Navigating Yates Memo Minefield and Broadening of Excess Side-A DIC D&O Insurance Policies

by Perkins Coie
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Former Deputy Attorney General Sally Yates issued a memorandum (the Yates Memo) in September 2015 setting forth guidance on how the U.S. Department of Justice would handle future corporate investigations and, to the extent practicable, pending ones. The Yates Memo makes clear that the Justice Department intends to push for individual accountability for those accused of corporate wrongdoing. For directors and officers, the Yates Memo has created a new world.

Push for Individual Accountability

Since the publication of the Yates Memo, the Justice Department has strongly focused on individual accountability for corporate wrongdoing. In particular, the Yates Memo outlined six guideposts describing how the Justice Department would handle future investigations:

  1. In order to qualify for cooperation credit in a civil or criminal matter, a corporation must provide to the Justice Department all relevant facts concerning the individuals involved in or responsible for the corporate misconduct;
  2. Criminal and civil corporate investigations would focus on individuals from the beginning of the investigations;
  3. Criminal and civil attorneys handling corporate investigations would routinely communicate with each other to ensure that individuals are effectively pursued;
  4. Except in extraordinary circumstances, no corporate resolution would provide individuals with protection from criminal and civil liability;
  5. Cases would not be resolved without a clear plan to resolve related cases against individuals; and
  6. The Justice Department’s civil attorneys would evaluate whether to bring suit against an individual based on considerations beyond the individual’s ability to pay.

Implications for Director and Officer Protection

The government’s focus on individual accountability has substantial implications for directors and officers protection. For example, the increased pressure on corporations to provide information about their officers and directors creates an increased potential for conflicts between the interests of the corporation and its executives in cases in which they are jointly prosecuted by the Justice Department. Logically, each defendant will want separate counsel, and it may be dangerous for the individuals not to insist on it. 

Additionally, if the government brings civil cases to trial for a finding of liability, that very finding could have enormous implications for indemnification and D&O insurance. Under many current arrangements, individuals could be forced to repay the corporation or the insurance company for defense costs previously advanced, and the corporation and the individual may not be able to count on any contribution from insurers for the resolution of the case or related cases.

The Justice Department’s focus on individuals puts executives at a very real risk that they may have a less than ideal defense or that they may have to repay amounts insurers or the corporation paid for their defense. Individual directors and officers should insist that their corporation’s D&O programs are changed in ways that broaden coverage and protect them against the risks posed by the Justice Department’s focus on individual liability.

Yates Memo and Broadening Your Side-A DIC Insurance

In light of the Yates Memo, corporations and their directors and officers should discuss the following changes with their Side-A DIC insurers:

  1. Recoupment―Efforts to recoup previously advanced defense costs are likely to increase with the Justice Department’s focus on individual accountability. Directors and officers should have their corporation seek endorsements from their Side-A DIC insurers that protect against the risk of the corporation or another insurer or the Side-A DIC insurer seeking to recoup previously advanced defense costs from a director or officer.
  2. Separate Counsel―The Justice Department’s individual accountability efforts increase the likelihood that a director or officer involved in a government investigation or lawsuit should have his or her own separate counsel. Accordingly, directors and officers should have their corporations seek amendments to their Side-A DIC insurance that offer protection against the risk of another insurer refusing to provide a director or officer separate counsel when a civil action has been filed against the director and officer or when the director or officer is being investigated. 
  3. Reasonable Fees―The Justice Department’s individual accountability efforts also are likely to increase the defense costs insurers will have to pay in connection with corporate wrongdoing matters. If past is prologue, insurers are likely to seek to reduce these defense costs by contending that they will not pay hourly rates for lawyers greater than the amount that insurers ordinarily pay in other lawsuits. This creates a great risk for directors and officers. Directors and officers should therefore insist on their corporations seeking changes in their Side-A DIC insurance that protects against traditional D&O insurers refusing to pay the standard rates of the specialized lawyers that directors and officers typically hire to defend them against major government investigations and litigation.

For further detail on the implications for directors and officers due to the government’s focus on individual accountability, read the full article, “Navigating Yates Memo Minefield and Broadening of Excess Side-A D&O Insurance Policies.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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