Confidently Sell or Buy Management Liability Insurance
New in D&O MAPS
Clarify Coverage for Informal Criminal Investigations
Updated PLI Public Company D&O Claim Discussion
Insurance,
The whistle-blower provision of the Dodd-Frank Act is beginning to make its presence felt.
The provision directs the Securities and Exchange Commission (SEC) to make monetary awards to whistle-blowers, when the information they provide leads to monetary sanctions (exceeding $1 million) against corporations and individuals who violate securities laws. In its recent "2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program," the SEC noted that:
- The number of tips received rose from 3,001 in 2012 to 3,238 in fiscal 2013.
- Since the program was established in 2011, the SEC has received a total of 6,573 whistle-blower tips.
- On September 30, 2013, the SEC made its largest award to date, when it paid more than $14 million to an informant whose tip led to a successful enforcement action less than 6 months later.
- In fiscal 2013, the SEC received tips from individuals in all 50 states, with California, New York, and Florida producing the largest number of tips.
- Submissions were also received in 2013 from people in 55 foreign countries.
- Since the inception of the program, the SEC has granted a total of awards to six whistle-blowers, four of whom received awards in 2013.
Am I the only person who is pondering the question of whether this initiative could be a waste of the SEC's finite investigatory resources?
But perhaps the dearth of awards -- thus far -- results from the fact that protracted investigation is first required before the SEC has sufficient evidence with which to begin an enforcement proceeding.
On the other hand, the program might merely be providing a costly vehicle for disgruntled employees and investors with a forum for venting their grievances -- real or imagined -- against those who they feel have mistreated them, regardless of whether any securities laws were actually violated.
What do you think about the whistle-blower program?
Share your thoughts with other readers of D&O Compass by posting in the Management Liability Insurance Specialist (MLIS) LinkedIn Group. (Note: You must be a member of the group, which requires having passed at least one MLIS exam.)
And now for an update on a matter we discussed in the October Editor's Message: Last month, the U.S. Supreme Court granted Halliburton's petition to have the Court reconsider its decision in Erica P. John Fund v. Halliburton. If the Court reverses itself in this rehearing and overturns the so-called fraud on the market theory, it will substantially raise the requisite standard of proof in securities class action claims, causing the volume of such actions to drop precipitously. We will keep you posted on the progress of this important case in future editions of D&O Compass.
Until our next issue of D&O Compass in January, best wishes for wonderful holidays, good health, prosperity, and happiness in 2014.
Thank you for subscribing to D&O Compass.
All the best,
Bob
Bob Bregman, CPCU, MLIS, RPLU
Senior Research Analyst
International Risk Management Institute, Inc.
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New in D&O MAPS
We have recently added analyses and specimen forms for American Alternative Insurance, Argo, and Hartford companies to D&O MAPS. If you are a subscriber, use the "New in D&O MAPS" links in the right-hand column of this newsletter to go directly to these analyses on the publishing platform to which you subscribe.
D&O MAPS is the authoritative online subscription service providing policy form analyses on a company-by-company basis. You don't subscribe to D&O MAPS? Learn more here.
D&O Practice Tip
Clarify Coverage for Informal Criminal Investigations
If an informal criminal investigation against an insured director or officer is dismissed without charges being filed, has there been a "claim" under a D&O policy that would trigger the insurer's duty to pay the insured's defense costs?
That was the issue in Gold Tip, LLC v. Carolina Cas. Ins. Co., 2012 U.S. Dist. LEXIS 120166 (D. Utah Aug. 23, 2012). In that case, the Bureau of Investigations for the Utah County Attorney's Office received a complaint that the insured CEO engaged in communications fraud and had filed a wrongful lien in connection with a corporate merger, both of which are felonies under Utah law. Believing there to be reasonable suspicion of criminal conduct, the bureau chief wrote a letter to Gold Tip (the insured organization) requesting documentation and assistance in the investigation of the allegations.
After several witnesses were interviewed and numerous documents were reviewed, the CEO's attorney contacted the bureau chief to inquire about the status of the investigation. The bureau chief told the attorney that the investigation was criminal in nature, that it was serious, and that the CEO was the "primary suspect." Then the attorney requested an opportunity to meet with the bureau chief to provide further documentation and explain the CEO's position regarding the allegations. Ultimately, the bureau chief acknowledged that the criminal investigation was "complicated" and closed the case, characterizing the allegations in the complaint as "unfounded."
