Call for D&O market to plug entity cover gap

D&O insurers are being urged to help plug the gap in cover for growing UK corporate criminal liability.

Recent years have seen a push to broaden UK corporate criminal liabilities through the introduction of ‘failure to prevent’ criminal activity, said James Cooper, partner at Clyde & Co. Failure to prevent offences create direct liability for corporate entities, and place the onus on an organisation to put in place policies and procedures to ensure that the risk of offending is reduced, he said.

Failure to prevent offences have been included in several key pieces of UK legislation, including the UK Bribery Act, the Criminal Finances Act 2017 and, more recently, the Economic Crime and Corporate Transparency Act 2023 (ECCTA). Future changes are also on the horizon, according to Cooper. On 14 November 2023, the Criminal Justice Bill was introduced into the House of Commons, which seeks to broaden the scope of corporate liability under the ECCTA.

The Bribery Act and the ECCTA have created liability for directors and regulatory powers to investigate individuals. At the same time, they have increased liability for companies themselves, explained Manson.

“The corporate failure to prevent [offence] has been seen as an important enforcement tool in the Bribery Act, so the government is now introducing the failure to prevent offense in other areas to encourage particular corporate behaviour, and this is something we expect to see more of going forward,” said Stephanie Manson, head of management liability at Marsh in London.

The cost of regulatory investigations into a company for failure to protect offenses can be costly, yet this risk is not currently covered by D&O policies as the claims are not against any directors or officers, she explained. This means there is a potential gap in cover for UK companies, according to Manson.

“The one place where the insurance market could innovate is around investigations against the entities themselves. At the moment, you can’t buy cover for most of that. We have talked to several insurers around looking at regulatory investigations of companies, and whether there is the ability to insure that. That is a risk that companies are facing but is not easily insurable right now,” Manson said.

The lack of insurer appetite for entity liability cover reflects the potentially large values for such claims and limited data to model potential losses. “Insurers are in the dark from a pricing point of view,” conceded Manson.

However, with excess capacity in the market, Marsh is looking to create a market for entity-level investigations cover. Last year, the broker launched a Side D coverage that protects corporate entities against the cost of regulatory investigations for climate-related financial disclosures. The cover is sub-limited and only offered to insureds that meet ESG criteria, explained Manson.

“If we get a good class of insureds, insurers can give a little cover and see how it plays out, and we can look to expand it further. That way we can get the market more comfortable with offering that type of [entity] coverage,” she said.

Manson urges companies that are interested in entity-level investigations cover to enter dialogue with their brokers and insurers.

“Buyers need to show willingness and have conversations around what value the company would place on that [entity investigation cover]. If we create a product – supply – there still needs to be demand. So it’s a conversation between clients, insurers and brokers around what do clients actually want. What the cover would look like and what would they be willing to do.”

For example, insurers might be willing to consider a coinsurance agreement, where the client takes a portion and the market takes a portion. This could give insurers comfort that insureds have “skin in the game” and an incentive to control defence costs, said Manson. “There could be good solutions with both parties talking to each other,” she said.

While the ECCTA mainly applies to larger businesses for now, it is something that all UK businesses and their insurers should be keeping a key eye on, with regulators given additional powers to prosecute and administer potentially unlimited fines, said Tom Lazell, executive director of management liability, financial and professional risks at Gallagher in London.

“Private company forms should respond to investigation costs incurred by the company relating to the new legislation – including for criminal prosecutions, where there will be a wider remit for prosecutors examining a ‘failure to prevent fraud’ offence, when the company has benefitted from an employee’s actions. But cover would not extend to fines and penalties for the entity itself,” said Lazell.

Individuals should receive full cover under a D&O policy, including for fines and penalties, unless criminal conduct has been established and adjudged after any appeals, explained Lazell. “The language of the ‘conduct exclusion’ should be checked, as well as key definitions, such as ‘insured person’, as senior managers’ acts can be imputed to the company now and these individuals may also need protection from insurers during such proceedings,” he said.

Brokers and insurers will be interested to see how active regulators will be in this space and whether they widen the pool of companies they set their sights on in future, according to Lazell.

“D&O insurers typically do not provide entity cover for public companies – outside of securities claims – and we don’t expect this to change, even in a soft market. However, there may well be scope under management liability policies for private companies,” he said.

“If notifications start coming in, though, expect possibly sub-limits and/or increased premiums from insurers to reflect the heightened exposure; while clients and brokers may wish to re-evaluate limits purchased and whether there are any gaps in cover than need to be addressed,” he added.