SEC Investigations

SEC Policy Could Impact D&O Policies

Requiring admissions of wrongdoing may drive up costs and prolong litigation.
By: | March 3, 2014 • 3 min read

It wasn’t quite the shot heard ’round the world, but the Securities and Exchange Commission’s recent announcement that it’s going to start requiring admissions of wrongdoing before agreeing to settlements certainly got insurers’ attention. However, the big question seems to be whether or not the agency’s bite is as big as its bark.

JPMorgan’s CEO Jamie Dimon. The SEC’s insistence on admission of wrongdoing in some recent settlements, including one with JPMorgan, could have far-reaching D&O implications.

JPMorgan’s CEO Jamie Dimon. The SEC’s conditions in some recent settlements, including one with JPMorgan, could have far-reaching D&O implications.

“Obviously, Harbinger and JPMorgan are the big cases at the moment,” said Will Fahey, senior vice president of Management Solutions at Zurich. “Those were somewhat extreme situations that are not typical enforcement actions. It remains to be seen if the SEC is going to be looking to implement this new policy requiring admissions of guilt more broadly or if they are just going to do it in isolated circumstances.”

If the policy truly becomes the SEC’s new mode of operation, it could have a big impact on D&O policies.

“If an individual admits guilt, then clearly there would be no coverage for that individual,” Fahey said. “Where there’s an admission of wrongdoing by a corporate entity itself, it’s not at all clear whether that invokes the fraud exclusion. It may. But that’s by no means settled.


“It’s a wait-and-see game to see how the SEC proceeds. Depending how that goes, we might see insurance carriers potentially address that coverage uncertainty.”

Steve Boughal, vice president and chief underwriting officer at Hartford Financial Products pointed out the potential for a sharp rise in costs for insureds due to the possibility of extended investigations and prolonged litigation.

“Seeking admissions of wrongdoing has the potential to decrease cooperation between the SEC and the target of the investigation,” he said. “Admission language will be heavily negotiated between the SEC and the target, which may increase legal costs associated with finalizing a settlement.”

Samuel Rosenthal, a partner at law firm Patton Boggs and chair of the firm’s Government Investigations and White Collar Litigation practice group, said that admissions of wrongdoing may hit some directors and officers hard.

“In D&O policies, there’s often a regulatory exclusion so it may mean that the policy itself will disclaim any liability for a regulatory action.

“But that’s policy by policy,” he said. “However, there are also exclusions for fraud and criminal conduct. Most policies — virtually all — won’t let somebody insure against fraud or criminal conduct. If you’ve admitted to engaging in fraud or criminal conduct, yes, you’re probably going to vitiate your D&O coverage.”

That doesn’t mean that insurers’ costs won’t skyrocket in the meantime. “You can insure if there has been no final determination,” Rosenthal said. “If somebody has been charged with fraud, there’s still coverage until there’s a final adjudication.”

While the impact of this directive continues to play out, Boughal cautioned both carriers and insureds to pay close attention to the finer points of policy language.

“It’s important for policyholders to understand the language of their policies and know whether it covers activity related to SEC investigations. Fines and penalties may be excluded from an insurance policy’s definition of loss.

“Directors and officers should review the type and amount of insurance they’ve purchased,” he said. “They might want to consider E&O insurance as a complement to D&O. This is especially important for companies in the financial institutions industry or companies that provide services that expose them to securities regulations, such as accounting or law firms.”


From the insurers’ perspective, Rosenthal said the SEC’s potential requirement is an opportunity to refine coverage exclusions.

“The carrier looks at this policy as a good thing. They may want to broaden their regulatory exclusions and their exclusions for fraud. I would think that the carriers always have an interest in broadening the exclusions; they always have in interest in making sure there are limits to coverage. The insured by contrast, has the opposite interest in making sure that the exclusions are as limited as possible.”

Trish Sammer Johnston is a freelance journalist based in Philadelphia who covers finance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.


That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.


Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]