Sally Yates DOJ Memorandum and the Potential D&O Insurance Implications

On September 9th, the Deputy Attorney General, Sally Quillan Yates issued a memorandum to fellow prosecutors citing the DOJ’s focus on individuals responsible for corporate wrongdoing and the importance of holding them accountable. The memo outlines the importance of focusing on individuals from the inception of a civil or criminal investigation. Further, in order to take advantage of every remedy that the government has at their disposal, there needs to be and will continue to be consultation and collaboration between civil and criminal attorney’s. As such, and to no surprise there will be more parallel proceedings between both the DOJ and other regulatory agencies.

Typical D&O Insurance Policies provide coverage for the company and its employees, directors, officers, etc. against actual or alleged wrongdoing. These policies contain multiple coverage parts within the D&O Insuring Agreement. Side A coverage which protects individuals for losses that are non-indemnifiable by the company. This coverage part usually has NO deductible. Side B coverage is the corporate reimbursement coverage part. This coverage applies when the company provides indemnification to its individuals and subsequently seeks reimbursement from the carrier for such costs. And lastly Side C which provides coverage for the Corporation itself. For both insuring agreements B & C, the self-insured retention is usually in the $150k-$500k range.

Corporate By-Laws/Presumptive Indemnification

Corporate by-laws and/or indemnification provisions for companies as it relates to their individual employees, officers, directors, etc. should be reviewed. Most policies have a presumptive indemnification provision. This simply means that if the company is financially capable of and legally has an obligation to indemnify such individuals, it must do so. In such an instance, the higher self insured retention would apply and not the zero deductible as noted above. In such an example, the Side B coverage part would be triggered.

Duty to Defend and Consent

In most D&O insurance policies written for the Hedge Fund industry, the insurance carriers have the right but NOT the duty to defend an insured for any claim. The carrier does have the right to associate with the defense. The insured will have the ability to select their own counsel which must be can’t be unreasonably withheld. As such, insurance companies require consent and prior approval before insurers will advance costs associated with a claim.  Given the DOJ’s focus on individuals and the potential need for various individual attorneys due to conflicts between the individuals and the company, this process just got all the more complex. It is imperative to include the insurance company in the process as soon as possible as to not prejudice your rights under the policy. A review of the policy provisions in this regard is imperative.

Written Undertaking(s)

Most policies are advancement policies and not reimbursement policies. This means that the insurance company advances costs associated with the claim in good faith. In the unfortunate event that there are portions of the loss that are NOT covered (due to final adjudicated fraud or intentional misconduct), insureds must agree to re-pay the insurance Company for the uncovered matters. Such written promise to re-pay the insurance company in the event a part of the loss is not covered is referred to as a written undertaking. Given the DOJ’s focus on pursuing individuals for potential wrongdoing, it would mean that the potential exists for individuals to execute such written undertakings and promise to repay in the event it is determined that a portion of the loss is not covered.

Allocation Methodology

Most D&O Insurance policies have a provision which stipulates how the carrier will determine the allocation of loss between a covered and uncovered matter. Best efforts or relative legal exposure methodology are the most common. In an ideal world, the policy language should allow for all parties to use their best efforts to agree upon a fair and reasonable allocation of a claim given the underlying circumstances. This language would be the most favorable to an insured.

Erosion of Limits - Separate Side-A Coverage or Higher Limits of Liability

Given that a number of attorney’s that would have to represent an insured in any one case, legal fees can escalate rather quickly. In such an instance, available coverage limits for both the company and the individuals would be eroded quicker. Separate Side A coverage for non-indemnifiable losses  as well as higher limits of liability should be considered.

About the Author

Louis D’Agostino is a Partner and Senior Vice President of Iron Cove Partners, LLC. Mr. D’Agostino is responsible for the oversight and management of Iron Cove's Financial Institutions Practice which is dedicated to addressing the unique and complex risk management needs of companies engaged in the arena of financial services. i.e. Private Equity Funds, Hedge Funds, Investment Advisors, Securities/Dealers, Mutual Funds and the like. Mr. D'Agostino & his team currently serve as insurance advisor to some of the world's largest Asset Managers and Financial Institutions.