The Foreign Corrupt Practices Act (FCPA), D&O Insurance and the People's Republic of China - Oh, My!
All three of these subjects sometimes scare those who know little about them, at times rightfully so and at others without just cause. Recently, developments with respect to each have raised some common issues.
First, let us turn to the Far East.
On February 25, 2011, the People’s Republic of China (“China”) enacted a law providing criminal sanction for the payment of bribes to government officials outside* China and to officials of international public organizations. The law is slated to take effect on May 1, 2011. The new law appears to provide only for imprisonment and not for awards of any fines, penalties or other monetary amounts. Prison terms can range up to a maximum of ten (10) years dependent upon the amount of the bribes at issue.
Although much remains to be seen as to how this new law will be implemented and enforced, the law should definitely have an impact on companies doing business in China because it specifically applies to a joint venture between a Chinese and non-Chinese company formed pursuant to Chinese law. At least at this juncture, it may be that this new law may be as major a cause of concern to foreign companies as is the case with the FCPA in the U.S. or similar laws in the U.K. and Canada for companies with shares traded on their securities exchanges or even merely doing business there, as the case may be.
Second, earlier this month Chartis, a major D&O insurer, introduced a new insurance policy product called Investigation Edge™. Based upon a review of the policy language and some of the Chartis promotional literature, the policy is intended to provide coverage to a company, but not for any of its directors or officers,** for various investigations undertaken by securities law enforcement authorities. The coverage is limited essentially to the costs of defending against or responding to an investigation, and specifically does not include coverage for any fines, penalties or other amounts that may be awarded or have to be paid in a settlement.
With regard to FCPA and similar violations, however, the new policy form contains the following exclusion.
The Insurer shall not be liable to make any payment for Loss in connection with any Investigation . . . of any actual or alleged bribery or violation of the U.S. Foreign Corrupt Practices Act of 1977, U.K. Bribery Act 2010, Canadian Corruption of Foreign Public Officials Act or any similar state, local or foreign law, rule or regulation.
Chartis marketing material notes, however, that optional FCPA coverage with a sublimit of $5M can be purchased.
Most D&O policies contain coverage for FCPA fines and penalties and the costs of defending against the investigations by the Securities Exchange Commission (“SEC”) or Department of Justice (“DOJ”) with language similar to the following found in Chartis’ Executive Edge™ product. The language is usually contained in the Loss definition in the policy form or added thereto by way of endorsement, and is limited solely to directors or officers of the company, but not the company itself.
. . . civil penalties against any Insured Person pursuant to Section 2 (g) (2) (B) of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-2(g) (2) (B).
Unfortunately, the $5M limit will prove woefully inadequate in a barnburner of a FCPA investigation such as that ongoing against Avon Products where the company has disclosed that its own costs have reached approximately $100M.***
Nonetheless, the Chartis product is innovative and begs a number of questions as to what may ultimately follow.
- Will other insurers introduce similar products and, perhaps more importantly, be willing to write layers of excess insurance over it?
- Will Chartis consider increasing the $5M FCPA sublimit?
- Will other insurers incorporate this new investigation coverage for the entity into their existing D&O forms? At what premium?
- What is left to potentially cover? FCPA civil penalties awarded against a company? Costs of remediation or future compliance that is presently not covered?****
If all or most of these questions are answered affirmatively by many insurers, there may be a number of unintended consequences. As a prime example, little, if any, of this is of real benefit to independent directors. Corporations and brokers will have to consider buying significant additional excess limits and/or separate independent director liability (IDL) coverage to protect against the potential dilution by expanding coverage.***** Also, from the perspective of excess insurers, their attachment points will be more readily within reach with expansive underlying coverage and they will need to more closely monitor developments and expenses paid in underlying litigation and investigations in order to protect their interests.
*It should be noted that so-called domestic bribery, i.e. bribes paid to Chinese government officials were already actionable prior to the enactment of this new law.
**Coverage for investigations targeting such individuals is already provided under most D&O policy forms available in today’s market.
***It was also reported on March 12 that a British lawyer was ordered to pay an amount of nearly $150M under the FCPA for bribery activity on behalf of Halliburton to Nigerian government officials. While D&O policies have the coverage enhancements discussed in this post, such broadening of coverage has been largely absent in the area of lawyers professional liability insurance.
****Despite the express lack of coverage for these costs in many policies, these types of costs were recently reported to have been borne by D&O insurers as part of a settlement of derivative litigation against Pfizer.
*****On top of all of this is the release within the last few days of the Cornerstone Research data on 2010 settlements in securities class actions. While mean settlement values dropped slightly from $37.2M in 2009 to $36.3M in 2010, the median settlement value increased drastically by over 41% to $11.3M. Settlements now often rip through many layers of excess insurance when coupled with covered defense and investigative costs.