Cyber attacks: Directors' Liability
The risk of a cyber attack is material for the majority of businesses in the financial services industry today. Such attacks are increasingly sophisticated, widespread and disruptive…
Published 1 October 2015
Where an individual is prosecuted for offences involving dishonesty, the importance of cover for defence costs under a D&O policy can hardly be over-stated. But where a criminal conviction appears inevitable and any defence futile, it can leave insurers feeling like they are just another victim of an on-going scheme by dishonest individuals. Close scrutiny of the dishonest conduct exclusion is required to determine at what stage cover should be declined.
The starting point for anyone charged with an offence is of course the well known rule of natural justice: innocent until proven guilty. An individual is entitled to a fair trial to defend allegations of wrongdoing. D&O policies usually provide for defence costs to be funded until a finding of dishonesty is reached. Precisely what type of finding is required differs from wording to wording, but a very common wording is "final judgment". This form of words was considered in June this year by the Supreme Court, Appellate Division in New York in Dupree v Scottsdale Insurance Company, but the result was not necessarily what you might expect.
The Chief Investment Officer of an investment company had been charged with offences including banking fraud. He obtained an order requiring his D&O insurers to meet his costs of defending the criminal proceedings. Following trial he was convicted of banking fraud offences but he brought an appeal to set aside the conviction. Following the trial and with the appeal pending, his D&O insurers successfully sought relief from the existing order, bringing their liability for defence costs to an end, and also obtaining an order for reimbursement of the costs paid to date.
The policy in question excluded liability for acts of fraud following a "final judgment against its insured". Notably, there was no specific language requiring reimbursement of costs paid prior to such a finding.
The Dupree coverage decision does not debate what might be the position following a successful appeal against conviction, nor does it discuss the commercial context relevant to D&O policies.
Whether the decision would be followed in other jurisdictions is open to doubt. Many policy wordings also refer in this context to "final, non-appealable adjudications". Defence Costs are also often defined to include the defence, settlement or appeal of any Claim. Where that is the case, it is unlikely the decision in Dupree would be followed.