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Managing claims exposure in Latin America.

The North American Free Trade Agreement, the probable congressional "fast track" of a preferential trade agreement with Chile, the Clinton administration's declared intention to promote U.S. business abroad and a slow but steady economic recovery are powerful indicators of certain international business expansion in the near future. Equally evident, U.S. corporations now appear to have "rediscovered" the potential of the Latin American market. American business and investment have already begun "moving south" as the robust Mexican stock market, the Bolsa Mexicana, readily attests. But despite the rosy picture, many companies have become painfully aware of the pitfalls of initial expansion into a foreign market. And what many U.S. businesspeople still fail to fully consider is the virtually inevitable contractual disputes and concomitant litigation that occur as some deals go sour, well after financial resources have been committed to the deal.

For most types of businesses, and for insurers in particular, business expansion in Latin America and the Caribbean carries with it a substantial risk of lawsuits in the United States on claims occurring abroad. And aggressive case management in defense of these claims can be costly. Indeed, a foreign insured's sophisticated awareness of the American business "bottom line" approach may be decisive in both an insured's determination to sue on a fraudulent claim and an insurer's decision to pay a suspect loss. Therefore, on the surface, conducting business in Latin America can be quite appealing: island paradises; palm trees; friendly faces; accommodating local lawyers and businesspeople; an open business environment; and countries apparently receptive to the company's arrival. But look closer. Things really are not what they seem.

Take the case of a major American broker that approaches a multinational insurer, seeking a "manuscript policy" for property and contents worldwide to include a warehouse in a Latin American country with a lot in its favor: a 20-year history of relative political stability; a profusion of U.S. and European bank regional headquarters; an "elected" government "supported" by a U.S.-trained military and led by a "friend of the United States"; and over 10,000 U.S. troops garrisoned in-country. With confidence, an underwriter cobbles together a policy. Then, suddenly, the friendly military leader declares war, and the United States invades, with widespread coincident looting, during which the warehouse is sacked. Not surprisingly, the insurer is hit with a multimillion dollar claim, and coverage is questioned. But the major American broker and the multinational insurer's own local agents exert maximum pressure to pay the loss, and a suit is instituted in the United States.

In another scenario, a local agent of a multinational insurer underwrites an "all risk" fire insurance policy for a factory - one of many offshore assembly operations owned by a U.S. company - located in a small Caribbean nation. The country is ruled by a dynastic family, which has ensured "political tranquility" for 30 years, thereby successfully luring American businesses to special tax status zones with minimal regulation and promises of high profits. Without warning, the "President for Life" abdicates, and the newly organized, legally sanctioned trade unions agitate for better wages and concessions, while business profits plummet. Military coups occur in quick succession. And although the military repressively ensures order, the factory's U.S. owners abruptly claim a total loss of the factory's contents, the result of a union riot. A $1 million lawsuit is commenced against the insurer in the United States, but all witnesses, documents and other evidence reside in the increasingly turbulent foreign jurisdiction.

As the first example illustrates, local agents, lawyers or other representatives may be under significant pressure from the local business community, which underpins their livelihood, to pay a large loss, regardless of merit. As the second example demonstrates, the ability to properly prepare for litigation in U.S. courts may mean the difference between a successful denial and costly acquiescence to a baseless claim. Deterring spurious lawsuits based upon foreign, fraudulent claims is an insurer's best strategy to hinder these foreign exposures. Once an insurer has balked at the cost of the fight, the company becomes an easy mark. Conversely, an insurer's reputation for aggressive defense may serve to convince the unscrupulous to look elsewhere.



The creation of a pre-trial, investigative infrastructure in the country where the claim occurred is essential to the successful defense of an overseas claim bound for U.S. courts. The classroom solution is to hire a prominent Latin American law firm and allow it to handle the case. Unfortunately, the success of this approach is problematic: the case is still destined for an American courtroom, for trial by an American lawyer. On balance, American attorneys are arguably best qualified to develop and prepare cases to be tried in U.S. courts.

