Every year directors and senior officers worry about coverage for the cost of advice incurred at the early stages of an investigation, prior to any main hearing. This would include regulatory visits and notification obligations where, from an insurer’s point of view, it can often be difficult to distinguish between routine investigations and those where the personal liability of directors is a realistic possibility. Costs racked up for legal advice for individuals at the start of investigations can be substantial.
With regulatory and enforcement so heavily focused on senior management this is a growing area of expense, particularly as matters become more complex and increasingly international.
It can prove tricky to distinguish between the costs of defending the entity and of defending the individual before formal proceedings have started.
Yet insurers do not like covering the pre-claim stage of an investigation because they worry about the potential for them to have to sign a blank cheque for legal fees up to the policy limit. It can also prove tricky to distinguish between the costs of defending the entity (which would not typically be covered by D&O insurance) and the costs of defending the individual before formal proceedings have been issued.
This is a classic blurring of the lines between entity and individuals in a coverage context – individuals can potentially find themselves caught in a gap between the two.
Cover at an early stage of an investigation is a key issue for the compliance officers and for the NEDs. There is a strong and interesting correlation between these findings and those relating to conflicts of interest in which the compliance functions and the NEDs also signal the greatest concern. This suggests that, for both these classes of corporate leader, there is a clear focus on the potential need for separate legal representation.
Forty-two per cent (42 per cent) of executive directors rate cover at an early stage of an investigation as a priority. This is less than the proportion of NEDs and also well below the proportion of executive directors who rank regulatory investigations and anti-corruption legislation as areas of key concern – suggesting it may not have the attention from executives that it deserves.
Companies should try to make a clear decision regarding who should and should not benefit from D&O insurance and/or indemnification and that this is made clear (and kept up to date) in relevant documents. (continued.)