Racketeer Influenced and Corrupt Organizations Act (RICO)

August 2, 2010

In an attempt to eradicate organized crime in the United States, Congress enacted the Racketeer Influenced and Corrupt Organizations Act as Title IX of the Organized Crime Control Act of 1970. Among its broad provisions, RICO specifically authorizes an injured person to sue in federal court for attorney's fees and treble damages when it is proved that the injury resulted from a pattern of racketeering activities as defined in the Act. Such activities include not only major crimes like murder and extortion, but milder crimes such as mail and telephone fraud. The scope of the Act is so comprehensive that violations of many securities laws may be used as fodder for bringing criminal claims alleging RICO violations for which severe penalties and imprisonment may be imposed.

A major criticism of RICO has been that few cases are brought against organized crime; instead, the general business community and even individuals and cities have become targets of plaintiffs claiming RICO violations. Claims against corporations and their officers soared after the Act was first passed, fueled in part by the potential to collect multiplied damages and attorney fees. There seems no limit to the ingenuity of lawyers in filing RICO actions. Because of the potential consequences that RICO imposes, suits against otherwise-respectable businesses can be quite disturbing, especially when many of the activities complained of may only remotely hint of wrongdoing under the Act.

The following is a RICO exclusion that appeared in a basic policy form that is no longer in use.

The Company shall not be liable to make any payment for Loss in connection with any claim made against the Directors and Officers:

(f) based upon or attributable or alleged violation of the federal Racketeer Influenced and Corrupt Organization Act (RICO), or any amendment thereto or statute enacted in replacement thereof, or any similar State or local statute;

The previous exclusion was an oddity, as it would appear that the fraudulent, dishonest, and criminal-acts exclusions found in all D&O policy forms would encompass much or all of the RICO-violations exclusion as well. However, the RICO exclusion used in this previous policy specifically precluded coverage for “alleged violation” of the Act, in effect preventing coverage for expenses associated with a successful defense. If present, RICO exclusions should be removed from the policy form or resisted when attempts are made to include them as endorsements. If a RICO exclusion must be accepted, wording should be revised so that coverage at least is provided for the costs of a successful defense. The following is an example of language specifically granting payment of defense expenses (subject to conditions) for claims alleging RICO-Act violations. Additional information can be found in the Dishonesty, Fraudulent and Criminal Acts discussion in the Exclusions section.

The existence of allegations in a Claim as defined in Section II. Definition (B)(2) which, if proven, would be subject to this Section III. Exclusion (A), including but not limited to alleged violations of the Racketeer Influenced and Corrupt Organizations Act, shall not affect the right of the Insured Persons or the Company to the current payment of Defense Expenses, subject to Section IV. Condition (C)(3).

                                                                                     Aetna F-2102 (12/90)

As a result of the longstanding soft D&O market, RICO exclusions are rarely found in D&O policy forms developed or published subsequent to 2003. However, some insurers may add a RICO exclusion to a policy by endorsement on a case-by-case basis. When present, a RICO-Act exclusion should also be subject to severability or nonimputation provisions that state that the wrongful acts of any director or officer shall not be imputed to any other officer or director for the purpose of determining the applicability of the exclusion. This desirable language preserves coverage for innocent insured defendants who otherwise might be excluded from coverage.

 

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