The good news, however, is that the creation of an effective litigation infrastructure seldom necessitates the dispatch of a task force of a dozen or so lawyers or the support of a working group within a firm. Keeping investigation and litigation costs down, however, requires both substantial reliance upon foreign resources and the development by the insurer's U.S.-based attorney of a mechanism to direct efforts abroad from the United States, i.e., an attorney-investigator-witness network. Not only does this pre/post-litigation infrastructure offer the insurer's attorney in the United States real time capability to conduct an aggressive defense, it also is far less expensive than funding the dispatch and support of a battery of lawyers abroad for the duration of the investigation and "discovery phase" of a claim. Typically, sending one or two attorneys to the country in question is sufficient. In one case, a carefully designed infrastructure permitted a single attorney to conduct over two dozen in-country interviews and meetings in a 10-day time period, selecting 10 fact witnesses for probable deposition and later acquiring thousands of pages of the claimant's own documents, evidencing probable insurance fraud. Thus, a well-conceived infrastructure reduces costs by relying primarily on local resources to organize, schedule and conduct aspects of the pre-trial inquiry.

Contacts Abroad

Part of analyzing any risk or claim in Latin America or the Caribbean entails knowing who the insured really is. In fact, identifying the individual or group behind a claim may prove crucial. If the claimant is a member of, or connected to, the local business or military elite, that person may have the ability to frustrate even the most meticulously crafted local inquiry. On the other hand, members of the elite may also prove valuable allies whose cooperation can be enlisted through skillful diplomacy. It is best to target those principals who may have an impact on the claim or case and identify a common interest that can be used to enlist their support, if appropriate. In one instance, a conservative businessman, who felt victimized by an insured, provided crucial proof of the fraudulent nature of a claim. In another case, tight-lipped former Central American military officers were persuaded to offer important loss information.

Thus, it is crucial to locate a reliable, honest contact in the country. It is virtually impossible to acquire sufficient information on the local center of influence, political dynamic and economic players in advance without a knowledgeable guide, usually an attorney from a firm of modest size. Other than intelligence, there are no set selection criteria. The local attorney probably does know best, even if his or her approach might seem ineffective to an American lawyer. After a local contact has vouched for the U.S. attorney, that "impossible to see" government official actually may prove quite accessible. Another potentially lucrative resource is the U.S. Embassy, which often has a wealth of unclassified reports and other procurable items that offer insight into the foreign environment. Unfortunately, embassy walls are difficult to breach and the quality of advice dispensed is heavily dependent upon the personnel assigned to post.

Finally, the linchpin of any overseas litigation preparation or claims investigation is a language capability. Nothing places local contacts or skittish potential witnesses more at ease than conducting a delicate meeting in their native tongue. Conversing with a government official in the country's official language is a sign of singular deference. Adopting the local language also ensures few, if any, misunderstandings in an important agreement or case.

Evidence Gathering

Nowhere is the potential clash between American and foreign legal cultures more apparent than in evidence collection. The parameters of foreign pre/post-litigation activity may be largely defined by foreign practice. However, information and evidence obtained abroad must also meet the prescriptions of the appropriate U.S. jurisdiction to be admissible. For example, the civil code of one Caribbean country in particular precludes compelling any reluctant witness to appear before the court to give testimony for a foreign case. But since a court usher could "invite" a witness to appear for a local matter, it has been suggested that a suit be commenced locally to provide a jurisdictional basis to coerce the witness's appearance. However, such coercion would render the testimony highly suspect, if not outright inadmissible, in U.S. courts. Instead, using an infrastructure member to cajole the witness into testifying is far more preferable. Emphasizing that the foreign nature of the suit would limit any local retaliation against the witness usually helps ease any concerns and often proves key to enlisting the witness's cooperation.

In certain Central American countries, local practice requires that any deposition be conducted by a magistrate or by an embassy vice consul. Regarding the former, a magistrate might be viewed as a representative of a former repressive regime, ensuring witness amnesia on key issues. As for the latter, the rather diplomatically sensitive embassy may claim to have no room in which to conduct the exam. Furthermore, an embassy official may insist that the vice consul pose all questions, that they be supplied, in writing, in advance, and that no follow-up questions be allowed.

