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October 28, 2016 Practice Points

DOJ Policy Shift Will Have Significant Effect on D&O Claims

A recent shift by the Department of Justice in its policy toward holding individual corporate executives accountable for corporate misconduct will almost certainly have significant implications for coverage under directors and officers liability policies

by Joshua D. Davey

The recent shift by the Department of Justice in its policy toward holding individual corporate executives accountable for corporate misconduct will almost certainly have significant implications for coverage under directors and officers liability policies.

On September 9, 2015, Deputy Attorney General Sally Quillian Yates released a memorandum entitled “Individual Accountability for Corporate Wrongdoing” (or the “Yates Memo”) that outlines a new direction in the DOJ’s approach to corporate wrongdoing. Noting that in large corporations “responsibility can be diffuse and decisions are made at various levels” making it “difficult to determine if someone possessed the knowledge and criminal intent necessary to establish their guilt beyond a reasonable doubt,” the Yates Memo emphasizes that the DOJ must “fully leverage its resources to identify culpable individuals at all levels in corporate cases.” To this end, the Yates Memo outlines six steps the DOJ will now take when investigating corporate misconduct in both civil and criminal cases:

  1. To be eligible for any cooperation credit, corporations must provide to the department all relevant facts about the individuals involved in corporate misconduct.

  2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.

  3. Criminal and civil attorneys handling corporate investigations should be in routine communications with one another.

  4. Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.

  5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized.

  6. Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

The Yates Memo’s focus on redressing individual wrongdoing likely represents a significant shift in the DOJ’s enforcement priorities. Whereas in the past corporations have often been able to resolve allegations of wrongdoing by paying fines, changing challenged business practices or submitting to ongoing monitoring— with individual executives often escaping any personal liability— the Yates Memo puts such executives squarely in the DOJ’s targets, even in situations where they may lack the ability to pay a judgment.

Indeed, by requiring companies to provide “all relevant facts” about individual involvement in corporate wrongdoing before they are eligible for cooperation credit, the new approach incentives companies to identify responsible individuals within the company. In prepared remarks at New York University following the release of the memo, Yates made clear, “[W]e’re not going to let corporations plead ignorance. If they don’t know who is responsible, they will need to find out. If they want any cooperation credit, they will need to investigate and identify the responsible parties then provide all non-privilege evidence implicating those individuals.”

The DOJ’s new policy that corporations under investigation must identify all individual wrongdoers as a precondition of any settlement is certain to have significant ramifications for the D&O coverage available to companies and individuals facing DOJ scrutiny. For one thing, the new focus on ferreting out individual wrongdoing shifts the dynamic between companies and their individual directors and officers, and is certain to multiply the number of individuals seeking separate defense counsel under a company’s D&O policy. In the past, companies under investigation and their executives have often shared counsel where their interests were obviously aligned. Under the new policy, with companies under pressure to identify individual wrongdoers and DOJ attorneys under orders not to let individuals off the hook, many cases that in the past may have been defended by a single firm will now require separate defense counsel for the company and each affected executive. Because defense costs under D&O policies are almost always paid within limits, this in turn will lead to much quicker erosion of a company’s D&O coverage, with multiple sets of lawyers each involved in managing the investigation, responding to discovery demands, and trial.

Moreover, the DOJ’s new focus on individuals is certain to increase the length and complexity of litigation for reasons beyond the sheer number of attorneys involved. It is often more difficult for the DOJ to prove an individual’s misconduct than a corporation’s. As the Yates Memo notes, corporate decisionmaking is often spread across multiple parts of the organization and it is not always clear that one or more specific individuals had the knowledge necessary to impose liability. For this reason, holding individuals accountable in the ways contemplated by the Yates memo is certain to require more work on the part of both DOJ and defense attorneys in such cases. Settlements are also likely to become more challenging – and more expensive – as multiple individuals will need to negotiate their own resolutions with the DOJ, often with the potential for criminal charges looming large.

Each of these considerations should give companies – not to mention their officers and directors – reason to reexamine whether their D&O limits are sufficient. Individual executives may also want to consider personal coverage in the event that the coverage offered by the company may not be adequate.

The Yates Memo’s focus on individual accountability also highlights the importance of considering whether a policy provides coverage for defense costs incurred in government investigations, even if litigation or other formal proceedings have not yet begun. Often, whether such coverage is available is a function of how the policy at issue defines the term “Claim.” Corporate and individual insureds will want to seek the broadest definition possible when obtaining coverage to ensure that their policy will respond at the earliest possible stage of an investigation.

Insureds will also want to consider the application of D&O exclusions for fraud, violation of statutes, or unlawful profit or advantage.  Some policies require a final adjudication before these exclusions will apply, while others do not. Absent a final adjudication requirement, policyholders run the risk that they will not have coverage for defense costs incurred in defending against allegations of wrongdoing. In addition, insureds should consider their policy’s severability and imputation provisions, which can work to preserve coverage for the company and individual executives even if one bad actor’s conduct triggers an exclusion.


Keywords: insurance, coverage, litigation, D&O Policies, DOJ, Yates Memo

Joshua D. Davey, McGuireWoods LLP, Charlotte, North Carolina.

Copyright © 2016, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).