A large project almost always brings together parties from several countries: a project owner from one, a builder from another, lenders from a third, and works built in a fourth. The insurance program follows that dispersion, and takes a form this course has not yet described: a master policy negotiated where the group's head office sits, and local policies issued in each country where the works are built. The whole looks like a single arrangement; it is in reality a stack of contracts governed by different laws, and it is from that difference that the difficulties arise.
The first reason for issuing a local policy is not commercial, it is legal. Many states require risk situated on their territory to be insured by an insurer licensed there, and that requirement is no formality: non-admitted insurance exposes the insured to tax and administrative penalties, and above all to the practical impossibility of collecting an indemnity locally. France adds obligations of its own, including ten-year liability insurance, which is mandatory law for the works it targets and which no foreign program can replace by equivalence.
The mechanism linking the two floors carries a name to be understood literally. A local insurer issues the policy its law requires, collects the premium, presents itself as the risk carrier, then reinsures almost all of that risk with the master program's insurer. It carries the name, the license and the contractual liability; the other carries the money. That arrangement is legitimate and universally practiced, and yet it moves two things: credit risk, since the local insured has a claim only against the local insurer, and decision-making power, since the party adjusting the loss is not the party that signed it.
Difference in conditions and difference in limits clauses exist to bridge the gap between what the local policy offers and what the master program promises. They are useful and they have a limit that must be known: they operate at master program level, therefore for the benefit of the entity that bought it, generally the parent company. The local entity has only its local policy. On a loss, the difference is paid to the parent, not to the subsidiary, which raises a tax and accounting question in the country of the loss and leaves the subsidiary with less than the program chart suggested.
Governing law and jurisdiction are the other pair of questions, and they are often treated as boilerplate at the end of a contract. They are two distinct choices: the law governing the contract, and the forum one will go to. An English-law policy subject to arbitration in London, covering works built in France, is perfectly valid; but it does not make the mandatory French rules applicable to those works disappear, nor the local insurance obligations, nor the fact that an injured third party will sue in the court of the place of the damage without caring about the arbitration clause. A contract chooses its law; it does not choose the law of those who did not sign it.
A divergence of contractual culture must be added, and it has concrete effects. Under English law the insured bears extensive pre-contractual duties and certain clauses operate as conditions whose breach discharges the insurer, regardless of any link with the loss. Under French law, as the modules on notification showed, the sanction is graduated and often conditional on a prejudice to the insurer. The same breach, the same clause, two opposite outcomes. An insurance manager applying national reflexes to a foreign policy is using the wrong grid, and only notices at the moment the grid matters.
The useful reading therefore consists of establishing, country by country and not program by program, an answer to four questions. Is local insurance mandatory here, and for which works; who issues the local policy, and what is its own strength independently of its reinsurance; does the difference in conditions benefit the local entity or only the parent; and what law governs the local policy, knowing it may differ from the master program's. Those four answers fit on one line per country, they are assembled at placement, and they are unfindable after a loss, where everyone discovers that the program chart did not describe the contracts but their intention.
A German industrial group builds a unit in France through its French subsidiary. The master program, governed by English law with arbitration in London, carries 150 million euros of contractor's all risks cover and a difference in conditions clause for the parent company's benefit. A French local policy of 60 million is issued by an insurer licensed in France, which retrocedes 95% to the master program's carrier. No ten-year liability insurance was bought, the group taking the view that the master program covers everything. A partial collapse occurs during the works: 88 million of damage. Separately, three neighbors sue in the court of the place of the works. What happens?
Three problems, two of which are invisible on the program chart. On the 88 million, the French subsidiary has a claim only against the local insurer, up to 60 million: that is the direct consequence of fronting, name and liability sitting with one party and the money with another. The remaining 28 million comes under the difference in conditions clause, which operates at master program level and therefore benefits the German parent, not the French subsidiary suffering the damage. The money exists, it does not arrive in the right place, and moving it down raises a tax and accounting question in the country of the loss. The second problem is graver and simpler: ten-year liability insurance is mandatory law for the works it targets, and no foreign program substitutes for it by equivalence. The group's reasoning, coherent everywhere else, is worth nothing here. The third point is the one the arbitration clause suggests is settled: the neighbors signed no contract, the London arbitration clause is not enforceable against them, and they will sue in the French court of the place of the damage. A contract chooses its law, it does not choose the law of those who did not sign it, and that is the line of the file no re-reading of the policy will make disappear.
- 01Non-admitted insurance is not a matter of form: it exposes the insured to penalties and to the practical impossibility of collecting an indemnity locally.
- 02Fronting separates the name from the money: the local insured has a claim only against the local insurer, and the party adjusting the loss is not the one that signed the policy.
- 03Difference in conditions operates at master program level: the top-up is paid to the parent and not to the subsidiary suffering the damage.
- 04A contract chooses its law, it does not choose the law of those who did not sign it: an arbitration clause is not enforceable against a neighbor suing in the court of the place of the damage.
- 05The same breach is sanctioned differently depending on the law: a discharging condition on one side, a graduated sanction conditional on prejudice on the other. Applying national reflexes to a foreign policy is using the wrong grid.