This video is the third of a three-part series addressing issues companies should focus on when negotiating and purchasing D&O insurance to adequately protect against governmental investigations. In this post, Miller Friel Attorney Tab Turano continues his discussion on maximizing insurance recovery for governmental investigations. Both public and private companies face the threat of governmental investigations. These investigations by Federal agencies, from the SEC to the FCC to the DOJ, can be for violations of securities laws, the Foreign Corrupt Practices Act, and other laws and regulations. Having the right D&O insurance can be critical for defending such proceedings. Not all D&O policies, however, are the same. This video discusses the importance of negotiating a broad and favorable “allocation clause” as well as narrowly-tailored “conduct exclusions,” both of which are important for maximizing defense coverage in connection with governmental investigations.
Please watch the video to learn more, or Contact us if you have any questions.
We have included a transcript of the video below:
Steps to Maximize D&O Coverage for Investigations – Part 3
Another issue to look out for during the renewal process or the purchase process is allocation of defense costs. Lots of times, D&O policies will provide coverage for officers and directors of a company, but not necessarily for the company itself, so if there’s an investigation launched just against the entity of the company, no coverage on the policy. But if directors and officers are involved, the insurance company will pay the defense of those directors and officers. The reality of the situation is when the government launches an investigation, oftentimes it’s about against both the company and specific officers and directors, and so you run an issue as to what costs are covered and what costs aren’t covered.
Sometimes, based on potential conflicts of interest, officers or directors will have their own separate lawyers and the company will have its own separate lawyers, and that’s sort of an easy situation. But when that’s not the case, there’s some difficulty in determining what portion of the defense costs are covered under the policy and what’s not, and obviously, insurers are always trying to knock down what they’re willing to pay, and to pay the least amount possible. One solution to this is that you can negotiate with the insurance company for an allocation clause that essentially says when you have an investigation or you have a claim that’s both partially covered and partially not covered, in this instance, a claim against the company which is not covered, and the claim against directors and officers that is covered, your policy or the insurer pays 100% of the defense cost incurred in connection with that claim. That’s a very valuable negotiated provision in these types of D&O policies that should be pursued.
The final issue to focus on when you’re purchasing your D&O coverage is the conduct exclusions. Most policies have exclusions that preclude coverage if there’s any allegations or any proven intentional wrongful acts, criminal conduct, intentional violations of statutes. Obviously, when you’re sued by the government for securities claims or foreign corrupt practices acts, those types of investigations, if they go poorly for you, may result in a finding that you in fact did break the law, you did commit some intentional wrongful conduct. And so obviously, those policies are not going to cover any kind of fines or damages or payments that you’re forced to pay as a result of the investigation, but one thing you can do is get a carve out to those exclusions that says even if ultimately you’re found liable for some sort of excluded conducts, some intentional or criminal conduct, the insurance company will still pay your defense costs that you incur in connection with that investigation. Again, that’s a very valuable enhancement to typical D&O policies that many insurers are willing to negotiate with you.
The takeaway here is that there are many, many claims being filed against policyholders, against companies, against officers and directors for various investigations by the government. D&O policies will traditionally cover defense costs that are associated and incurred in connection with these investigations, but it’s important to negotiate language that maximizes the coverage that you’re entitled to.