Until proven guilty: ensuring that your D&O policy covers the costs of defending a criminal prosecution.

• Author: Weiss, Stephen J.
• Position: D&O Insurance Update

ALTHOUGH NO IMAGES can possibly sear and scar like those from September 2001, during the month of September 2002 America was confronted by another set of jarring, almost unthinkable stories and pictures: indictments of a string of top executives from Enron, Tyco, WorldCom, and other once-admired companies and, on the evening news, images of some of these executives, in handcuffs, being escorted by FBI agents.

With all this highly visible prosecutorial activity, some executives of public companies are naturally wondering--and worrying--about whether their D&O insurance would pay the staggering defense costs of a criminal proceeding. The short answer is that most do cover defense costs, as long as the director or officer is ultimately found not guilty However, some do not. It all depends on the language of the policy you buy.

D&O insurance policy forms vary greatly from one insurance company to the next. Even policies bought from the same insurance company, using the same policy form, might end up being quite different because, unlike an auto policy, D&O policies are negotiable. Well-advised companies will start with an off-the-shelf policy and then negotiate with the insurer for a series of enhancements.

Coverage for Criminal Proceedings. All D&O insurance policies cover civil proceedings, but not all cover criminal proceedings. In buying a D&O policy, you should select one that covers criminal proceedings to ensure that there will be money available to adequately defend the officers and directors against criminal charges. Your search should not be too difficult because the vast majority of D&O policies in the market today cover criminal proceedings. If you happen to like most of the terms of a policy that does not cover such proceedings, don't worry: Many times you can successfully negotiate a change in the definition of a covered claim to include criminal proceedings.

But keep in mind that all D&O policies have an exclusion for criminal or fraudulent conduct. In other words, if the insured is convicted, the insurance company has no obligation whatsoever to pay for defense costs. In fact, if the insurance company already paid defense costs when a guilty verdict is handed down, the insured will have to repay every cent. This is not unreasonable. No insurance policy is intended to shield the guilty from the consequences of criminal behavior.

When Does Coverage Begin? Not all policies that cover criminal defense costs are created equal. Some...