Will your D&O policy respond to FCPA enforcement?

The extent to which a D&O policy will respond to an FCPA claim can vary considerably depending on the specifics of the action, stage of the action, and the policy’s terms, definitions and exclusions.

For public company directors and officers interested in a brief overview of public company D&O insurance and the current risk landscape, we have recently published a thorough guide. When performing a D&O policy assessment, reviewing the policy’s definitions is a logical starting point. In the specific context of FCPA claims, buyers should pay careful attention to a few key areas:

Definition Of “Claim” & “Securities Claim.” When reviewing a D&O policy, the scope of covered proceedings and investigations against directors and officers (and private company entities) will be outlined in the definition of “claim”. This is in contrast to those claims brought solely against public company entities, in which case coverage will hinge on the policy’s definition of “securities claim”. These definitions should include, among other claims: civil, criminal, regulatory and administrative proceedings and investigations. In the context of public company entities, such proceedings and investigations are often only covered if they are also maintained against “insured persons”. While buyers may encounter resistance, it’s worthwhile to inquire about the availability of broader entity coverage that removes the parallel “insured person” requirement. This may be achieved through coverage negotiations or separate purchase. Such an amendment would afford the company coverage for costs associated with proceedings and investigations brought solely against the entity. 

Scope Of Investigations. In outlining coverage for regulatory actions, insurers will always preface with “formal” and “informal” when defining proceedings and investigations. Policyholders should be particularly cognizant of this distinction. While significant costs can be incurred at the informal stage, insurance for costs related to “informal” investigations is generally unavailable to public companies, outside of purchasing a separate specialized policy. Private companies on the other hand may have an easier time locating such coverage. On a side note, when attempting to negotiate broader coverage for investigations, directors and officers should also carefully consider the D&O program’s structure and overall policy limits — companies with particularly lower limit policies, in danger of limit-erosion (during the early stages of an investigation) may instead prefer to preserve some of that coverage.

Receipt Of Claim. Each policy will differ when it comes to defining how regulatory proceedings and investigations must be commenced. Policies with the broadest language will often allow claims to be triggered by: a service of complaint, return of an indictment, request for information, notice of charges, receipt of a wells notice or target letter, formal and informal inquiries, investigative orders, subpoenas, search warrants and/or written statements from enforcement authorities. While having a wide range of “claim receipts” included within the definition of “claim” is generally favorable, it’s also critical that the directors and officers in fact, recognize such requests as “claims”. Failure to recognize a claim and report it to the carrier in a timely manner can result in a declination of coverage later, on the basis of late or improper reporting. 

Loss & Damages. Once the definition of “claim” has been reviewed, policyholders should understand the types of damages that are covered, particularly those related to investigative costs, and fines & penalties. For purposes of clarity, directors and officers should seek policy language that provides coverage for fines and penalties with language affirming that “FCPA fines” are specifically included — an enhancement that appears to be fairly available in the marketplace. Despite the availability of this enhancement however, the insurability of fines and penalties is subject to applicable law and may not be allowed by the courts. Accordingly, in an effort to increase the likelihood of claim payments, insureds should seek language clarifying that coverage for fines and penalties is subject to the most favorable venue/jurisdiction. Lastly, insurance for pre-claim and investigative costs is also of particular importance. This should include pre-suit and pre-claim costs, investigative costs and costs related to the production of documents (including e-discovery costs).

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In the next post, I’ll talk about exlusions that can kill your FCPA coverage.

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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.