Broken cover

A growing trend for insurers pulling fraud and regulatory cover for company directors is having a major effect on corporate defence practices


Company directors facing regulatory investigations are being left unable to fund their defence due to a trend for insurers to pull their cover, according to litigators. Several corporate defence lawyers acting for directors have identified a “concerning” pattern undermining the practices of fraud and regulatory defence firms.

To protect directors and other senior personnel against the impact of investigations, companies typically take out directors’ and officers’ (D&O) cover, but lawyers say big insurers are taking legal advice to try to avoid covering fees, arguing that full disclosure of potential regulatory risk has not been made.

Lawyers say the issue is escalating in a heightened regulatory environment, sending shockwaves through firms, brokers and clients.

High and dry

Pannone’s regulatory head Tony Barnfather specialises in corporate defence against cases investigated and prosecuted by regulators such as the SFO, OFT, HMRC, FSA and the HSE. He is brought in to mastermind strategy at the investigation stage for matters such as alleged cartel behaviour and corruption.

Barnfather warns that company directors are being left “high and dry” when D&O policies taken out to fund their defence are withdrawn at the “11th hour”. He goes so far as to suggest this could leave individuals facing the prospect of representing themselves in court.

Barnfather cites the example of one of his clients, former iSoft director John Whelan, who is facing a retrial this year on allegations of conspiring to make misleading statements in the accounts of software company iSoft.

The FSA prosecution is one of the biggest brought by the regulator and Barnfather says it has left him questioning the commerciality and validity of D&O policies after an insurer withdrew its cover for Whelan.

“To arrive at such a conclusion without hearing evidence is perverse, given the policy wording and clear reasons for D&O cover,” says Barnfather. “The insurer’s investigations into a case can last years, during which time the director still needs to establish his defence. This action undermines the whole point of taking out D&O insurance”.

The implications for firms is clear: if the insurers refuse to cover the client’s fees and the client cannot access legal aid or has their assets frozen under a restraint order, the lawyers do not get paid and therefore will not take the case.

This results in regulatory practices such as Burton Copeland, Pannone and DLA Piper facing tough decisions on potential instructions.

Burton Copeland’s Harry Travers says it is a very serious matter and has called for “careful examination” of the small print on a policy before any claim is made.

Travers, a regulatory and business crime partner, says it is something his team is coming across “all the time”.

“It’s vitally important to make sure the scope of these policies is considered before the circumstances giving rise to a claim by the policyholder for the payment of defence legal expenses arise,” Travers explains. “When such a claim needs to be made and the client most needs the benefit of the policy, that’s when insurance companies can be difficult in relation to the amount of costs covered and the selection of a specialist defence lawyer.

“Those advising corporates and their directors on their procedures need to look carefully at policies, before the circumstances giving rise to a claim have arisen.”

Rate expectations

Travers also points out that lawyers should be examining clauses on legal fees, the use of panel firms and hourly rates.

“They need to make sure the company, its directors and senior employees will be covered for the proper payment of legal fees should they be subject to investigation,” he adds. “This must include each party’s right to use a specialist firm rather than a panel firm put forward by the insurer. Also, to be on the safe side, hourly rates should be quoted so there’s no dispute about them later when a claim is made.”

Travers adds that examining the policy small print only after a claim is made by a defendant could be “too late”.

“Representing clients facing regulatory or criminal investigation is highly specialised work,” says Travers. “Corporates should check their insurance policies to ensure the company, its directors and employees have the right level of cover to pay for appropriate specialist representation in the eventuality that a claim needs to be made.”

Whelan dealing

In the case of iSoft former director Whelan, he and his fellow directors are awaiting retrial in April after the first trial resulted in a hung jury. That prosecution followed a six-year investigation in what is regarded as a flagship case by the FSA.

The costs involved in representing the defendants throughout such a process can comfortably fall into the seven-figure bracket.

D&O policies state that the insurer will pay for all the director’s defence costs, with clauses usually specifying that cover can only be avoided if the policyholder is convicted in court or makes an admission of guilt.

Barnfather says the implications of insurers refusing to honour policies at an earlier stage are “huge”, particularly when the regulatory environment is getting more strict.

Interestingly, this trend comes at a time when it was expected the D&O insurance market would expand to cater for more cases against companies and directors. The insurance companies were to fill the void left by legal aid, where the bill has been cut by government and is regarded as inappropriate for these types of large, complex cases.

Lawyers claim some insurers are instead putting more time and resource into investigating policy cover when a claim is made. Barn-father says insurers are effectively acting as judge and jury prior to any finding or sanction, saying they are withdrawing cover based on their own investigation.


Kennedys partner David MacLoughlin advises insurers on D&O insurance and reinsurance coverage issues, and acts in defence of directors. He says any perceived rise in cover disputes may be due to a general increase in regulatory activity and litigation following the recent market turmoil.

“When people have lost money they look to sue professionals so there are more claims flying around,” explains MacLoughlin. “The D&O insurer’s position when a claim is notified is that they have limited information. It’s necessary that, as more information comes to light, they keep the position under review.”

MacLoughlin argues that it is not a case of insurers being desperate to find a way not to pay hundreds of thousands of pounds in legal fees.

“Information may come to light that the director should have disclosed before he took out the cover,” says MacLoughlin. “Had it been disclosed it would have meant a higher premium would have been charged or even that no cover would have been provided.

“The insurance firm is required to consider whether the information tallies with the risk that was presented to them. Insurers, in my experience, do not look for reasons to reject a notification. Rather, they are seeking to identify what legal fees are covered under the terms of the policy.”

Cold climate

The public may lack sympathy for the plight of wealthy directors of large corporates facing regulatory or even criminal allegations. Some argue they should use their own accumulated wealth to pay for top lawyers, recouping the cost from the other side if possible, if they are successful.

But Travers explains that D&O clients are being hit more frequently by restraint orders to freeze their assets. This is more prevalent in criminal regulatory prosecutions following on from investigations by authorities such as the SFO.

Tony Barnfather
Tony Barnfather

Suspects are increasingly finding their assets frozen under the Proceeds of Crime Act, adds Barnfather, and, unlike in civil cases, once assets are restrained no exception is permitted to fund criminal defence costs.

“With no D&O insurance and the demise of legal aid plus restrictions on access to personal assets, how are directors meant to fund their defence against the might of UK regulators who spend many millions of pounds preparing their cases?” asks Barnfather.

“It’s not beyond the realms of possibility that directors may end up defending themselves in court. These directors are usually businessmen with exemplary characters who, under our system of justice, should be able to properly defend accusations made by the state.”

Debate required

Whelan himself has chipped in to the debate. His legal team has agreed to proceed with the case after he successfully applied for legal aid funding. He says this may now cost the taxpayer money that should be covered by insurers, but fears other businessmen in similar situations “simply can’t afford to challenge the insurers”.

Lawyers such as Barnfather think there should be a serious debate on this issue across the criminal justice system. Whelan’s case may justbe the necessary catalyst.