Recent studies show foreign markets are attracting more and more mid-market companies, which raises risk management challenges for those operations.

More than 50% of companies that participated in New York-based Deloitte Consulting L.L.P.'s 2011 middle-market business conditions survey, “Mid-Market Perspectives,” said at least part of their revenue came from overseas markets in 2010. By 2014, that percentage is predicted to rise to 65%.

Importing and exporting goods across international borders can be financially advantageous, but insurance and legal experts say mid-market firms, many of which are doing business in foreign markets for the first time, must be aware of the myriad risks that accompany shipping and trading in countries outside the United States.

Even without brick-and-mortar properties or large workforces positioned abroad, risks such as geopolitical conflicts, weather and environmental hazards and economic instability are inherent in any overseas transaction. Most of the difficulties companies could encoun-ter while trading in foreign markets are easy enough to mitigate with moderate insurance coverage (see related story), qualified legal counsel, and local partners and advisers familiar with each country's laws and culture.

However, failing to comprehend and account for those risks can inflict significant losses on a business or invite litigation, which could prove catastrophic for mid-market companies that may not be as well-positioned to absorb the financial damage as their larger counterparts.

“Understanding the nuances of doing business outside the U.S. is incredibly important,” said Bill Skapof, head of international products for Zurich North America Commercial in Chicago. “So much of what you would imagine is similar to the U.S. in terms of how business is conducted is actually quite unique to the various countries in which you might be doing business,” he said.

In international commerce, some risks are universal and owe little to a firm's specific business model. Piracy, political uprisings, labor strikes, pandemics and natural disasters can affect inbound and outbound supply lines, causing business interruption losses and even breach of contract disputes.

Companies planning to send personnel overseas, even for short-term business trips, likely will need to assess their exposure to employment practices liability, kidnapping and ransom risks, emergency extractions as well as account for coverage gaps for medical care and workers compensation abroad, experts said.

“Especially when we talk about the middle market, I see a lot of our clients too focused on getting the operations going and not really thinking about the salespeople that they're sending over to other countries or the employees sent to train foreign partners in the use of a product,” said Shawn Burnsworth, vp and practice leader for Wells Fargo Insurance Services USA Inc.'s international unit in Atlanta.

Mid-market firms also should take note of local laws and customs governing their foreign partners, as well as domestic regulations for international trade. Many countries do not permit transactions with firms covered by nonadmitted insurers, which are not subject to those countries' laws or regulations, experts said.

Additionally, companies should assess in advance any translation or cultural interpretation issues that may arise from their product's composition, packaging or accompanying literature.

On the other hand, domestic firms must be aware of U.S. laws that limit permissible business practices overseas, particularly the Foreign Corrupt Practices Act. Actions such as gift-giving and monetary stipends in exchange for face-to-face meetings or as consummation of a business arrangement might be considered the way business is done in foreign countries, but likely would likely run afoul of U.S. law.

Whether companies import products and materials, export them or both, experts said the biggest challenge facing mid-market firms is the tendency to assume domestic general liability insurance policies will provide adequate protection against losses in foreign markets.

“There are key gaps in coverage they may have if they're only carrying domestic general liability coverage usually related to the coverage territory definitions in the domestic policies,” said Paul Privitera, vp of global services at Travelers Cos. Inc. in Hartford, Conn. Those gaps can be particularly problematic in a product defect claim, a negligence claim, or other loss event resulting in damages to a consumer or other third party. In those cases, Mr. Privitera said, “the domestic policy will not respond to resulting foreign suits and will most likely not respond to foreign occurrences.”

“Those kinds of losses are not only damaging in purely financial terms, they can also inflict reputational harm or result in loss of access to a foreign market,” he said.

Other risks mid-market firms are likely to encounter depend largely on what exactly is being shipped, its origin and its destination. Companies importing consumer products, prefabricated components or raw components should concern themselves mainly with their supply chain from source to end user, Mr. Burnsworth said.

“Really what you're looking for is contingent or dependent business interruption exposures where you're reliant on a foreign manufacturer or supplier,” Mr. Burnsworth said. In a product contamination or recall situation, the ability of insurance coverage to respond to claims, as well as the firm's ability to replace that product or component “all contribute to liability exposures and the potential for public perception and reputation issues,” he said.

The risks for U.S.-based companies that export products can be much broader and more numerous, experts noted. By virtue of their size and relative market share, many mid-market firms may lack the necessary leverage to negotiate unfavorable terms out of a contract with a foreign entity. Such arrangements can leave firms vulnerable, often unwittingly, to risks such as overseas retailers and distributors with which the domestic company is not in direct contract that are beyond the scope of a firm's insurance coverage.

“Suddenly, that firm finds itself having to respond to a claim in a territory in which they aren't covered for liability,” Mr. Burnsworth said.

International intellectual property, patent and trademark issues also can damage a mid-market firm moving its products or materials through foreign countries.

Adam Bialek, intellectual property practice chair at the Wilson Elser Moskowitz Edelman & Dicker L.L.P. in New York, said companies often do not thoroughly vet their partner firms' intellectual property, patent and trademark holdings for true ownership, nor do they always perform the necessary due diligence to ensure their own properties will survive infringement challenges in countries to which their products are being exported.