It was recently announced that Barclays Bank is facing an estimated legal bill of £30 million after agreeing to foot the legal defence costs of four of its ex-employees who are the subject of an investigation.
With the recent prominence of this investigation and those of Rolls Royce and Tesco’s too, it is a good time to consider how a company and/or its employees and directors can pay for the often extensive legal cost associated with defending a criminal or regulatory investigation or civil claim.
In the years since the global financial crisis there has been a considerable increase in regulatory activity across all sectors. As in the case of Barclays above, authorities have spent significant time looking back at past conduct that occurred before and during the financial crisis as well as keeping a close eye on the activities of businesses now. Notably, the financial services sector has seen prominent and highly publicised investigations and prosecutions with matters such as LIBOR, the Forex scandal and money laundering within Deutsche Bank and Danske Bank grabbing the headlines. The financial cost of investigations can be huge. Last year Deutsche Bank agreed to pay $170 million in order to settle Euribor rigging allegations to halt their spiralling legal bill. Meanwhile Tesco’s set aside £129m to cover the expected costs associated with the compensation scheme requirement of a Deferred Prosecution Agreement with the SFO, whilst Rolls Royce paid £286m in penalties in the UK, US and Brazil as well as setting aside a further £378m for payments for 2019 – 2021.
Although these investigations have largely focused on the corporate entities at the top of the chain, in recent years there has been a shift to looking at and focusing on the individual. The corporate veil is not always a defence in regulatory investigations and often we see parallel investigations into both a company’s and its directors’ individual conduct. The FCA set out in its 2018/19 Business Plan their aim to place responsibility and accountability on individuals through the Senior Managers Regime. Whilst Lisa Osofsky of the SFO has stated that she is looking to accelerate the SFO’s investigation into and prosecution of individuals.
The financial burden of contesting a regulatory investigation can be huge – even without a prosecution – and whilst the corporate entity can usually mitigate the costs associated with contesting allegations through payment of a fine (such as in the case of Deutsche Bank above), it is harder and often more problematic for the company’s individuals to do the same. Indeed, for senior managers there is likely to be more contest and litigation as directors and officers can be held personally liable and, as such, any liability will have on-going ramifications for the entirety of an individual’s career. Additionally, even if allegations are successfully defended, in regulatory investigations, unlike civil litigation there is no ability to recover costs.
It is against this background that it is worth examining how directors and officers (D&O) liability insurance can help mitigate the impact of an investigation and protect both a company’s and an individual’s bottom line. A D&O policy will provide financial assistance to help defend claims made against directors or senior managers relating to corporate mismanagement and can usually be purchased alongside a company’s corporate insurance policy.
A typical D&O policy will be split into two sides. Side A will cover the personal liability of company directors and officers for losses that are not indemnified by the company. Side B (or reimbursement coverage) will pay the company back for amounts it pays under its indemnification obligations to its directors and officers. Generally, insurers will require companies to use Side B cover, unless the law prohibits the indemnification of those individuals. It is important to note that insurance can never cover the cost of a regulatory or criminal fine itself rather it can only pay for the legal advice and defence costs which will be used to mitigate the extent of the fine.
Over recent years the coverage offered by D&O policies has expanded so as to cover costs associated with investigations as well as prosecution and defence costs. However, many policies differ in their terms and it is important to check at which stage of the process coverage will kick in. Typically coverage will start when a director or officer is formally notified in writing of the investigation by the body investigating. However, policies can vary and it is best to notify your insurer at an early stage (when you are first aware of any circumstances which may give rise to a claim) to ensure a collaborative approach from the outset and to minimise later coverage disputes with insurers. Indeed, most of the coverage disputes we see with insurers are in respect of the notification process. If in doubt, you should seek advice regarding the terms of your policy from your broker and/or lawyers.
Finally it is worth checking to see at which stage in the proceedings the policy will pay out. The better policies will provide for the advancement of costs. This is preferable to the alternative of the company or individual making initial payments and then requiring reimbursement of these from the insurer at a later date.
Comment
With the constantly changing regulatory landscape and increased means by which both companies and directors can now be held accountable, it is vitally important that procedures are put in place ahead of time to help mitigate the cost of any investigation. The likelihood that a company (and indeed its directors) becomes embroiled in either regulatory or criminal investigations is now far higher than it has been in the past. The FCA has stated that they plan on opening more cases soon. Whilst it is difficult to protect against all possible risks, a good insurance policy will help protect a company’s bottom line in a time of crisis and enable directors and senior managers the best chance at defence by obtaining and relying upon legal advice which is paid for by their insurers.
Winter 2019
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