With the FCA's new rules regarding self-reporting and whistleblowing due to be fully implemented by September 2016, one question at the forefront of insurers' minds is whether this will this lead to a rise in claims.
The rules follow a number of recent banking scandals, such as the attempted manipulation of the Libor rate. They encourage employees to speak up and challenge poor practice or unlawful behaviour within their business. The firms affected by the rules are expected to have in place a strong framework to facilitate whistleblowing by employees, primarily ensuring that all concerns reported are property investigated with no personal repercussions.
The FCA website summarises the new rules. They require relevant firms to:
- Appoint a Senior Manager as their whistleblowers' champion
- Put in place internal whistleblowing arrangements sufficient to handle all types of disclosure from all types of person
- Include text in settlement agreements explaining that workers have a legal right to blow the whistle;
- Present a report on whistleblowing to the board at least annually
- Inform the FCA if it loses an employment tribunal with a whistleblower
- Tell UK-based employees about the FCA and PRA whistleblowing services and
- Require its appointed representatives and tied agents to tell their UK-based employees about the FCA's whistleblowing service
Although, presently, the new rules only apply to (most) large banks, building societies and insurance firms, they should act as non-binding guidance for all other businesses regulated by the FCA.
However, despite the new regime expanding the scope of the previous rules and guidance considerably, the impact of the rules may not be as significant as one might expect, as the rules are largely reflecting, and to a certain extent codifying, today's standard practices.
The number of whistleblowing reports being made to the relevant authorities has increased steadily over recent years and whistleblowers have continued to provide crucial intelligence, allowing regulatory action to be taken against many firms and individuals.
So will these new rules really lead to more D&O claims here in the UK? Certainly, in other countries where stricter whistleblowing rules already prevail there has been a marked increase in the number of formal investigations commenced in connection with alleged wrongdoings by companies and/or their senior management. Clearly, if whistleblowing is actively encouraged, this will lead to an increase in reports though it should be borne in mind that in some jurisdictions, such as the United States, there are financial incentives for whistleblowing which may have contributed to the increase.
It is therefore possible that the implementation of the FCA's new rules could lead to an increased exposure for D&O insurers. In what continues to be a soft market, further revisions in cover, afforded to firms operating in the financial services industry and beyond, should not be ruled out.
What are the coverage implications?
The anticipated increase in complaints received from employees may prompt the need for more thorough internal investigations by the management to determine whether a formal report needs to be made to the relevant authorities. The costs of such investigations may not be covered under standard D&O policies on the basis that internal investigations do not typically constitute a "Claim" in relation to which "Loss" is usually recovered. It is usually the case that in order for the policy to cover costs of an investigation, it would need to be an official or formal investigation of some kind. As such, insurers may need to consider whether they wish to indemnify these types of costs.
Whether these types of costs should attract cover is not necessarily a new issue for the London market. However, the implementation of the new rules may require insurers to revisit it once again, especially as clarity is likely to be sought by insureds and brokers.
Of course, one advantage of companies, and their directors and officers, being provided with cover from the outset of a matter means that they should be able to deploy a more robust defence immediately, which may allow them to avoid a more formal investigation being launched and therefore reduce insurers' overall exposure. However, the costs of such investigations can be significant and could easily erode the limits of indemnity available, leaving the individual insureds with deficient cover in the event of an actual claim. Some commentators still believe this is, and always has been, a business expense.
A solution to this could be to sub limit the cover available under an appropriate extension, protecting the main limits.
Insurers may also need to consider how to treat the admissions that will inevitably be made by whistleblowers and/or the company to the relevant authorities in return for more favourable outcomes. Most standard D&O policies will contain a clause prohibiting admissions of liability being made without the prior written consent of insurers. If this is stipulated to be a condition precedent to indemnity this may cause problems for insureds, especially where they are facing time constraints in which to reach an agreement with the authorities, coupled with strict confidentiality requirements. Insurers may be placed under pressure to revisit such clauses given the well documented changes in the regulatory environment in which their insureds operate.
Furthermore, the making of an admission may have additional coverage implications. For example, most conduct exclusions require "final adjudication" before they trigger. However, some D&O policies allow insurers to rely on this exclusion where there has been a written admission of liability. If the policy is not specific as to the form that the admission must take, and by whom it must be made, insurers should analyse whether they can rely on an admission made in correspondence with the authorities.
An admission may also trigger the "deliberate misconduct" exclusion, to the extent it exists in the policy. It is likely that insureds will insist on there being clear and unanimous severability provisions in the policy so that the acts and knowledge of one individual insured cannot be imputed to another.
Lastly, an increase in the levels of cooperation between the company, some employees and the relevant authorities could of course trigger a typical insured v insured exclusion. If this exclusion begins to cause difficulties for insureds, it is likely that a further carve out may be required for this scenario, diluting the application of the exclusion clause even further, assuming it is still present in the policy.
The new sentencing guideline's implications for D&Os
February saw the UK implement the Sentencing Council's landmark "definitive guideline" on the sentencing of defendants convicted of offences relating to health and safety, corporate manslaughter and food safety and hygiene offences, regardless of the date of offence.
In addition to the unprecedented hike in fines, the codification of the sentencing of individuals convicted under the Health & Safety at Work etc. Act 1974 (usually, directors) introduces a custodial sentence even for offences that have the lowest degree of culpability.
Fines now have a "starting point" linked to turnover, adjusted upwards or downwards depending on relevant aggravating and mitigating features, allied to relevant financial information.
The guideline, while providing relative clarity on fines for micro, small and medium-sized businesses with turnovers of less than GBP 50m, creates significant uncertainty for larger businesses by categorising them as having a turnover exceeding GBP 50m. It seems inconceivable that a business with a turnover of GBP 800m could be fined a similar sum to one with a turnover of GBP 50m.
Further, with a "very large" business defined in R v Sellafield Ltd [2014] as one with a turnover of over GBP 1bn, the die is already cast for significant fines for "very large" businesses, even where culpability and harm are both very low.
Defence costs covering health and safety or corporate manslaughter-type offences are commonly included as a standalone insuring clause in commercial D&O policies. The greater the risk of custodial sentencing, the more likely a director is to want to access the D&O policy to retain the best legal representation available, particularly given that director disqualification proceedings could also follow conviction.
The new guidelines may have broader implications, however. The potential for larger fines against the entity for HSE failings could trigger claims by investors against the D&Os where the entity's share price has suffered as a result, or the entity has gone bust.
Will whistleblowing lead to a blow in cover?
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