Conforming D&O Coverage for FCPA Protection – Navigating Limits and Opportunities

Posted by Andrew Masini on Sep 14, 2016 5:58:19 PM

When looking for coverage for Foreign Corrupt Practices Act (FCPA) costs, the Directors and Officers (D&O) Policy is often the first stop. It appears to be the policy most applicable, because it defends against complaints of wrongdoing. However, to get significant protection from FCPA costs a D&O policy has to be significantly modified.

Just by the moniker, Directors and Officers Policy, you know that the coverage is intended to be limited to a collection of individuals running the entity, not the entity itself. The first modification to look for is “Side C” coverage or the equivalent language indicating that the entity will be covered in the case of FCPA matters.

Even when Side C coverage or its equivalent is present, you have to be sure the language contemplates FCPA matters. Side C coverage was originally created to address securities matters. The language may even specifically exclude FCPA matters. Be sure that the language that extends D&O protection to the entity extends to alleged FCPA violations.

D&O policies are intended to cover the costs of investigations triggered by the filing of a complaint or the serving of a subpoena. In FCPA matters, very extensive investigations are often launched in response to an informal inquiry or the request for a production. Look for language that indicates that, for FCPA matters, a claim can be submitted for the cost of responding to an informal inquiry. Also look for coverage of pre-claim investigation costs. Such pre-claim coverage allows the entity to initiate its own investigation prior to any communications from SEC or the DOJ and still have the costs covered. This is important because the SEC and the DOJ encourage and reward self-reporting, which entails having the entity pro-actively investigating itself.

D&O policies are written with the idea in mind that the covered individuals are not intentionally breaking the law. Hence, the language may exclude dishonest or criminal acts. That concept does not fit in well with FCPA actions which routinely raise allegations of dishonest or criminal acts — allegations that remain present throughout the inquiry and any proceedings. The D&O language has to suspend that exclusion in FCPA matters until a final ruling on intentional conduct or criminal action is entered.

U.S. D&O policies intended for the domestic market understandably define “wrongful acts” in terms of U.S. law; However, FCPA matters often uncover acts that are deemed unlawful under foreign law. Extension of D&O coverage to FCPA matters has to allow coverage for violations of foreign equivalents of the FCPA.

D&O policies tend to only contemplate having to reimburse attorneys’ fees. FCPA investigations routinely entail extensive fees for audit, accounting and consultant services. To properly cover FCPA matters, the D&O policy has to allow for reimbursement of these fees.

D&O policies may place limitations on the selection of counsel or the reimbursement for counsel fees. These provisions may hamstring an entity in an FCPA matter. FCPA matters require attorneys with expertise in the FCPA and that expertise comes at a premium.

There are also two other distinctions to take into account. First, D&O policies cover derivative lawsuits brought by shareholders but they do not cover lawsuits brought by others; whereas, FCPA-specific endorsements or coverage will address both types of lawsuits. Second, FCPA coverage generally covers costs of investigations and proceeding but stops short of coverage of fines and penalties; while a D&O policy, extended to cover FCPA matters, may provide some relief for fines and penalties.

Contact us if you need help assessing or placing your FCPA coverage.

Topics: D&O, FCPA, Risk management, Risk Management Blog

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