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Wednesday
Jul102019

D&O Liability Insurance: Hazards for the CCO

Legal claims are regularly brought against corporate officials through a wide variety of angles, including, for example, allegations of breach of fiduciary duty and willful disregard of regulatory imperatives, or for a range of statutory violations premised in financial crimes, like bribery or insider trading.

Companies typically protect their executives from these legal expenses and liability exposures through indemnification and insurance coverage. Indemnification protections -- generally delineated in contracts -- typically provide directors and officers with the maximum indemnification permitted under state and federal law.

Indemnification is often very broad, whereas director's and officer's (D&O) insurance policies contain numerous exclusions and conditions.

Whether a chief compliance officer (CCO) is required to be indemnified by a company depends on the state of incorporation, so it is important to make sure that the CCO is properly recognized as a corporate officer of the insured entity.

Some states require that CCOs need only be appointed in the bylaws of the insured entity as a corporate officer, while other states might additionally require that the CCO also be appointed as a corporate officer in state filings.

There generally are limitations on a corporation’s ability to indemnify individuals found liable in shareholders’ derivative suits. In addition, insolvency may prevent a company from honoring its indemnification obligations.

This is why the indemnity is only the first line of individual defense.

Insurance

When considering insurance, careful attention must be given to matching the exact insurance products and riders to the risk sought to be transferred.

Both errors-and-omissions and directors and officer liability coverage have been available for decades and have well-established standards and terms. 

Other types of coverage, such as cyber security insurance, which are newer to the market, may lack the same conventions as other policies. 

Errors & omissions (E&O) policies are widely used throughout the industry to help protect against claims by clients arising out of professional services provided by the insured. 

D&O liability insurance is insurance payable to the directors and officers of a company, or to the organization itself for losses or defense costs. D&O coverage can be added to an E&O policy or purchased separately, to protect the firm as well as the directors, officers, partners and employees of the insured entity for claims arising out of business decisions, not investment decisions. 

D&O is where one would find coverage for "claims," including formal regulatory investigations, by authorities such as the Securities and Exchange Commission that are not triggered by a client complaint.

Side A, Independent Directors Liability (IDL) Insurance typically serves as a supplemental policy to D&O coverage, and it provides individuals with insurance protection when indemnification is not available. 

Side A IDL insurance helps fund independent directors mitigate liability and exposure to various risks associated with indemnification (when a fund is legally prohibited from paying for a director/officer's defense); erosion risk (when a D&O policy has exhausted its limits of liability); solvency risk (when the company is financially unable to provide indemnification); and coverage risk (when a D&O policy does not provide coverage for the situation). 

Side B coverage
is the D&O insurance that is geared to the corporation, and it provides a mechanism for corporations to be reimbursed when they indemnify their executives. In this vein, D&O will not cover cases where directors obtained illegal remuneration or acted for personal profit.

Here’s the kicker when it comes to foreign bribery charges: D&O policies do not cover fraudulent, criminal or intentional wrongful acts, although innocent directors remain fully covered, even if the acts of their colleagues were intentional or fraudulent.

Additional considerations

Insurance has more utility that just direct financial protection; it may even be required by clients.

And firms may attract higher caliber personnel when they offer strong and appropriate protections. Some venture capital firms require that their portfolio companies purchase D&O insurance as a condition of the firm’s investment.

Increasing demand for insurance has created competitively priced policies. The premium for D&O insurance is based on the estimated frequency and severity of claims, taking into account the size of the company and risk factors such as the firm's claims and loss history, financial and stock price performance, domicile and international activity.

As coverage is usually for current, future, and past directors and officers of a company and its subsidiaries, businesses can still terminate a person's employment and director status but hold onto a policy that includes them, getting reimbursed if it has paid the claim of a third party on behalf of its managers so as to protect them.

Insurance products are dynamic, so businesses should seek to speak with the right broker and an attorney well-versed in this arena to be able to purchase the most appropriate coverage.

____

Janaya Moscony, pictured above left, is the founder and CEO of SEC3 Compliance Consultants. She previouisly served as a Securities and Exchange Commission regulator and examiner. She received her Chartered Financial Analyst designation 1999.

Julie DiMauro, above right, is a contributing editor of the FCPA Blog. She writes best practice articles and speaks about compliance and risk issues in the financial services sector as part of the Regulatory Intelligence group at Thomson Reuters in New York. Follow her on Twitter @Julie_DiMauro and email her here.

A version of this article originally appeared on the Thomson Reuters Regulatory Intelligence service and appears here by permission.

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