THE EFFECTS OF THE JUSTICE DEPARTMENT’S “YATES MEMO” ON D&O COVERAGE

The memorandum “Individual Accountability for Corporate Wrongdoing,” reinforces the Justice Department’s commitment to targeting individual corporate executives when there is corporate wrongdoing. Because of this, the memo, colloquially known as the “Yates Memo” will likely have ripples that touch Director & Officers insurance coverage. A few of the expected effects on New England businesses:

  1. More claims seeking coverage.

In the past, the DOJ only went after individual executives when there was “smoking gun” evidence showing individual wrongdoing. Because the new guidelines reward companies for seeking individual responsibility from the beginning, more claims will be filed.

  1. A need for higher liability limits.

With the new guidelines in place, you may need to carry more coverage than you did in the past. Prosecutions and civil cases may run longer, as companies may no longer have the ability to negotiate settlements that work for both the individual and the company. Run new analyses of your vulnerability and adjust your coverage accordingly.

  1. Separate personal policies.

In some cases, companies may find it more effective to have directors and officers carry personal policies in addition to the coverage the company holds. In these cases, decisions will need to be made regarding whether the executives will pay for their own coverage out of pocket or whether the company will pick up the expense.

  1. New exclusions in policies.

New policies may need to include exclusions, since they will likely be the last line of defense for an individual who is facing an investigation. It is likely that exclusions will disallow coverage in cases of fraud and criminal misconduct.

  1. More kinds of coverage coming into play.

Many legal and insurance experts are recommending that D&O policies include an excess Side A/DIC policy. These policies provide catastrophic coverage, which can become necessary when a company does not have the financial ability to cover defense expenses or to indemnify its officers.

The eventual impact of the new policies has yet to play out. In the meantime, companies should consult with the lawyers and with the company that provides their D&O coverage to ensure that they have ample protection sin place.

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