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Corporate scrutiny looms

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Directors and officers liability insurers and buyers have taken notice of the U.S. Justice Department's greater emphasis on individual accountability in cases of corporate wrongdoing.

In a memorandum, Deputy Attorney General Sally Quillian Yates detailed how Justice Department attorneys are to approach civil corporate matters “to hold to account the individuals responsible for illegal corporate conduct.”

The implications have gotten insurers' and buyers' attention.

“The Yates memo, the Department of Justice's line in the sand, defined new game-changing "steps' specifically aimed at strengthening the Justice Department's pursuit of individual corporate wrongdoing, and it lays out the details of how they intend to do that,” said Rob Yellen, New York-based executive vice president of FINEX North America, a unit of Willis Towers Watson P.L.C. “That has the potential to fundamentally change how companies look at enforcement risks and how they respond to inquiries by authorities.”

Last year's Yates memo emphasizes “the primacy in any corporate case of holding individual wrongdoers accountable,” said Brady Head, division president of the public company D&O division of American International Group Inc. in New York.

Once the U.S. Securities and Exchange Commission “got the ball rolling” following the 2008 financial crisis, the Department of Justice “came out strong” with its memo last September, said Brenda Shelly, New York-based directors and officers product leader at Marsh L.L.C.'s FINPRO practice.

“The way it looks right now is a re-commitment to enforcement against corporations and a new, higher level of individual accountability,” she said.

That re-commitment has resulted in an increased focus on individual liability for corporate wrongdoing, said Alan Sorkowitz, counsel in the insurance group for Sidley Austin L.L.P. in New York.

“I see this all the time from our white-collar criminal group and our securities and derivatives enforcement group,” he said.

Risk managers should talk with their brokers, lawyers and other industry professionals to make sure that their insurance addresses the exposure and that the policy will respond in the event of a related claim, Mr. Yellen said.

“There are definitely conversations going on given the Yates memo,” said Robbyn Reichman, co-leader of Aon Risk Solutions' legal and claims practice in New York. “We're talking about adequacy of D&O limits. We're talking about policy exclusions and making sure those exclusions are as narrow as possible. We're talking about program structure.”

Clients are certainly asking for guidance from their brokers. Colin Daly, executive vice president of financial lines and D&O practice of JLT Specialty Insurance Services Inc., said those he talks to are asking for advice on “policy coverage matters and changes that are needed within a policy to insure that it will perform to the standards they expect” in the wake of the stepped-up regulatory activity.

Some brokers will recommend increasing the organization's D&O limits and “do a close inspection of the D&O program to see if there are any seams or gaps where an individual or director can be held liable and not have any protection,” said Robert Hartwig, president of the Insurance Information Institute Inc. in New York.

This flurry of activity is par for the course when it comes to making sure coverage suits the purpose, however.

“There is always an ongoing need to customize the D&O policy, and it will take the flavor of what issues are present in the exposure environment,” said Marsh's Ms. Shelly. “Right now, customization activities focus largely around policy conditions that keep protections in place for individuals and, to the extent they're available (and increasingly they are), for the corporation itself, when a target of governmental regulatory enforcement activity.”

And the coverage terms and conditions are being tested.

“You see more disputes under directors and officers policies than you ever did before,” said Mr. Sorkowitz. “You see more changes in terms and conditions than you ever did before. It's a very fluid market and a very fluid legal environment.”

“I would not be surprised if in the coming six to eight months we saw an increase in the number of investigations,” said Ms. Reichman. “More investigations of individuals means more defense costs — they go hand-in-hand.”