States, not the country that has set the $5,000 maximum limit. The auto policy from that foreign country will provide coverage for only $5,000. For any liability coverage above the $5,000, the DIC policy will step in and provide protection.
Here is another true story to illustrate why it is necessary to have excess auto coverage as a part of DIC policies. Two U.S. citizens were traveling in an auto in a foreign country--one driving and the other as a passenger. They had an auto accident in which the passenger was seriously injured. Per the laws of that country, the insurance on the auto did not provide any coverage for the liability claim presented by the injured passenger. DIC provided the necessary coverage when the injured U.S. citizen brought claim in the United States.
In another loss, a U.S. citizen, while driving an auto in a foreign country, hit a bicyclist. This country considered the accident a criminal offense and had the U.S. citizen put in jail because the local insurance coverage did not cover the situation. A difference in conditions policy did have proper coverage. Due to the DIC, the man was out of jail in less than an hour.
Workers compensation
In most countries, workers compensation is supplied by the national government. Benefits will vary from one country to another. Coverage for injuries to foreign nationals is not an issue. The only workers compensation benefits available to them are what their native country provides. What can be an issue is injury to a U.S. citizen who is temporarily working in a given country.
The employee is injured while working in the foreign country, and the employer wishes to provide the same level of protection that the worker would have had were the worker injured in the state out of which he is based. Workers compensation benefits in a foreign country may not be at the same level as those available in the United States. They also may not cover all of the injuries that would be compensible under the Workers Compensation Acts in the United States. Difference in conditions can pay the difference between the workers compensation benefits of a foreign country and the benefits the worker would have been eligible for if the injury had happened in the state out of which the worker was based.
The cost of transporting an injured worker back to the United States, repatriation expenses, can be well in excess of $100,000. This number might seem high until you consider the cost of using an ambulance and medical people of some level to take the injured worker to an airplane, the cost of leasing an airplane and hiring medical personnel to be in attendance while in flight. Then when the worker reaches the United States, there is the cost of transporting the worker by ambulance with medical attendants to the hospital.
Usually an employer will not transport an injured worker back to the United States when the injury is routine--such as a broken leg or arm--but will do so when the injury is serious. Such a trip might require some very high-priced medical equipment and special medical personnel. Difference in conditions coverage which includes coverage for repatriation expenses as part of workers compensation benefits will pay for these expenses.
Some other losses that are typically not covered by workers compensation coverage in a foreign country are sicknesses such as cholera, malaria, polio, and tuberculosis.
Business interruption
Not all insurers in foreign countries provide business income coverage on the same basis as the typical U.S. business income policy. There is no set rule about this that applies to every insurer in every foreign country. As one example, a firm has a loss that only partially shuts down the plant. Because the plant can operate on a partial basis, the insurer does not pay anything because its form does not pay for partial business income losses. The loss can be covered with a difference in conditions contract.
Political risk
At various times, some foreign governments have stolen U.S. property. Examples of this are when a government decides to nationalize an industry. Sometimes assets have been confiscated and in other instances, the host government has revoked the operating license(s) of the U.S. firm. Political risk insurance can be purchased as a separate policy. Some political risk insurance contracts cover the perils of confiscation, expropriation, and nationalization. Difference in conditions policies also can provide coverage for political risk exposures.
For example, let's say a U.S. firm ships an expensive machine to a foreign country and the foreign government does not allow the customer to pay for the machine. Because the U.S. firm's DIC includes coverage for political risk, the U.S. firm is reimbursed for the cost of the machine.
Property coverage
Some foreign countries impose tariffs of 100% to 200% on incoming goods. For example, let's say a U.S. firm sustains $1 million damage to a machine that it owns in a foreign country. The local foreign property insurer pays $1 million for the loss. Because the machine is too badly damaged to fix, the U.S firm ships a new machine to the country. Upon reaching the foreign country's incoming shipment dock, the country tells them that they will need to pay $2 million of import tariff. Insurance coverage from the local insurer does not include coverage for the import tariff. Difference in conditions coverage pays for this import tariff.
Ocean marine open cargo
Basic ocean marine open cargo coverage applies to shipments only while they are being transported on a ship. Since the inception of this coverage about 300 years ago, different forms have been developed to modify this coverage to fit particular potential loss situation(s). One of the more popular and commonly used endorsements is the "warehouse-to-warehouse" clause. When this clause is attached, the open cargo form will cover goods in transit from the time they leave the shipper's dock until they reach the customer's receiving dock. When using the warehouse-to-warehouse clause, coverage applies whether the materials are being shipped by rail, truck or any other means of transportation.
For example, a U.S. firm ships some goods to a nation in the interior of Africa. From the African coast, the shipment will be going by rail through several other countries prior to arriving at its destination. While going through one of the countries en route, that government confiscates the entire shipment. While an ocean marine open cargo policy would not cover this kind of loss, the U.S. firm's difference in conditions coverage would respond.
Crime
Typically, crime insurance covers losses that occur in the country in which the insured operates and the policy is issued. However, the crime losses may take place in other countries not insured by a crime contract. Embezzlement is the main crime exposure when operating in foreign countries. Foreign countries are smaller than many of our states. It is possible that, within a matter of hours, a person can drive into and through four or five European countries. However, the embezzlement coverage may apply only in the country where the insured is located. Hence, there would be no coverage for embezzlement losses that are perpetrated outside of the insured's country.
For example, an employee in a European country drives into another country from where she accesses her employer's financial accounts to have money sent to her "special account." Over a period of years, her activity results in the embezzlement of about $500,000. Because the actual embezzlement did not take place in the country where the business's insurance was written, the firm's embezzlement insurer denies the claim.
Uncovered embezzlement losses can be insured as part of difference in conditions coverage.
Conclusion
Difference in conditions coverage written to cover only in the United States provides excess property coverage and coverage for perils not commonly insured, such as flood and earthquake.
Difference in conditions coverage, when written to cover international exposures, also provides property coverage. In addition, it can cover losses from such overall categories of loss exposures as workers compensation, auto, general liability, business interruption, political risks, ocean marine, boiler and machinery, inland marine and crime. *
©COPYRIGHT: The Rough Notes Magazine, 2000