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SEC Seeking Criminal Prosecutions and Admissions of Guilt; How will your D&O Insurance Policy Respond??

Apr 16, 2014 6:18:15 PM ,


April 16th, 2014

SEC Chairman Mary Jo White in a recent speech highlighted the importance of “all encompassing” enforcement which involves the vigorous use of criminal, civil and regulatory tools to enforce the securities laws. She further noted the significant rise in criminal prosecutions arising from the securities markets during the last 20 years.

Furthermore, the top cop on Wall Street is also pursuing admissions of wrongdoing and the days of settling investigations by merely paying the hefty fines may be a thing of the past.

What does this mean for folks who had the foresight to purchase Directors & Officers Liability Insurance to protect themselves and their firms against formal regulatory investigations? Most hedge funds procure D&O Insurance protection in order to mitigate costs associated with investor claims, regulatory investigations as well claims by other third parties.

As you may know, any fines and penalties are specifically EXCLUDED under the policy. In many jurisdictions, they are also deemed uninsurable by law. The coverage that is afforded under a Directors & Officers Liability policy is for the defense and legal costs associated with the respective investigation. This is where the renewed focus of regulators to pursue admissions of wrongdoing can have real policy implications. Every D&O Insurance policy contains exclusionary language related to fraud, dishonesty or illegal remuneration. The point at which such an exclusion would be triggered, if at all, depends a lot on the legal proceedings at hand. However, in the event that the regulators pursue an admission of guilt (as in the case of the SEC vs. Phillip Falcone & Harbinger Capital Partners LLC) the insurance proceeds that had been advanced up to the point of the admission may have to be returned to the insurance company.

What about the innocent individuals at the company that had no knowledge or awareness of the wrongdoing? Would those individuals have protection in the above referenced investigation or in any subsequent limited partner claims or lawsuits ? The answer is ..... maybe!

If the policy contains a well crafted Severability Provision related to the policy exclusions then the innocent insureds would have coverage.

A Severability Provision in a policy states that although an exclusion applies to one (or more) insured(s), the exclusion does not necessarily apply and therefore bar coverage as respects other innocent insureds. In the example above, the fraudulent actions of Mr. Falcone would not be imputed to other individual insureds and as such afford coverage for other directors, officers, partners or employees who were not a party to these fraudulent acts.

The lesson here is to make sure you review your D&O insurance contract and make sure the Severability Provision is written as broadly as possible. Our group can provide a detailed analysis of this language as well as identify  other potential coverage gaps at no cost. Contact us today.

Tags: Hedge Funds, insurance, Iron Cove Posts, Coverage, Criminal Prosecutions, Directors and Officers Insurance, Directors & Officers Liability, Errors and Omissions, Falcone, Fines, Harbinger, Iron Cove Partners, Liability, Mary Jo White, Penalties, SEC, Severability

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