Therefore, avoid the waste of time and money created by moving ahead with depositions before either the magistrate or the embassy vice consul. If at all possible, fly the witnesses to the United States and take their testimony there. In the end, the cost of air-fare and hotel accommodations will be less than repeating the depositions or losing the case because of "memory loss" on the part of a witness.

Letters Rogatory

In spite of treaties between the United States and Latin America, most governments in Latin America are averse to compelling their citizens to appear as witnesses for civil cases pending in foreign jurisdictions. The route suggested most often by U.S. attorneys, both for convenience and administrative ease, is letters rogatory - that is, judicial requests by a U.S. court asking a foreign court to facilitate testimony in the foreign country. Theoretically, the foreign government will use these letters to compel the witness testimony.

The usefulness of this procedure, however, is highly dubious. Letters rogatory are a government to government process, often moving at glacial speed. The U.S. State Department receives and forwards the letters to the foreign government, which then convokes its functional equivalents of the State and Justice Departments and the letters wind their way through the long established but little used bureaucratic labyrinth. Depending upon local custom, a magistrate may be designated or a commission formed to subsequently obtain responses to the letters by the named witness. Reversing the same procedure, the foreign government returns the executed letters to the U.S. State Department. As one Caribbean rogatory commission member noted, letters rogatory sent to his country usually take at least one year to complete.

Fortunately, there is an alternative - and at a significantly lower cost than importing a cast of witnesses into the United States. It may be possible to take legally admissible depositions in the foreign country should your potential witness be denied entry into the United States. In fact, this course may unwittingly be facilitated by an embassy vice consul who cannot be convinced that the person you wish to depose in the United States is, in fact, a legitimate witness who will return home after testifying.

Attitude, experience and language capability really do count in defending actions related to overseas claims. These experience-borne talents, familiarity with U.S. law and a keen understanding of the manner in which foreign law can be applied within the American legal context should ensure the admissibility of the evidence crucial to the defense. There is nothing more frustrating than the exclusion of key testimony for failure to "follow the rules." Furthermore, a failure to recognize cross-cultural distinctions may preclude enlisting the aid of an important witness, gaining that interview with a key government official or obtaining those conclusive documents.

Should We Settle?

The defense of a claim arising from an occurrence in Latin America, the Caribbean or elsewhere in the Third World can be expensive. Yet, even if the claim is fraudulent and the insurer is right, should the insurer simply pay the fraudulent claim and forgo the fight? If the insurer stands alone, settling a claim might make the most business sense.

But the possibility of exposure to other claims should be a major consideration in any business decision to settle a suspect claim. No insurer wishes to be known as easy prey. Maintaining settlement confidentiality for problem claims is usually the best means to avoid being inundated with similar claims in the same market. However, the confidentiality approach is not always feasible in Latin America or the Caribbean. The vast majority of countries in this region have tightly knit business communities. In one case, the details of a large settlement reportedly became public in the Latin American country well before the confidentiality stipulation was executed (in the United States). Of course, after the settlement became public, others with comparable claims proceeded to aggressively press their demands.

Insurers operating in Latin America also need to consider the existence of organized crime rings actively working to defraud carriers. Once a ring identifies those insurers more disposed toward settlement, the number of suspect claims lodged with those companies increases. Criminal enterprises in lesser developed nations have proven to be as equally organized, if not more so, as those in the United States.

The defense of claims arising abroad, and pursued in U.S. courts, involves unpredictable dangers absent in ordinary litigation. Such defense requires early, carefully planned and executed strategy, and great resolve - without which the multinational insurer is fully exposed. Keeping this fact in sharp focus may be the difference between being profitable and becoming a target.
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Author:Greenhill, Jonathan; Greenhill, Zachary
Publication:Risk Management
Date:May 1, 1993
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