How DPAs could affect D&O insurers

Out-Law Guide | 06 Jan 2014 | 2:54 pm | 2 min. read

Deferred prosecution agreements (DPAs) are a way for authorities and companies to settle certain kinds of disputes involving allegations of corporate criminal misconduct. Their use could have implications for directors and officers liability (D&O) insurance.

This guide was updated in January 2014

Providers and policy holders should be aware that policies may need to be redrafted to ensure that there is clarity about what is and what is not covered.

From February 2014, 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.

Implications of DPAs for D&O insurers

Requirement to co-operate

DPAs are no bar to separate proceedings being brought against individual directors and officers. A DPA is simply a court-sanctioned agreement between the prosecutor and the corporate. Directors and officers are not parties to it.

Most of the substantive terms of a DPA, which can include financial penalties, disgorgement of assets and requirements to make changes to an existing compliance programme, are unlikely to impact D&O issues directly. It will not be possible, for example, for companies to pass on financial penalties to insurers, D&O or otherwise, because of the established position that to do so would be contrary to public policy. 

However, a term that can be added to a DPA is a requirement for a company to 'co-operate in any investigation related to the alleged offence'. This could trigger enquiries of directors and officers and therefore D&O insurers will want to consider how their policies should respond in these circumstances.

Consequences of 'statement of facts'

As a DPA must include a statement of facts agreed between a corporate and the prosecutor, there could also be considerations for directors and officers, and their insurers, where there have been any admissions made by a company in that statement of fact that impact on their positions.

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 as well.

Consequences of self-reporting

DPAs will also likely sit closely alongside the regime for corporate self-reporting as encouraged by the SFO. It is possible (and perhaps likely in most cases) 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.

To that extent, DPAs shine a light on the issue of funding for directors and officers to obtain legal advice and representation during such investigations, should they need or want to do so; and the extent to which they will want to access D&O cover for this and other associated costs they may have arising from an internal investigation.