Federal law enforcement authorities are now investigating with greater frequency and vigor potential criminal charges against directors and officers in a variety of contexts. Most notably, on September 9, 2015, Deputy Attorney General Sally Quillian Yates issued a memorandum to all assistant U.S. attorneys and other key agencies which describes the federal government’s focus on individual criminal accountability for corporate wrongdoing.
In this so-called Yates Memorandum, the Department of Justice (DOJ) recognized that “[o]ne of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing” and that it is “important that the Department fully leverage its resources to identify culpable individuals at all levels in corporate cases.”
The cornerstone of the policies and procedures set forth in the Yates Memorandum (which have now been incorporated into the United States Attorneys’ Manual) is that in order for a company targeted in a federal investigation to gain any credit for cooperation with the government, it must provide to the DOJ “all relevant facts relating to the individuals responsible for the misconduct.” In other words, a company is now highly motivated to disclose to federal investigators the identity and “all relevant facts” relating to directors, officers and other individuals arguably responsible for the company’s alleged wrongdoing. This creates a huge conflict between the company and those potentially responsible individuals.
The practical impact of this new and aggressive DOJ initiative is still largely unknown. However, it is clear that directors and officers should reconsider the adequacy of their insurance protection. Some of the more important features of a D&O insurance policy which should be examined in this context include:
Definition of Claim. Most, but not all, directors’ and officers’ liability (D&O) policies include within the definition cradle to grave coverage for defense costs incurred by insured persons in connection with criminal investigations and proceedings that are either against or involve an insured person (subject to the other terms and conditions of the policy), whether or not the company indemnifies the insured person for those defense costs. This broad coverage feature should be confirmed in the contract.
Definition of Loss. Most D&O policies exclude from the definition of loss fines or penalties. This exclusion can remove coverage for fines or penalties against individual insured persons where there is no intentional or willful violation of law by the insured person.
Conduct Exclusion. This exclusion, which eliminates coverage for certain types of egregious wrongdoing by an insured person, can be narrowed to provide the broadest coverage for innocent parties where criminal conduct is being alleged and/or investigated.
Fifth Amendment Privilege. The invoking of an insured person’s Fifth Amendment privilege against self-incrimination could be alleged to be in violation of the policy requirement to cooperate with the insurer in the investigation of a claim. This could cause an insurer to deny coverage for the insured’s failure to comply with the contract provisions.
An expert should review these and other provisions of your D&O policy regularly to make sure that innocent insured persons receive the best possible coverage under these circumstances.
Please contact your Hylant representative if you have any questions, or if you would like to discuss this issue in more detail.