Allegations of bribery can give way to multi-million dollar investigations, even if they turn out to be false. Now there's help.
A U.K. company began offering anti-bribery insurance last month, which will reimburse companies for the cost of investigating and defending charges of bribery.
London-based insurance company Hiscox introduced coverage for the costs associated with an actual or suspected violation under Section 7 of the U.K. Bribery Act, which establishes liability for companies with a U.K. presence that fail to prevent acts of bribery around the world. For now, the insurance is only available to U.K-based companies, although a U.S. product may be following soon.
“U.K companies have a real exposure to bribery risk, which is not currently met by any existing insurance product,” says Marcus Breese, casualty underwriter at Hiscox. “It became quite clear that directors and officers insurance didn't do the job; a D&O policy just isn't designed to respond to this type of issue.”
Rolled into the “Bribery Act Response” insurance, Hiscox provides “pre-incident crisis planning” to help companies identify where relevant data resides within the company and who has access to it, even before a bribery investigation is needed. “Pre-incident crisis planning is a compulsory part of the policy, because we think it's a real benefit for insureds, especially as bribery investigations become exceedingly data intensive,” says Breese.
Companies that choose the coverage, which is offered in conjunction with risk consultancy firm Control Risks and a group of law firms, also get the option at the inception of the policy of calling on an integrated legal and consulting team to help create a strategy to respond to bribery charges. The option is designed to promote efficiency in the process by laying out a roadmap for who is responsible for what at the start of an investigation.
“What it does is lay out for the client what we think is the best way to handle a particular investigation,” says Breese. Each strategy will vary by company, depending on the complexity and scope of the investigation, he says.
The price of the policy varies on a case-by-case basis. Because bribery investigations can cost multinational companies potentially hundreds of millions of dollars, “any assistance that an insurance policy can give from an indemnity point of view, or from a claims handling perspective, is valuable,” Breese adds.
So far, however, bribery insurance has been a tough sell. Companies still don't think of insurance as being a solution for bribery risk, says Breese. For the insurance industry, he says, “the hurdle that we have to overcome is getting the C-suite audience to understand there is a solution for assisting in some of these areas.” Still, Breese says companies from varied industries have shown interest in the product, including industries “I hadn't necessarily anticipated, such as from universities,” he says.
Bribery Insurance vs. D&O Policies
While Hiscox is the first insurer to provide coverage to companies for the costs associated with bribery charges, other carriers have offered coverage of individual executives and directors through D&O insurance. “The principle difference is that a D&O policy doesn't provide entity coverage,” Breese says. “D&O policies are designed to protect directors and officers and then the indemnification costs that the company incurs as a result of defending them. That's a different issue.”
“Because anti-bribery coverage is still a novelty, there is a potential for greater volatility in pricing, which may make it more or less attractive for some companies.”
—Toby Bishop,
Director,
Deloitte Forensic Center
Of the few D&O policies on the market that cover the costs of investigations associated with bribery allegations, such products tend to cover companies that are co-defendants to a D&O claim. “That means an investigation brought against the entity itself would fall outside a D&O policy,” says Breese.
Marsh's “FCPA Corporate Response,” released in July 2011, for example, covers investigation costs, including “legal, accounting, auditing, and consulting fees,” associated with potential violations of the Foreign Corrupt Practices Act, U.K. Bribery Act, and other anti-corruption laws.
The release of Marsh's FCPA Corporate Response followed on the heels of a similar product that property-casualty insurer Chartis—part of the AIG family—launched in March 2011 as part of its “Investigations Edge” package, which covers investigation costs associated with securities law and FCPA violations.
Coverage for FCPA Corporate Response, however, is only available as an add-on to existing D&O coverage. “We're still a bit cautious about getting into FCPA coverage for entities,” says Louis Lucullo, global head of commercial D&O insurance at AIG.
Another major difference is that D&O policies typically will cover the costs arising from formal proceedings or investigations brought by regulators against directors and officers, but often will not cover the costs associated with informal investigations. “That creates trigger issues with most D&O policies, because they're predicated upon a formal claim being made,” says Breese.
