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Justice Department probes may lead to higher D&O rates

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Justice Department probes may lead to higher D&O rates

A U.S. Department of Justice memorandum reinforcing its policy to pursue executive wrongdoers could result in higher directors and officers liability insurance costs and drive a wedge between executives and their firms in defending such actions.

However, experts say underwriters are likely to see how the Justice Department stance plays out before making any changes.

In a Sept. 9 memo to U.S. attorneys, Deputy U.S. Attorney General Sally Quillian Yates said, “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.”

Ms. Yates said six steps should be taken to investigate corporate misconduct (see box).

The Justice Department “has taken a lot of flack for not holding people accountable for a multiyear financial institution breakdown, so I think it's partly (public relations) to make up for that,” said Phil Norton, Chicago-based president of Arthur J. Gallagher & Co.'s professional liability division.

Justice “is under political pressure and popular pressure, and so I think there will be big pressure on them” to obtain guilty pleas from individuals, said Kevin LaCroix, executive vice president at RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio. “I wouldn't want to be the individual that's caught up in this.”

While Justice “may not be able to make any case against individuals,” the mere fact they are investigating corporate executives “is going to complicate the lives of many people,” said Brian T. Kelly a partner at Nixon Peabody L.L.P. in Boston.

“I think they will make some examples of people,” but “I'm not sure ... we're going to see a whole wave of CEOs and (chief financial officers) being turned in by their own companies,” said Brenda Shelly, New York-based D&O product leader at Marsh L.L.C.'s FINPRO practice.

“If they're going after individuals in a way they've now promised,” accused executives are more likely to get their own attorneys rather than sharing a lawyer with their company, making it more difficult to settle cases and leading to higher defense costs, Mr. Norton said.

“Defendants don't tend to cooperate in the same way when they risk jail time,” said Rob Yellen, New York-based executive vice president of FINEX North America, a unit of Willis Group Holdings P.L.C.

“It could lead to higher defense costs with individuals opting to take cases to trial due to the reputation and financial risks they may face,” said Steve Boughal, New York-based vice president and chief underwriting officer of Hartford Financial Products, a unit of The Hartford Financial Services Group Inc.

“Most policies will not cover an investigation of the entity, but they will cover an investigation of a corporate officer or director, so there'll be more covered claims,” said Joseph P. Monteleone, a partner at Rivkin Radler L.L.P. in Hackensack, New Jersey.

Dan A. Bailey, a member of Bailey Cavalieri L.L.C. in Columbus, Ohio, said much will depending how Justice proceeds.

“If the proceedings by the DOJ are criminal in nature, that won't create an indemnity obligation,” Mr. Bailey said.

If Justice seeks fines and penalties, “many D&O policies exclude those for coverage. But if the DOJ also seeks the recovery of damages on behalf of injured stockholders or the public, that could create some indemnity obligations,” he said.

“So, the bottom line is, if in fact there's going to be a lot more proceedings by the DOJ against executives, that's sobering news to the D&O market,” Mr. Bailey said.

Experts advise firms to carefully review their coverage.

“It's important for insureds, agents and brokers to review some of the key coverage components that may be applicable to a DOJ investigation,” including the definition of a claim, Mr. Boughal said.

“I would worry about limits adequacy,” said Robbyn Reichman, New York-based co-leader of Aon Risk Solutions' legal and claims practice group.

Another consideration are criminal and fraudulent conduct exclusions, experts say.

“You wouldn't want to have an exclusion triggered simply because of a conviction at the trial court level,” said Mr. LaCroix, He advised companies to make sure such exclusions apply only after a final, nonappealable adjudication.

Experts say companies should also be sure there is adequate Side A coverage for individual directors.