D&O’s Shifting Risks
Corporations obtaining cooperation credit during Department of Justice investigations became virtual whistleblowers on individuals involved in misconduct, a Sept. 9, 2015 DOJ memo intimated.
The memo got Rob Yellen’s attention. The North American product leader for directors and officers and fiduciary liability insurance product at Willis Towers Watson, FINEX, describes the memo as a product of the “individual accountability era.” Enforcement agencies have been criticized, “fairly or not,” he said, “for not holding more individuals accountable during the financial crisis.”
Now, when an employee breaks the law, you are required to notify the DOJ and provide all supporting documents. Moreover, internal efforts to resolve the legal breach should include criminal or civil liability protection for the miscreant.
“Given this, ensuring that your directors and officers liability policy has those heightened enforcement dynamics in mind is essential,” Yellen advised.
Navigating a Potential Labyrinth
The memo was also a game changer for Louis Lucullo, chief underwriting officer, financial lines, Americas AIG. Memorializing more stringent aspects of settlements sought by a regulator would have an impact on Side A of a D&O tower. Companies could possibly be “unable to indemnify if they were providing information about wrongdoing … as a result, we now see companies buy more Side A as a portion of their total D&O limits.”
That rings true for John Phelps, director, business risk solutions at Florida Blue and former RIMS president. Though, he notes, much depends on the state “and how liberal your indemnification can be in your bylaws.”
Florida allows one of the broadest indemnification provisions that can be included in bylaws. Phelps noted that “it makes sense to have Side A for protection in case something does slip through your coverage B.”
The complexities of indemnification, Lucullo adds, suggest that Side A alone should not be considered for bankruptcy scenarios. Situations occur “where a company is not able to indemnify or the wrongful refusal to indemnify provides for the advancement of defense costs under the Side A policy.”
Additionally, changes to federal laws impact the way state and other regulatory bodies respond to meet their own legislative obligations. “You might see local regulators step up and put their own regulations in place,” said Yellen.
The danger is the potential for “balkanization.” Suddenly, you’re fighting battles on multiple fronts. There’s a possibility for significant investigative redundancies and costs as you try to comply, and the rules and enforcement demands may vary from one authority to another. “If multiple enforcement authorities are involved, it gets complicated … and ultimately costs more as you respond,” said Yellen.
Shared Coverage Pitfalls
Many are taking a wait-and-see approach, including Shanda Davis, Travelers D&O product manager for Bond and Specialty Insurance. “We’re going to see how that plays out, but certainly states have different regulations today.”
Whatever regulatory gaps the states and local governments need to fill, she said, a comprehensive D&O program is crucial, whether public or private.
“You need that in place, to protect assets of the personal side of [directors and officers] and to attract and retain qualified executives and board members.” No one will join a company if there’s the smallest hint they might go unprotected if unfairly suspected of wrongdoing or if someone else in the company goes rogue.
Yellen added, “You don’t know everybody you’re sharing your coverage with. You want to make sure you’re going to be judged on your behavior, not the behavior of somebody [less] concerned about cooperating with the insurer.”
“You want to make sure you’re going to be judged on your behavior, not the behavior of somebody [less] concerned about cooperating with the insurer.” — Rob Yellen, North American Product Leader for directors and officers, and fiduciary liability insurance product, Willis Towers Watson, FINEX
Full severability of the application “is a critical element if you’re advising someone to buy D&O,” agreed Lucullo, “because you don’t want to invalidate your entire D&O policy due to the acts of one wrongdoer.”
While regulatory investigation coverage for individuals might be covered already, some might view the expansion of regulatory investigation under D&O for the corporate entity “as a dilution of limits,” said Lucullo, because individuals expect coverage. To address that issue, you can simply buy investigation coverage in a standalone policy, he noted. &