Recent developments in the area of internal investigations and changes in D&O insurance policies illustrate how directors and officers of many companies are at substantial personal and financial risk due to insufficiencies in their corporations’ indemnity programs. Corporations should act now to adjust their D&O insurance and indemnity protections to this new reality.
Commencing an internal investigation has become the accepted response to claims of serious corporate wrongdoing – no matter the source of the claim.
Recently, some D&O insurers announced changes to their policies to account for some of the issues that directors and officers face when they become involved as an interviewee in an internal investigation. Attesting to the close connection between D&O insurance and corporate indemnity by-laws and agreements, D&O policies generally require corporations to themselves indemnify directors and officers to the fullest extent of applicable law. The new policies grant the insurer rights to pursue the corporation if it fails or refuses to abide by any applicable by-law or agreement. In order to make sure that the directors, officers and corporation are fully protected, changes to the corporate by-laws may be required.
An article published by a Holland & Knight partner in the The John Liner Review, The Quarterly Review of Advanced Risk Management Strategies (Spring 2010), discusses these and related issues in more detail. The need for directors and officers to retain counsel in connection with internal investigations is rendered even more acute by recent case law and plea bargains which demonstrate that statements an interviewee gives to corporate internal investigators can become the basis for criminal obstruction of justice charges so long as the interviewee is aware that his or her statements may be turned over to an enforcement agency. This is nearly always the case. We believe that this situation significantly expands the susceptibility of directors and officers to unindemnified personal financial loss and risk.
Boards of corporations and general counsel should take a close look at both their current D&O coverage and their existing indemnity agreements and by-laws to be sure that there are no unintended coverage gaps.