Whether Hiscox will come out with a product that insures against FCPA investigations is still something that is under consideration. “We have thought about it. That would be the natural next step for us in the sense that a lot of our insureds are based in the United States. We need to build up our expertise and knowledge in this particular area before we start to think about other territories.”
Is It Legal?
Critics of bribery insurance argue that coverage defeats the purpose of laws such as the Bribery Act and the FCPA by eliminating the risk to companies and executives. Nearly all policies, however, do not cover deliberate wrongdoing.
FCPA CORPORATE RESPONSE
Below is a sample of what FCPA insurance from Marsh purports to do.
Reimburses companies for investigation costs including legal, accounting,
auditing, and consulting fees due to an FCPA claim.
Provides coverage for both the organization and individuals for FCPA
investigations.
Acts as primary insurance to a directors and officers (D&O) liability policy
to immediately protect individual directors and officers.
Responds to anti-corruption probes of foreign regulatory bodies to the
extent that they are compatible with the FCPA.
Pre-inquiry investigation costs from self-reporting or internal
investigations that later materialize into a claim are recoverable.
Named insureds include the company, all subsidiaries, and all persons
employed and/or otherwise affiliated with or acting at the direction of the
company, inclusive of independent contractors, consultants, and advisors.
Definition of “claim” specifically tailored to include civil, criminal,
administrative, and/or regulatory investigations and inquiries by U.S.
government regulators and their foreign counterparts.
Provides worldwide coverage.
Advancement of costs are prior to the conclusion of an investigation.
Exclusions are limited to prior notice and pending/prior litigation.
Coverage is non-rescindable and non-cancellable.
Source: Marsh.
“If any one of the parties that we're defending is either found guilty, or there is a finding of fact of guilt, or an admission of guilt by any one of those individuals, then the policy falls away,” explains Breese. “We have the right to recoup what we have spent.”
The only exception is a Section 7 offense under the Bribery Act. What that means, he says, is that if the company didn't have knowledge of the bribery offense, then Hiscox will cover all costs, including any costs associated with a deferred prosecution agreement. “We don't recoup the costs in that case.”
Marsh's FCPA Corporate Response similarly does not cover the costs of investigations of bribery that are already underway. “You cannot buy insurance for an existing issue,” says Machua Millett, senior vice president in the financial professional group at insurance broker Marsh. “If you already have an investigation that is underway or you already know within a very high level within the corporation of an issue that is likely to lead to an investigation, the insurance policy will not cover that.”
Toby Bishop, director of the Deloitte Forensic Center, also reminds companies that bribery insurance will not cover fines, penalties, disgorgement, or the loss of customers or financing. “You can insure against limited investigation costs, but you can't insure against unlimited reputation loss,” he says. “Insurance is no substitute for proper investment in anti-bribery and anti-corruption programs.”
Weighing the Options
“It's a valuable tool,” says Charles Leasure, of counsel in the insurance and reinsurance practice of law firm Pepper Hamilton. Still, it's just one tool in a company's overall risk mitigation toolbox, he says.
Randy Stephens, vice president of advisory services for NAVEX Globa, says the insurance doesn't provide an incentive for companies to take greater risks. “Just because you have [auto] insurance doesn't mean you start driving faster, or more recklessly,” he says.
Companies that are interested in anti-bribery coverage will want to seek out coverage tailored to their specific risk profile. “Companies have to make sure they're selecting the right product for them that addresses the risks that the company has determined to be a concern,” says Stephens.
In determining the scope of coverage, Brian Mich, managing director and co-chair of the U.S. anti-corruption compliance and investigations practice at BDO Consulting, says companies should weight the following important considerations: “To what extent do the FCPA, U.K. Bribery Act, and other anti-corruption laws pose a risk to the company? Do employees interact with government officials? Do they operate in high-risk jurisdictions where corruption is more likely?”
Another important consideration is whether the potentially high cost of the premium is worth the protection the company will get out of the product. “They may prefer to manage the risks using their own liquidity and access to finance,” says Bishop. Anti-bribery coverage is still a novelty, meaning that it's subject to “greater volatility in pricing,” he adds, “which may make it more or less attractive for some companies.”
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