Is your company based in the United States but it does some business outside the country? If the answer is yes, you may need to purchase foreign liabilitycoverage. Most standard liability policies that are issued to small businesses in the U.S. are not intended to cover accidents that take place in foreign countries.

The standard ISO general liability policy provides a small amount of coverage for accidents that occur outside the U.S.

This article will explain what types of accidents are typically covered and which ones are not. It will also provide a brief overview of foreign general liability coverage.

What's Covered under the Standard U.S. Policy?

Most liability policies cover bodily injury or property damage caused by an occurrence that takes place in the coverage territory. The coverage territory is essentially the U.S.A, (including its territories and possessions), Puerto Rico and Canada. However, it also covers injury or damage that arises out of:

• Business travel by you or another insured in international airspace between the U.S.A. and a foreign country;
• Temporary business travel in a foreign country by you or another insured;
• Products you distribute outside the U.S.A. if they are made or sold by you in the U.S.A., Puerto Rico or Canada.

Note that a lawsuit that arises from any of the above activities is covered only if it is brought in the U.S.A., Puerto Rico or Canada.

Example

Fran owns a small clothing manufacturer called Fran's Finery.

The company designs and manufactures clothing in the U.S. Its products are sold at small boutiques around the country. Fran's Finery does not export any products outside the U.S. However, tourists occasionally purchase its clothing while visiting the U.S. from foreign countries. If a customer is injured by one of Fran's products after returning home and files a lawsuit against the company in the U.S., the claim should be covered.

Suppose that Fran and one of her employees (Tiffany) attend a trade show in Italy. While at the trade show, Tiffany stops by a booth owned by Divine Designs, another American firm that is participating in the trade show. Tiffany is admiring a display when she accidentally knocks over a fancy mirror. The mirror crashes to the floor and shatters. Several months after Fran and Tiffany have returned to the U.S., Fran receives a demand through a U.S. attorney from Divine Designs. Divine wants Fran's Finery to pay the cost of replacing the mirror. Since the damage arose out of temporary business travel and the demand was made in the U.S., the claim should be covered under Fran's Finery's general liability policy.

When Foreign Liability Coverage is Needed

Fran's Finery should purchase foreign liability coverage if any of the following occur:

• The company begins to export products to foreign countries;
• The company opens a store, warehouse or other physical location in a foreign country; or
• Fran or her employees begin to make frequent trips to foreign countries

Types of Foreign Liability Policies

When small companies purchase foreign liability coverage, they typically purchase one of two types of policies: an exporters package or a controlled master program. The type of policy you need depends on the nature of your foreign activities.

Exporters Package

As its name suggests, an exporters package is designed for companies whose foreign operations consist mainly of exports (U.S. products exported outside the U.S). An exporters package is not intended for companies that have a physical location in a foreign country. The policy covers product liability suits that arise from bodily injury or property damage that occurs outside the U.S. Some policies cover injury or damage that takes place in the U.S. if the suit is brought in a foreign country. Exporters packages also cover incidental foreign travel. Additional coverages like auto liability, personal property and crime may also be included.

Controlled Master Program

Small companies that have a physical presence (such as an office or warehouse) in a foreign country typically purchase a controlled master program (CMP). A CMP consists of a master policy and one or more local policies. The master policy is written by a U.S. insurer on an American policy form that is very similar to the standard ISO policy. Local policies are issued by an insurer (typically a subsidiary or affiliate of your U.S. insurer) located in the country where the physical facility is located. For example, if you have an office located in Spain, your U.S. insurer will probably ask its subsidiary or affiliate insurer in Spain to issue a local liability policy there.

Must you purchase a local policy in every country where you have a physical location? The answer is it depends. Some countries require you to purchase a local policy. Other countries permit the use of a non-admitted policy (a policy issued in another country, such as the U.S.). Penalties for non-compliance with local insurance law can be stiff, so it is important to know what the laws require. 

Under a CMP the master policy applies on an excess basis over the local policy. For instance, suppose that the local Spanish policy has a liability limit of $US 200,000 and that the limit on the master policy is $US 1 million. If a $300,000 slip-and-fall claim is filed against you in Spain, the local policy will pay $200,000 while the master policy will pay the remaining $100,000.

The master policy also applies on a difference-in-conditions (DIC) basis over the local policy. This means that if a claim occurs that is not covered by the local policy but is covered by the master policy, the master will apply. Since the master policy is written on a U.S. form, its terms and conditions are usually broader than those in the local policy.

Coverage Territory

Both an exporters package and a master policy (under a CMP) cover injury or damage that occurs in a country included in the policy's coverage territory. Virtually all policies exclude certain countries. Excluded countries are those deemed a security threat to the U.S. as well as those against which the U.S. has imposed a trade embargo or trade sanction. Make sure that the countries where your business operates are included in the coverage territory specified in your exporters package or master policy.

An exporters package or master policy (under a CMP) should cover suits whether they are brought in the U.S. or in a foreign country. Some policies restrict coverage to suits brought outside the U.S. Such policies should be avoided.