Could Crime and D&O Cover One Day be Combined?

So, what’s the big idea?  After all, crime insurance, as we know, is primarily a first party cover i.e. it offers protection for financial losses suffered by a company as a result of (among other things) the fraud of its employees and/or others.  D&O insurance is liability insurance which pays out when directors and other managers are involved in litigation or the threat of it.  What have they got in common? Well, if an informal alliance comprising Her Majesty’s Opposition and the Director of the Serious Fraud Office get their way, the underlying exposures may start to share a number of common features.

The Labour Party last week launched a plan entitled “Tackling Serious Fraud and White Collar Crime”.  At the heart of this plan is a new Criminal Justice Bill which, if enacted, would make companies vicariously liable for their employees’ economic crimes unless companies can demonstrate they have adequate compliance procedures in place.

As things stand, prosecutors must prove the existence of a “controlling mind” at director level in order to find a company criminally liable for the frauds of its employees. (This is the same theory of law which led to the enactment of the Corporate Manslaughter and Corporate Homicide Act 2007 allowing for prosecutions of companies without the need to show “controlling mind” knowledge. Interestingly, one of the very few other statutory exceptions to this rule is to be found in section 7 of the Bribery Act under which companies may be prosecuted and fined an unlimited amount if they are found to lack adequate procedures protecting them from  their employees and others engaging in corrupt behaviour.

These new proposals would be very much more far reaching. It is one thing to develop specific anti-corruption policies and procedures but quite another to do so in relation to all the many different methods by which frauds may be perpetrated through corporate vehicles. Where the only corporate defence to a criminal prosecution is that such procedures were adequate (even when ex hypothesi they were not) the landscape begins to look rather scary. Nor has it taken long for the proposals to be enthusiastically endorsed by David Green, the current Director of the Serious Fraud Office.  In a recent speech at law firm Baker & Mackenzie, Mr Green said that a change of law in this area would make it far easier for prosecutors to bring charges against corporates for fraud and would complement recent legislation introducing deferred prosecution agreements.

Perhaps most scary of all though, is the avowed aim of the Shadow Attorney General and of the Shadow Home Secretary to transform the UK’s enforcement record on economic crime and to create a “profit centre for the criminal justice system” similar to the US.  It is hard to see how a change of law of this type would not create a fundamental increase in liability exposures for companies operating in the UK along with additional revenue to The Exchequer. I wonder also whether the new law would have extra territorial effect (like the Bribery Act) so as to apply to frauds perpetrated by UK companies overseas. That would also be of concern.

So what about the directors and officers of companies and their insurers?  It is true that the individual managers may not themselves be held personally liable for the criminal fines and penalties, (which would probably be uninsurable anyway). That said, the reputational consequences for the companies concerned might easily trigger a sharp share price drop which could in turn spark civil liability claims against the individuals. Combined with the “plea bargain” type arrangements as envisaged with deferred prosecution agreements due to come into force in 2014, former directors who presided over companies at the time a fraud was perpetrated could find themselves with little room for manoeuvre. Legal liability protection for the individuals coupled with crime protection for the companies themselves could be part of a solution here. It is perhaps ultimately less a question of whether the covers need to be combined as one of where the gaps in cover might be both now and in the future.


About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
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