Mr. Bailey is a member of the Columbus, Ohio, law firm of Bailey Cavalieri LLP. Mr. Bailey specializes in D&O liability insurance, corporate, and securities law. He is a frequent lecturer and has authored and coauthored several books dealing with D&O liability issue.

This material is not intended to provide legal advice as to any of the subjects mentioned but is presented for general information only. Readers should consult knowledgeable legal counsel as to any legal questions they may have.

Federal law enforcement authorities are now investigating with greater frequency and vigor potential criminal charges against directors and officers in a variety of contexts. Most notably, on September 9, 2015, deputy attorney general Sally Quillian Yates issued a memorandum to all Assistant U.S. Attorneys and other key agencies, which describes the federal government's focus on individual criminal accountability for corporate wrongdoing. In this so-called Yates Memorandum, the Department of Justice (DOJ) recognized that “[o]ne of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing” and that it is “important that the Department fully leverage its resources to identify culpable individuals at all levels in corporate cases.”

The cornerstone of the policies and procedures set forth in the Yates Memorandum (which have now been incorporated into the U.S. Attorneys' Manual) is that in order for a company that is targeted in a federal investigation to gain any credit for cooperation with the government, the company must provide to the DOJ “all relevant facts relating to the individuals responsible for the misconduct.” In other words, a company is now highly motivated to disclose to federal investigators the identify and “all relevant facts” relating to directors, officers, and other individuals arguably responsible for the company's alleged wrongdoing, thereby creating a huge conflict between the company and those potentially responsible individuals.

The practical impact of this new and aggressive DOJ initiative is still largely unknown. However, it is clear that directors and officers should reconsider the adequacy of their insurance protection. Some of the more important features of a D&O insurance policy which should be examined in this context
include the following:

1. Definition of Claim. Most, but not all, D&O policies include within the definition “cradle to grave” coverage for defense costs incurred by insured persons in connection with criminal investigations and proceedings that are either against or involve an insured person (subject to the other terms and conditions of the policy), whether or not the company indemnifies the insured person for those defense costs. This broad coverage feature should be confirmed.

2. Definition of Loss. Most D&O policies excluded from the definition of “loss” fines or penalties. This exclusion can potentially be deleted or at least narrowed to apply only to fines or penalties for an intentional or willful violation of law.

3. Conduct Exclusion. This exclusion, which eliminates coverage for certain types of egregious wrongdoing by an insured person, can be narrowed by (1) applying only to deliberately fraudulent conduct or an intentional violation of law, (2) applying only if the conduct is established by a “final and non-appealable adjudication in the underlying proceeding,” (3) applying only to insureds who do commit the referenced conduct, and (4) not applying to outside directors and/or defense costs.

4. Fifth Amendment Privilege. To avoid the insurer alleging an insured breaches his duty to cooperate with the insurer by asserting his Fifth Amendment privilege against self-incrimination, the D&O policy could expressly prohibit the insurer from raising such a coverage defense.