NEW YORK—Stricter reporting and disclosure requirements, expanded enforcement efforts and greater public visibility of wrongful acts during the past several years have increased the likelihood of derivative civil litigation for some companies after a government investigation, according to a panel of attorneys at the ninth annual Anderson Kill & Olick P.C. Directors and Officers Conference in New York.
Derivative claims brought on by shareholders and investors, business partners, consumers and vendors in the wake of a regulatory violation can wreak havoc on a company’s executive liability insurance portfolio, panelists said, especially where coverage already has been applied in response to the underlying violation.
“It’s well known that civil settlement values increase dramatically when there’s a parallel enforcement action,” said Joseph McLaughlin, a partner at New York-based Simpson Thacher and Bartlett L.L.P.
Foreign Corrupt Practices Act
Mr. McLaughlin said one particular area of concern, especially in the last two years, has been the U.S. Securities and Exchange Commission’s and Department of Justice’s heightened emphases on enforcement of the Foreign Corrupt Practices Act.
“The government has certainly been very active on that front, and whenever you have government investigation and enforcement action, you’re likely going to get a derivative civil action,” Mr. McLaughlan said.
For in-depth coverage of this topic and related issues, visit the Business Insurance Solution Arc on A World of Risk: Managing Foreign Bribery and Corruption Exposures.
Environmental regulations
Panelists also pointed to environmental regulation as another potential driver of derivative civil claims, especially as the U.S. Environmental Protection Agency continues expanding commercial and industrial disclosure and reporting requirements.
“I’ve seen and heard argued that with more obligation of disclosure, we’re seeing more shareholders coming back to a company saying that they haven’t disclosed enough information, or that what they did disclose was misleading,” said Michael Barry, a director at Wilmington, Del.-based Grant & Eisenhofer P.A.
Mr. Barry specifically highlighted pending legislation that would expand chemical disclosure requirements for natural gas drilling operations, and the media attention that has accompanied the issue.
“The industries with a real potential exposure there, I think, are the chemical and mining sectors,” Mr. Barry said. “Those are the areas everyone’s focusing on, particularly with all the news recently about fracking and natural gas drilling.”
Government settlements no shield
Though enforcement actions tend to lead to more substantial derivative civil awards and penalties, panelists said a settlement with the government of a violation does not guarantee victory for derivative plaintiffs.
“There is a big difference between the existence of a settlement with the government and an attachment of liability in the derivative context,” Mr. Barry said. “In order to establish liability in a derivative claim, you essentially have to establish that the violation took place in the board room or was specifically known by the directors, and that’s a very high burden to meet.”
D&O response to regulation
In many respects, directors and officers liability insurance has responded well to changes in the regulatory landscape, though deficiencies still persist, panelists said. One glaring example, they said, is the relative lack of access to pre-claim investigation cost coverage for entities and, in some cases, individual directors.
However, panelists noted, a handful of new products have emerged to at least partially bridge that gap. And where insurance initially falls short, some creative legal maneuvering may be the solution.
“We’ve been relatively successful in arguing that something like a client’s response to an SEC investigation—which often isn’t covered under a D&O policy—if it in turn benefits a companion civil suit, it should be covered under the policy,” said Alex Hardiman, a shareholder at New York-based Anderson Kill & Olick.
