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These D&O exclusions can kill your FCPA coverage

We addressed how D&O policy definitions can differ — expanding or limiting coverage for FCPA enforcement — in my previous post.

Even when policy definitions appear favorable however, policy exclusions can quickly eradicate coverage. There are a few exclusions that policyholders should be particularly aware of when assessing coverage in the context of FCPA enforcement.

Regulatory Exclusions. While fairly uncommon for all but the highest risk industries (such as cannabis, tech, and pharma/life-science companies) the regulatory exclusion included in some D&O policies serves as the single most problematic exclusion for obvious reasons. A typical regulatory exclusion precludes coverage for (among other claims), any claims, interviews or investigation demands:

“By or on behalf of, or in the right of, at the behest of, at the direction of, or with the participation of any regulator in any capacity whatsoever….or any person or entity which any regulator, in any capacity whatsoever, has asserted any claim or demand of whatever nature”, OR “Based upon, arising out of, directly or indirectly resulting from, in consequence of or in any way involving any agreements, consents or other agreements with any regulator, or any actions required by a regulator….or any loss or reduction of earnings resulting from any agreement with, or action by any regulator”

While a regulatory exclusion would undoubtedly preclude coverage for most (if not all) costs related to FCPA actions, the above language can eliminate a wider range of related claims through its broad “based upon, arising out of, or in any way involving” preamble. Such policy language has the potential of negating coverage in the event of a resulting bankruptcy or follow-on securities claim (or derivative action), following an FCPA violation/investigation. For this reason, all policyholders should aggressively avoid any regulatory exclusions. Those that cannot be avoided should be negotiated and softened as much as possible, with an absolute carve back for resulting securities claims and side-A coverage. In situations where carriers are unwilling to accommodate narrower language, purchase of a separate side A DIC policy (with its broader coverage terms) could serve as an alternative solution in securing coverage for directors and officers. In fact, Side A-DIC policies are multi-faceted risk tools with a myriad of features, as outlined in our recent guide.

Conduct Exclusions. Due to the fact that FCPA claims often involve assertions of intentional wrongdoing, policyholders should carefully review the conduct/intentional acts exclusion, narrowing its scope as much as possible. This means 1) ensuring that intentional acts and fraud are defined as deliberate and willful, and personal profit is defined as “illegal personal profit”, 2) ensuring that defense cost coverage is provided until there is a final adjudication in the underlying action, and 3) ensuring the policy contains both application and exclusion severability clauses which would maintain coverage for any “innocent actors”. Even when the aforementioned language is in-tact, insureds may still have concerns. One such concern, is that the corporate entity may decline to indemnify them, effectively forcing the individual(s) to first meet a large retention (upwards of 250k) before being able to access coverage. Additionally, the c-suite may also be concerned with the prospect of having their assets exposed when the insurer attempts to recoup any defense costs already provided, following an adjudication of guilt. A separately placed Side-A DIC policy will often address both of these concerns by bypassing any “presumptive indemnification” clause and entirely carving back defense costs from the conduct exclusions.

Insured Vs Insured Exclusion. In order to maintain D&O coverage for FCPA actions initiated by inside whistleblowers, companies have 2 options when addressing this exclusion. The first and most preferable option, is to ensure the “Insured vs Insured” exclusion is replaced with the more modern and readily available “Entity vs Insured” exclusion, which only precludes claims brought by an insured entity, against an insured person. This enhancement has been readily available in the marketplace for a few years now. Absent the ability to obtain an “Entity vs Insured” exclusion however, directors and officers should ensure that the policy’s “Insured vs Insured” exclusion is amended to include an absolute carve-back for (among other claims) claims brought by whistleblowers.


Evan Bundschuh, RPLU (pictured above) is vice president and commercial lines head at GB&A, a family-owned specialty insurance brokerage located in New York focused on professional and management liability programs, including directors and officers, employment practice liability, cyber risk and professional liability insurance. He can be contacted here.

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1 Comment

  1. Excellent piece!

    One correction: the statement that "the corporate entity may decline to indemnify them, effectively forcing the individual(s) to first meet a large retention … before being able to access coverage'" is not correct.

    Should the organization NOT advance indemnification, coverage for the individuals would fall under a coverage agreement where there is NO retention (referred to as "A-Side D&O coverage").

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