Help commercial clients accused of ‘tariff cheating’

One overlooked element of the ongoing trade tiff across North America is a U.S. Department of Justice (DOJ) directive to prosecute so-called ‘tariff cheaters.’

The DOJ has elevated “trade and customs fraud, including tariff evasion” to its second highest enforcement level for white-collar crime, according to news reports. Those same reports suggest Canada and European countries will face the brunt of enforcement actions.

While no insurance coverages specifically address tariffs (and most policies have exclusions in cases of punitive or statutory fines), the U.S. investigative actions highlight the need for coverage reviews by commercial clients that export goods.

“There are four main coverages that could, in multiple ways, assist with some form of protection,” says Aliya Daya, senior client executive, commercial insurance at Acera Insurance.

“The first one is political risk insurance. That’s the most direct, relevant coverage. It protects against government actions that restrict trade, including import and export bans, expropriation, [and] cancellation of licences or contracts.”

Further, if tariffs escalate into retaliatory measures, such as trade restrictions, political risk coverage responds to losses tied to those government actions.

The second key coverage is supply chain and contingent business interruption, because tariffs can delay shipments or make certain imports too expensive. And that can bottleneck supply chains.

“Contingent business interruption coverage can help recover lost income if a key supplier or customer is affected by trade restrictions or certain geopolitical events that impair operation,” Daya tells Canadian Underwriter. “They don’t respond to the tariff itself, but the business interruption caused by it.”

Related: How commercial brokers can help with ongoing tariff fallout

A third option is export insurance. “It’s not very common, and it’s for companies exporting goods, especially under large scale government contracts,” she says. “It can protect against losses if a buyer or foreign government cancels a contract due to tariff-related actions. It’s…relevant in industries such as construction or energy advanced manufacturing.”

Finally, trade credit insurance coverage can provide relief if tariffs strain cash flow, increase costs or lead to buyer insolvencies.

“Trade credit steps in [and] helps businesses recover receivables if a customer defaults on payment, risk that can happen when tariffs occur and market prices rise,” says Daya. “Supply chains are strained, so it’s crucial for manufacturers or wholesalers [and] exporters managing larger accounts.”

Related: How will U.S. tariffs impact Canadian P&C pricing?

In cases where executives are accused of mismanagement or non-compliance, directors and officers (D&O) liability insurance also can help with defence costs.

“Let’s say a company is accused of misclassifying imported goods to reduce tariff exposure. If regulators investigate and allege that the company leadership failed to implement proper compliance controls, the executive could personally face allegations of negligence or mismanagement,” she tells CU.

“Any resulting fines or penalties would not be covered, but the legal defence costs for those executives, which could be lawyer fees [or] potential settlements for certain types of civil claims investigation expenses…could potentially be covered under the D&O.”

Clients seeking options

Daya says she’s “seen an uptick in [commercial] clients revisiting their international risk compliance posture, especially clients with cross border supply chains or U.S. exposure.”

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Further, those clients tend to be in certain industries that are more exposed, such as construction, manufacturing, energy and wholesale distribution. Clients with $10 million or more in annual gross revenue are also more likely to review coverages.

The good news is insurers may soon have new coverages that will help commercial clients fend off unexpected losses.

“There is an evolution happening within insurance products and within the insurance industry. Give it a year and there might be some unique products available, not necessarily tariff specific, but tariff adjacent,” she tells CU.  

“These will be specialty products out of London. They won’t necessarily be written by domestic insurers…but I do hear certain unique products being talked about – or unique extensions added to the existing products, like political risk insurance or trade credit insurance.”

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.