Insurers and policy holders need clarity over DPAs, BIS crackdown and extent of D&O coverage

Out-Law Analysis | 06 Jan 2014 | 3:25 pm | 3 min. read

FOCUS: Insurers providing directors and officers (D&O) cover should redraft their policies to clarify whether or not they cover company directors and officers for costs associated with new corporate dispute resolution procedures.

Deferred prosecution agreements (DPAs) will come into force in February. They are a way for authorities and companies to settle certain kinds of disputes, and will be likely to lead to greater self-reporting of wrongdoing by companies.

This could have implications for directors and officers liability (D&O) insurance because the DPA process could lead to an increase in actions against directors and officers. Insurers must be clear about which of the costs arising from the actions are covered by their policies.

The Government is also planning to take action to bolster trust in the running of UK businesses, and has made proposals which could lead to greater liabilities for directors and officers.

Directors and officers themselves should also examine their D&O insurance to find out exactly what their policies cover.

As outlined in Out-Law's Guide to How DPAs could affect D&O insurers, from February DPAs will allow allegations of certain types of criminal activity by companies to be resolved without a company being subject to a full criminal prosecution and the risk of a conviction. A DPA will be an additional tool in the armoury of certain prosecution agencies, currently the Crown Prosecution Service (CPS) and Serious Fraud Office (SFO), to tackle corporate wrongdoing in cases involving fraud, money laundering, and corruption as well as a number of other economic crimes.

A prosecutor will be able to initiate discussions with a company with a view to entering a DPA. DPAs do not fetter the ability of the SFO or CPS to prosecute companies. When and how they are used will be governed by a code of conduct to be published by the CPS and SFO.

The Department of Business, Innovation and Skills (BIS) published proposals earlier this year that it hopes will make directors and officers more directly responsible when they act negligently or fraudulently.

The BIS paper includes a proposal to give courts a new power to make a compensatory award at the time it makes a disqualification order.

It also includes a proposal to grant liquidators the right to sell or assign fraudulent and wrongful trading actions. This would increase the prospects of directors being pursued; it would enable a liquidator to sell the claim on to an individual creditor, group of creditors, or possibly even a third party. Creditors would benefit from the proceeds of the sale and the claim would be more likely to be pursued. A market in these actions would be likely to develop, increasing further the prospect of actions being taken against directors.

The paper also includes a suggestion that directors who act fraudulently or negligently be personally liable to compensate those who have suffered loss.

These actions could increase the likelihood that a director or officer's behaviour would result in costs defending against claims or payouts associated with those claims. Because these are new proposals it is not clear whether D&O insurance would cover those costs. This is one of the areas where policy holders should seek clarity and insurers should provide it.

The problem becomes more acute when combined with the implications of the DPA process. As part of that process a 'statement of facts' is produced. This is agreed between a corporate and the prosecutor, so could contain information about directors and officers and their actions.

This may mean that DPAs lead to increased numbers of cases being brought against individuals as a consequence of self-reporting, where the prosecutor secures admissions from the corporate that point to others' criminal liabilities.

It is possible, even likely, that DPAs could flow from a company internal investigation where directors and officers have been interviewed as part of that investigation and the company has then chosen to self-report to a regulator.

This means that information about directors and officers would become public. Directors and officers will want to obtain legal advice and representation during such investigations. Will this be covered by D*O insurance?

It is not clear whether coverage would extend to these costs, but it is clear that insurers need to re-examine and possibly redraft policies to make it clear whether or not new kinds of costs and liabilities arising from the BIS proposals and DPAs are covered by policies.

Neil McInnes is an expert in bribery and investigations and Chamika Hand is an insurance expert, both at Pinsent Masons, the law firm behind Out-Law.com