Since 2009, enforcement of FCPA actions has significantly increased. The Department of Justice has convicted over 50 individuals, and companies have paid approximately $3 billion in fines and penalties. Government contractors are a prime target for FCPA actions given their multi-jurisdictional, cross-border activities, with recent actions against IBM, Alcoa, H-P, Weatherford, and ADM.
FCPA actions are especially dangerous to government contractors given the potential threat of debarment (i.e., losing eligibility to compete for government contracts). This potential penalty limits a government contractor’s ability to negotiate fines and penalties. Further, FCPA actions can generate tremendous amounts of investigation costs (including attorneys’ fees) where there is a multi-jurisdictional investigation. This on-going liability can severely affect a government contractor’s ability to function.
Given these factors, government contractors should take affirmative steps to mitigate their potential FCPA exposure. While that includes maintaining a significant compliance program, government contractors should also look to defray their risk through insurance coverage and indemnification provisions (if third-party vendors are used).
Insurance Coverage for FCPA Actions
Insurance coverage for FCPA actions typically is provided either through specialized policies, or through Directors and Officers (D&O) insurance coverage. FCPA-specific policies typically provide coverage for the fees associated with an investigation, but not fines or penalties. D&O insurance coverage typically covers the individual directors and officers, but may not cover the government contractor. D&O policies also may provide some coverage for some fines and penalties.
Given that insurance coverage for FCPA actions is not necessarily comprehensive, government contractors should negotiate expansions in coverage during renewals, with a focus on D&O policies.
Negotiating Expanded Coverage Under D&O Policies
While D&O policies typically insure a company’s officers and directors, insurers will often provide optional entity coverage (Side C coverage). That coverage, however, is often limited to “securities” claims and sometimes expressly excludes FCPA claims. Recently, in other contexts, insurers have been willing to expand D&O policies to provide coverage to entities for investigations and the associated costs.
Notably, with respect to other types of claims, insurers have been willing to expand the definition of “Claim” to cover investigative costs arising from the issuance of a subpoena or request for production by a government agency. This expansion of coverage by insurers provides government contractors a window to push to expand their D&O policies to provide entity coverage for FCPA claims, including entity coverage for the investigative phase of such claims.
Policy Provisions That Require Specific Attention
In negotiating renewals, government contractors should take into consideration several provisions that may significantly impact their coverage.
First, for government contractors that provide their services in multiple jurisdictions, one key consideration is the “coverage territory” defined in the relevant policies. To the extent that the government contractor provides services in non-U.S. jurisdictions, the policies should reflect the scope of coverage and ensure that such potential “wrongful acts” are covered. This includes potentially referencing the foreign laws that are the mirror of the FCPA (e.g., the United Kingdom’s Bribery Act or Canada’s Corruption of Foreign Public Officials Act).
Second, government contractors should negotiate any exclusions that bar coverage for dishonest or criminal acts. Given that FCPA actions raise these very allegations, government contractors should negotiate with insurers to modify these provisions such that coverage is only excluded where there is a final, non-appealable ruling of intentional conduct or criminal action.
Third, government contractors should be conscious regarding any limitations imposed on the selection of counsel or the amount of fees that an insurer is willing to reimburse. FCPA actions against government contractors require a specialized level of expertise. Given this dynamic, government contractors should negotiate for pre-selected counsel, and the rates that the insurers are willing to reimburse.
Other Avenues to Mitigate Risk
To the extent a government contractor utilizes third parties to perform services, government contractors should negotiate broad indemnification provisions and impose insurance requirements on those vendors. These broad indemnifications and the imposition of insurance requirements will provide an additional financial resource to the government contractor in the event of an FCPA action.