In late 2015, Deputy Attorney General Sally Yates issued a memorandum to federal prosecutor — commonly known as the Yates Memo — that emphasizes the accountability of individuals involved in corporate wrongdoing. Consequently, businesses and culpable employees are both targets during federal investigations. This can lead to a number of liabilities for your organization.
The Yates Memo specifies that businesses must identify all culpable individuals during a Department of Justice (DOJ) investigation. This will likely result in frayed relationships with employees, longer investigations and higher defense costs. Additionally, the DOJ will expect your business to cooperate during both corporate and individual cases, as the Yates Memo removed many protections for individuals.
To ensure that you are adequately protected, you need to examine your business’s directors and officers (D&O) insurance coverage before an investigation takes place.
Primary Focus of the Yates Memo
The Yates Memo consists of six “key steps” to encourage businesses to focus on individual accountability as well as to encourage federal attorneys to bring civil and criminal charges against culpable employees.
Two of these steps will have a large impact on the focus of investigations:
1. Businesses must identify individuals involved in corporate wrongdoing to qualify for cooperation credit in case resolution.
2. Federal attorneys will target individuals during the onset of an investigation. They will not focus solely on the business as a whole.
Because businesses must identify culpable individuals to receive cooperation credit during a federal investigation. The priorities of your business and your employees will likely diverge over the course of a case.
Additionally, the Yates Memo states individuals don't have to partake in wrongdoing to be a target of investigations. Board members, directors, officers and managers that do not provide sufficient oversight of their respective responsibilities can be found negligent and targeted during a case. This broad range will likely make it more difficult to determine who caused any wrongdoing.
While it is in your business’s best interests to conduct thorough internal investigations and find all culpable individuals, employees may be less willing to reveal relevant information and may even request their own legal counsel to represent their best interests. And, if your D&O coverage provides funding for this defense, there will be less funds available to provide protection for your business as a whole.
Protection for Individuals
As the Yates Memo emphasizes individual accountability, it takes away protections that individuals could turn to when resolving cases. The key steps in the memorandum specify the following:
→ There must be a plan to resolve any related cases involving culpable individuals before corporate cases are handled.
→ Resolutions between businesses and the DOJ will provide no protection for culpable individuals.
→ Civil charges against individuals will not account for the ability to pay financial penalties.
These points will serve to lengthen cases because businesses need to cooperate with individual and corporate cases. This means that your business must continue to devote time and resources to internal investigations and provide for legal counsel. As a result, your current D&O coverage is likely inadequate given the new priorities found in the Yates Memo.
D&O Coverage Considerations
To ensure that you have adequate D&O coverage to defend both your business and its employees during an investigation, you should review the following topics:
→ Type of coverage: Ensure that your D&O policy will provide adequate protection for all parties involved in a case. Coverage should include funds for your employees’ defense, any additional funds your business provides for their defense and your business’s defense if you are sued by a third party as a result of a federal investigation.
→ Investigation coverage: Consider purchasing investigation coverage as an endorsement to your D&O policy. This will help protect you from the financial burden of lengthy internal investigations.
→ Policy limits: Consider raising your policy limits to ensure that you have adequate protection. Defending more individuals and assisting federal prosecutors will lead to longer cases and higher defense costs.
→ Conduct exclusions: Examine your current D&O policy to see if it has conduct exclusions for fraud, dishonesty and other misconduct. These exclusions may also include final adjunction provisions, which prevent carriers from withholding funds until a case has been resolved.
→ Balance between indemnification and insurance: Conduct a review of your business’s balance between indemnification and D&O coverage. If you provide for the majority of a case’s defense costs, you may face severe financial hardship after it's resolved.
Let’s have a conversation
The risk prevention experts at The Plexus Groupe transform complexity into simplicity to empower growth-orientated companies like yours by reducing exposures, improving cost efficiencies, and protecting your most valued assets.
Have questions regarding directors & officers coverage? You have come to the right place. Contact Plexus Vice President of Executive Liability Willie Lindsey at 847-307-6100 or firstname.lastname@example.org. We will work with you to protect what you have earned and achieved.
Disclaimer and publishing credit: This Risk Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2016 Zywave, Inc. All rights reserved.