After a four year investigation by the UK’s Serious Fraud Office (“SFO”) into car and engine manufacturer Rolls-Royce, a UK Court approved a Deferred Prosecution Agreement (“DPA”) in January 2017.[1] The investigation focused on bribes Rolls-Royce paid to secure valuable export contracts in various markets, including China, Brazil and Indonesia. Although the DPA allows Rolls-Royce to avoid prosecution, the company will have to pay £671 million (approximately US $800 million) to UK, US and Brazilian authorities in order to settle its bribery and corruption offences.

After the DPA was approved, SFO director David Green explained, “I think it shows very clearly that the SFO has teeth and that the SFO will not go away.”

This is only the third DPA approved by a UK Court and is by far the largest. Before approving the agreement, the Court was required to address two issues: (1) whether the DPA was in the interest of justice; and (2) were its terms fair, reasonable and proportionate? The Court’s positive determination of both issues will be the source of much analysis by contentious regulatory lawyers. However the case should be of interest to the D&O insurance community, as well. For Rolls-Royce, further investigations into individuals in connection with the case continue. In this regard the judge noted the involvement of “senior management and, on the face of it, controlling minds of the company.”

As a result of the Rolls-Royce investigation, some points for insurers to consider include:

  1. It is settled law in England & Wales that fines and penalties are not insurable losses. However, DPAs do not prevent ancillary or subsequent investigations into individuals (indeed they may trigger them), and so Insured Persons will, in these circumstances, expect their company’s D&O policy to respond to any Defence/Investigation costs they incur as a result of the investigation.
  2. SFO investigations and DPAs can also be the trigger for parallel or subsequent civil action against individuals. Here, damages/settlement sums, as well as the costs of defending the cases could trigger D&O insurance cover (subject to relevant policy terms, conditions and exclusions).
  3. The Rolls-Royce DPA and preceding investigation shows the SFO has the appetite, but more critically, the funding to maintain large scale investigations. The SFO’s track record of high-value/high-profile investigation has been ‘mixed’ ( its troubled and later aborted action against high-profile entrepreneurs, the Tchenguiz brothers being an obvious low point), which has led some UK commentators to question if its willingness to take on expensive and highly publicized cases might wane. After the Rolls-Royce decision, however, its director sent a positive message that such was definitely not the case. For insurers this could signal a desire by authorities to hold more, and more high-profile individuals, as well as companies, to account. We might reasonably expect more DPAs, and therefore, an increase in related D&O claims activity to follow. In anticipation of this development, insurers might want to review policy wordings to consider, for example, Investigation Costs sub-limit and excess provisions, exclusions for fraud or deliberate misconduct, and whether the cost of internal investigations before SFO involvement (perhaps more prevalent in the financial sector since the introduction of new UK whistleblowing rules in 2016) would also be covered.