The cost of entity investigation coverage has decreased sharply in the last six months, giving general counsel a newly affordable option for supplementing their directors and officers insurance, says Jennifer Sharkey, national managing director at insurance brokerage Gallagher. 

“The market is competitive,” Sharkey told Legal Dive September 24. “Some insurers see this is as a potential value-add for their insureds.”

General counsel can use the coverage to save money if their company is faced with the costs of complying with the demands of the Securities and Exchange Commission, Department of Justice or other regulator that has opened an investigation into the company’s operations.  

The insurance has been available for years as a stand-alone product but it’s expensive.  

“The cost associated with an investigation can be millions and millions of dollars,” said Sharkey. That’s especially the case if the company turns to multiple outside counsel to help them manage it, she said. 

Terms and conditions of supplemental coverage that’s embedded in a company’s D&O insurance will differ by insurer, but generally it’s limited to public companies and for investigations that are tied to a securities-related claim. 

In a typical case, shareholders will bring a claim against a company, spurring the SEC or DOJ to open an investigation, triggering the coverage, or the SEC or DOJ will open an investigation, spurring plaintiff’s counsel or shareholders to file a claim, triggering the coverage.  

“It can happen either way,” said Sharkey. “Sometimes there’s a big stock drop, or some other event, and the SEC might start an investigation, and the plaintiff firms will jump all over that. And it could be the other way. The plaintiff files a claim first, and then the SEC looks at the allegation and they might start an investigation.”

Securities-related claims are typically brought in the form of class actions, usually for a company’s alleged failure to disclose something that’s material or for disclosing something in a misleading way, or for officers or directors otherwise breaching their fiduciary duties. 

“Usually it’s around an event — a drop in stock price or an acquisition — some kind of event, and plaintiffs are going to say it’s a disclosure claim,” she said.  

Potential misconduct investigations not tied to a securities-related claim aren’t covered in the supplemental policies, although they could be covered in a stand-alone policy. 

“The SEC claim is the trigger,” she said. “If you buy a separate policy, you can get it without the trigger. But in the D&O policy, the company only has coverage for securities claims — not contractor claims, no claims from clients or customers, just typically a 10b-5 securities claim.”

General counsel weighing whether to add the coverage will want to look at what’s known as the D&O tower. That refers to the limits the insured is buying to cover the legal costs and settlements of claims brought against directors and officers who are alleged to be personally liable in the matter. If this new entity investigation cost coverage is added in, those costs would come under the tower as well, potentially limiting how much each individual can get.  

“Do you want to deplete your D&O limits?” Sharkey said. “Do you want to tell the board you’re potentially depleting your D&O limits to add coverage for investigation costs? The D&O tower was always purchased to protect the directors and officers. If you add this coverage component to it, you potentially could erode limits for the individual directors and officers.”

For legal costs separate from the investigation costs, the company is treated as a covered insured in the same way as each director and officer under the regular D&O policy.  

If depleting the D&O limits is a concern, she said, the remedy is to raise the limit when you add in the supplemental coverage. 

Another consideration is look-back coverage. This makes the coverage applicable to investigation costs that are incurred before a claim is filed. 

“There are six or seven or more versions that insurers are offering,” she said. Look-back coverage can be part of the mix.