In addition to the reputational issues created by an anti-bribery or corruption investigation, the costs of responding can be significant, writes senior associate at Herbert Smith Freehills Guy Narburgh
Many of the headlines in the Australian financial media in 2013 concerned stories about bribery and corruption issues affecting high-profile individuals as well as prominent Australian companies.
The Independent Commission Against Corruption completed six inquiries last year, and another four are still ongoing. Australia’s ranking in Transparency International’s Corruption Perceptions Index dropped two places from 7th in 2012 to 9th in 2013.
Commentators have called for stricter legislative controls in Australia, mirroring the models adopted in the US and UK.
Aside from the significant reputational issues created by an anti-bribery or corruption investigation or inquiry, the costs of responding can be significant. While the reputational cost cannot be insured against, these response costs frequently can be. However, given the nature of such investigations, several issues commonly arise that should be considered both when purchasing cover and when making a claim on an insurer.
Coverage for corporate costs
Insurance for the costs of responding to a bribery and corruption investigation is potentially available to companies (as opposed to individuals such as directors), but is a relatively undeveloped market.
Insurance products have been developed to specifically respond to investigations conducted pursuant to two of the most prominent international pieces of anti-bribery and corruption legislation: the US Foreign and Corrupt Practices Act and the UK Bribery Act.
These products typically respond prior to any other potentially available insurance coverage, such as coverage for individuals under directors’ and officers’ (D&O) policies, and can provide cover for individuals or the corporate entity in relation to legal fees and expenses incurred in responding to anti-bribery investigations. Importantly, they can also provide cover for costs associated with ‘internal’ investigations, which can also be significant.
Typically, these products do not respond to investigations related to bribery or failure to prevent bribery that does not involve a public official or liability for any claim (in the form of a judgment or settlement) arising from an anti-bribery or corruption investigation, including the costs of implementing compliance/remedial measures, fines or penalties.
One of the factors affecting the take-up of this type of insurance is its price. Anecdotally, a policy limit of $5m can cost as much as $1.5m in premium. While it is possible to structure premium payments to reduce up-front costs, this is likely to create a perception that the cover, based on current pricing, does not offer significant value for money. Furthermore, because of the low take-up of these policies to date, there is limited information on how they perform in the event of a claim.
Coverage for individual costs
Far more common is insurance for the costs associated with an individual’s involvement in an anti-bribery and corruption inquiry or examination. Usually, this cover will be found in a D&O liability insurance policy.
Three main types of coverage under D&O policies are potentially available – investigations cover, extradition cover, and bribery and corruption extensions.
Most D&O policies in the Australian market provide coverage for investigations by ‘official bodies’. When purchasing cover for investigations, some of the important things to consider are what triggers the coverage under the policy, whether the definitions of ‘investigation’ and ‘official body’ are sufficiently broad to capture the bodies that would typically undertake an anti-bribery or corruption investigation, whether the policy covers investigations, acts or omissions occurring anywhere in the world, and if the cover is subject to a specific monetary sub-limit.
Policies commonly provide some cover for the costs of an individual seeking to challenge a judicial order for extradition in respect of proceedings or an investigation. Some policies also contain specific extensions of cover in relation to claims made against individuals for violations of the US Foreign Corrupt Practices Act or any similar legislation in any other jurisdiction.
Exclusions and conditions
If an investigation or claim is potentially covered under one of the insuring clauses or extensions, care needs to be exercised as to whether any exclusion or condition applies that may limit or exclude cover.
D&O policies contain exclusions in relation to certain types of conduct by a director. These ‘conduct’ exclusions generally have the effect that the D&O insurer must advance investigation or defence costs to a director until such time as a written admission or final judgment establishes that the director acted dishonestly, fraudulently or criminally, or gained personal profit or advantage to which they were not legally entitled.
A D&O policy is likely to contain a contractual restriction on cover for fines and penalties. Coverage for fines and penalties under D&O policies remains a vexed question, with a lack of clear and consistent guidance on which types of fines and penalties would be treated as insurable, particularly ‘strict liability’ fines and penalties.
Following a series of Australian cases in recent years, it is common for D&O policies to contain a clear obligation on the insurer to advance ‘reasonable’ investigation or defence costs to a director while any investigation or claim is ongoing (and provided there is coverage for the investigation or claim). Some of these clauses contain specific timeframes for payment of costs; some do not. Even where no timeframe is specified, an insurer’s duty of utmost good faith would require it to act reasonably and respond promptly, absent any issue as to coverage.
In addition to these issues, given the nature of the allegations underlying a corruption investigation, the D&O insurer may seek information, pursuant to a contractual right under the policy, which will enable the insurer to consider whether there may have been misrepresentations or non-disclosures prior to the commencement of the policy.