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The Department of Justice is stepping up its efforts to prosecute individual company executives, which could see more directors and officers facing jail time and individual financial penalties.

The department issued a memo (obtained by the New York Times) to its prosecutors outlining best practices and recommending that allegedly responsible individuals should be the focus of investigations at the outset, and that they only consider a company to have cooperated in an investigation if it turns over information about the actions of individuals at the firm.

This type of prosecution can cost the executives involved and the company hundreds of thousands of dollars in defense costs and fees, potentially bankrupting both the individuals targeted and the business.

The latest effort comes as the DOJ has been criticized for not doing enough to hold company executives accountable and seeking criminal prosecutions against them, especially in the wake of the financial crisis. The move appears to be part of a larger push by the department to go after white-collar criminals.

With the stakes increasing, it’s more important than ever that you protect your executives’ and company’s assets by securing a directors and officers (D&O) liability policy. A D&O policy provides overage for defense costs and damages (awards and settlements) arising out of wrongful-act allegations and lawsuits brought against an organization’s board of directors and/or officers.

Coverage under a D&O policy typically has major coverage parts, or “sides”:

  • Side A covers the director or officer in circumstances when the company is not legally permitted to provide indemnification.
  • Side B covers the company for indemnifying the relevant director or officer when the company is legally permitted to provide indemnification.
  • Side C provides some limited coverage for the company itself.

 

But there are times when coverage questions may arise due to various circumstances, or times when costs exceed the D&O coverage amount.

 

Some issues that could arise include:

  • A company refusing to indemnify certain directors or officers because of concerns they may have done something wrong, or
  • A company exhausting its entire D&O policy and then refusing to pay a director’s or officer’s legal fees.

 

There is an additional policy – an excess “Side A Differences in Conditions” policy – that would fill the void in these circumstances. This policy will advance defense costs for directors and officers in the event the company doesn’t pay an otherwise covered claim for any reason.

These policies have fewer exclusions than normal D&O policies. They can often be triggered even when the underlying D&O policy is not triggered due to an exclusion. Also, there is usually no retention or deductible on Side A Differences in Conditions policies.

 

Top five reasons you need D&O

According to the “2012 Towers Watson Directors and Officers Liability Survey”, the main reasons that organizations purchase D&O coverage are:

  1. Directors and officers can be held personally liable for claims; organizations increasingly consider personal liability coverage as one of the most important aspects of their D&O program.
  2. D&O liability claims related to regulatory actions are increasing for all types of organizations, representing 23% of claims in 2012.
  3. Directors and officers increasingly desire additional assurances beyond corporate indemnification. In fact, 43% desire added protection in the event their company becomes bankrupt and/or insolvent.
  4. Directors and officers and their employers are susceptible to a wide range of claimants, including shareholders, competitors, customers, employees and government entities.
  5. D&O claims are increasingly common for private companies, public companies and nonprofits; 36% of all organizations reported claims in the last 10 years.

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