The Financial Conduct Authority (FCA) has introduced new rules to encourage self-reporting and whistleblowing, effective from September 2016. Under the rules, employees are encouraged to blow the whistle on their employers where they suspect fraud or unlawful conduct. In exchange, the employees are assured that their concerns will be investigated without any personal repercussions.
Although there have been relatively few investigations and actions taken by the relevant authorities (due in part to budget constraints), the number of reports being made to authorities has increased in recent years. For example, the Serious Fraud Office (SFO) reported receiving 2,508 whistleblowing reports in the 12 month period to 31 March 2014 but only opened 12 new investigations during that period. The SFO is now understood to have secured additional finance. These figures will be little comfort for those subject to investigations.
The significance of the new rules in the UK is still to be seen. In the US, where legislation already exists, studies have shown that judgments involving whistleblowers can lead to higher penalties. A study reported that whistleblowers had enabled regulators to obtain judgments of US$16.86 billion beyond what they would have been able to obtain without whistleblower involvement.
Policyholders are therefore encouraged to review their D&O policies and consider whether the policies provide adequate insurance coverage in the event of a regulatory investigation or judgment involving a whistleblower. Specifically, policyholders should consider:
- Scope of the cover
- The increase in whistleblowing complaints is likely to increase the need for internal investigations, as well as formal investigations. Policyholders should check whether costs of internal investigations are in principle recoverable under their policies.
- Investigations involving whistleblowers often relate to sensitive issues. Are the provisions relating to cooperation and reporting of claims to the insurer appropriate where whistleblowing is involved?
- Could an admission by a whistleblower in exchange for leniency trigger an exclusion under the policy?
- An exclusion may be triggered where there is "deliberate misconduct". In this case, the policyholder should carefully consider the wording of the exclusion, and when it might be triggered.
- An exclusion might also be triggered through the process of admission, for example where a "final adjudication" provision is in included in the policy. Policyholders should consider what the process of admission may be.
- Does the policy contain an "insured versus insured" exclusion? Might this be triggered by the whistleblowers cooperation with authorities? If so, policyholders should consider whether this exclusion is likely to cause difficulties.
- Does the policy's claims cooperation clause include "claims cooperation severability"? This is an important provision to protect innocent insureds who cannot be imputed with knowledge or wrongdoing by any other insured.
The extent to which the above factors are relevant will depend on the nature of the insured's business operations, and the policy wording itself. In case of doubt, policyholders are encouraged to seek legal advice.