During the investigation, the CEO incurred $183,294.54 in defense costs. But when the CEO submitted his defense attorney's invoices, his D&O insurer denied coverage, arguing that there was no "claim," which was defined as "a written demand for monetary or non-monetary relief including, but not limited to: 1. a civil, criminal, administrative, arbitration proceeding, or 2. Any proceeding brought or initiated by a federal, state or local government agency."
The federal court disagreed. First, the court said that the letters from the Bureau of Investigation to the insured company seeking documentation and a meeting with the CEO could plausibly be considered a "written demand for ... non-monetary relief." The insured company could have reasonably believed that, if it refused to cooperate, the Utah County Attorney's Office would be more inclined to criminally indict the CEO. Thus, the company was essentially coerced to cooperate in the investigation under the threat that the county would use the legal process to compel such conduct.
Second, the court said that the investigation could plausibly be considered a "criminal proceeding" or a "proceeding brought or initiated by ... [a] local government agency." Although the term was not defined, the court said that a "proceeding" included a situation where "a government entity conducts an investigation and requests action from the subjects of its investigation." That's what happened here.
Third, the court opined that it was not necessary for there to be a formal indictment before a criminal investigation ripens into a "proceeding" for purposes of insurance coverage. Otherwise, insureds would have the incentive to resist the informal investigation until an indictment was actually filed. But that would probably result in higher defense costs -- an outcome that would not have benefited either party. On the other hand, cooperation at early stages of the process would often limit those costs and serve the economic interests of both insured and insurer. Therefore, it would promote public policy to interpret the word "proceeding" broadly so that an informal investigation without a formal indictment would be covered.
Fourth, the court pointed out that, if the D&O insurer really intended that the definition of "claim" should be limited to situations where a formal indictment had been issued, it could have explicitly done so. Not clearly and unmistakably communicating that preindictment investigations were excluded rendered the definition ambiguous as to that point, and the court construed the ambiguity against the insurer.
Insurance buyers should check to see if informal, preindictment investigations that do not result in charges qualify as "claims" before selecting a policy. Every insurer's language is different. For example, one D&O coverage form defines "claim" to include "a criminal proceeding commenced by a return of an indictment." That kind of language wouldn't cover informal investigations if charges aren't filed. Another D&O coverage form defines "claim" to include "the receipt by an Insured Person of a target letter or similar document in connection with a criminal investigation of such Insured Person." This kind of language is more liberal. But a lot of D&O coverage forms do not expressly address informal investigations either way, which under the reasoning of the Gold Tip case may mean that they are ambiguous on that point.
Want more D&O coverage tips? An archive including tips from previous editions of D&O Compass is available to subscribers of D&O MAPS in ReferenceConnect or IRMI Online.
New in Professional Liability Insurance
Update of the Public Company D&O Claim Discussion
If you subscribe to Professional Liability Insurance, look for a complete update of the sections dealing with securities class action claims, along with the so-called parallel proceedings that are frequently brought concurrently with securities class actions.
The update contains detailed securities class action claim data from 1997 to the present, including a list of the 100 largest settlements of all time. Next are analyses of several important D&O-related decisions rendered by the U.S. Supreme Court within the past 4 years. The discussion continues by examining claims stemming from (1) accounting allegations, (2) merger and acquisition (M&A) activities, (3) the subprime mortgage/credit crisis, (4) Chinese reverse merger litigation, (5) the London Interbank Offered Rate (LIBOR) scandal, (6) the SEC's ramped-up enforcement efforts against the directors and officers of public corporations, and (7) the Federal Deposit Insurance Corporation's massive lawsuit initiative against the directors and officers of the banks that failed during the 2007-2009 financial crisis.
Anyone who underwrites, sells, or buys D&O insurance for public companies will by reviewing this material enhance his or her understanding of the varied and complex claim exposures to which the directors and officers of these organizations are subject.
Subscribers to Professional Liability Insurance in ReferenceConnect and IRMI Online will want to check out this informative update.
02 Dec, 2013
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Source: http://insurancedataonline.blogspot.com/2013/12/d-marketplace-and-policy-form-news.html
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