Financial Institutions Risk Bulletin June 2017 FOO
Are fines ever insurable under Directors and Officers (D&O) Liability Insurance?
In recent years the question of whether fines are insurable under D&O Liability insurance has become something of a hot topic. This is perhaps no great surprise as it now seems the norm for regulators to levy eye watering fines on financial institutions and their directors. Fines imposed by the Financial Conduct Authority totalled £905,219,078 in 2015; this figure (which had been heavily contributed to by substantial fines of large and complex institutions) dropped dramatically to £22,216,446 in 2016).1
In the great majority of cases the answer to whether fines are insured under D&O insurance is going to be negative. The main reasons being:
- Prohibitions by Regulators - Several principal financial regulators specifically prohibit the insuring of penalties imposed by them. For example, the Financial Conduct Authority prohibits payment under an insurance policy of any financial penalty it imposes (as set out in General Provision 6 (Insurance against financial penalties) of the FCA Handbook).
- Public Policy - In most jurisdictions it seems that most fines are uninsurable as a matter of public policy, i.e. there is a general legal principle which prevents companies and individuals negating the deterrent effect of fines for wrongful conduct by insuring their exposure.
- Policy Exclusions and Prohibitions - Almost all policies will exclude the payment of criminal fines. Further, policies often contain a provision which states that no coverage shall be afforded for amounts which are uninsurable by law.
Notwithstanding the above, the door is not totally shut on the payment of fines under D&O insurance. Indeed many D&O policies include specific coverage for civil fines provided that such fines do not involve dishonest conduct.
However in order for such fines to be payable, insurers would need to be satisfied that prohibition by a regulator or public policy does not prevent payment. Matters are complicated in this respect as the question of whether it is legally permissible for an insurer to pay a civil fine in the United Kingdom is something of a grey area.
That being said, some commentators have suggested that fines which involve no finding of fault on the part of the individual could be insured. So, if a fine is to have a reasonable prospect of being covered, the following factors will need to apply:
- Payment is not prohibited by a regulator or public policy.
- The insurance policy does not exclude the fine in question.
- The fine is civil in nature and it does not involve a finding of fault on the part of the individual.
We always aim to provide broad insurance in this area, however, as noted, even where express cover is obtained from insurers, legal and regulatory barriers to cover may remove directors’ and officers’ protection.
Financial Institutions - Insurer developments
In Novae Group Plc – Announced on 10 April 2017 that Financial Institutions was one of four casualty lines that they have elected to exit as these lines are “unsustainable”.2 Novae Syndicate 2007 was created out of the SVB Group, a dedicated financial institutions syndicate which has written FI business since mid-1980’s.
Berkshire Hathaway Specialty Insurance (BHIS) – Entered the financial lines marketplace in London. BHIS has been open four years and already has operations in USA, Canada, Australia, New Zealand, Singapore and Hong Kong.
Acquisitions Completed – The transactions listed in our March Risk Bulletin being 1) Ironshore acquired by Liberty Mutual, 2) Endurance Worldwide acquired by Sompo International and 3) Allied World Assurance Company acquired by Fairfax have all now completed.
Financial Institutions - New appointments
Zurich Insurance – Sid Kaushik joined as a Senior Underwriter, Financial Institutions from Chubb.
Berkshire Hathaway Specialty Insurance (BHIS) - Patrick Brown joined as Head of Executive & Professional Lines, UK & Southern Europe from Travelers.
C.N.A Hardy – Beth Whybrow joined as Senior Underwriter, Financial Institutions from Neon Syndicate.
Beazley – Gerard Bloom and Neil Stevenson both joined as Head of International Financial Lines and International financial institutions focus group leader respectively. Both joined from XL Catlin.
XL Catlin – Peter Tjong and Mark Bachl-Cohen have joined as Senior Underwriter, Financial Institutions from Travelers and Axis Specialty respectively.
Barents Re – Keith Foster joined as Head of Financial Lines. He joined from C.N.A. Hardy.
Sompo International – John Richards and Anthony Hoare both joined as Senior Vice President and Underwriter respectively in Financial Institutions team. Both joined from Novae.