The Challenges Of E&O Insurance For Compliance Consultants

*** The following article was originally written for, and appeared on, and is re-posted with the publishers' permission. ***

When consulting services are related to the FCPA, AML, ATF or KYC compliance, the potential for litigation is amplified. And while many compliance consultants purchase professional liability (errors & omissions) insurance, securing a properly structured policy is challenging. For lawyers and auditors, there are dedicated policy forms that provide tailored professional liability coverage with valuable enhancements. But for consultants, who occupy a niche in the market, most insurers group them all together, collectively insuring them on “miscellaneous professional liability forms.” That's a problem. Consultants providing executive coaching or advising on market placement strategies have a significantly different risk profile than compliance consultants who deal with money laundering, corruption and bribery matters. The policy forms offered to the latter compliance professionals are often poorly structured to their exposures, and contain exclusions that can render coverage near illusory.

Statutory Violation Exclusion. The most problematic and deceiving exclusion is the “statutory violations” exclusion. It precludes coverage for claims “based upon, arising out of, or related to any actual or alleged violation of the following laws” (among others):

  • SEC Act of ’33 or ’34 or any state blue sky or securities laws
  • RICO Act (or any similar provisions of any foreign, state or local statutory or common law)

When reviewing coverage terms, it can be easy to overlook these exclusions, believing the likelihood of being named in litigation for violating the securities laws or RICO to be relatively small. While this may be true at present, from a coverage perspective the main problem lies with the broad lead in language, which precludes coverage for claims “based upon, arising out of, or related to any actual or alleged violations.” Nearly every claim against an FCPA/AML consultant would arise from or be related to a violation of the FCPA, BSA, or CTF Acts. While those acts aren't explicitly mentioned as excluded violations, the policy will likely extend to “similar provisions and laws” -- which an insurer could argue are similar enough to those scheduled within the exclusion. To preserve coverage, compliance consultants should ask their brokers to negotiate with the carriers to include clarifying language that:

  • States violations of FCPA, BSA, and CTF Acts are omitted from the list of excluded statutory violations
  • Carves back coverage for “claims arising out of any professional service (consulting) failures,” and
  • Narrows the broad lead in language from “based upon, arising out of or related to” to simply “for” any actual or alleged statutory violations.

Definition Of “Professional Services.” The policy’s definition of “professional services” is really the heart of the policy. It sets the parameters of the type of services failures that would ultimately be covered and dictates coverage to a great degree. So it's critical to have a definition that's both accurate and all-inclusive of the services being provided. Policyholders and prospective buyers should be particularly aware of inaccurate services descriptions such as “management consultant” or “coaching services.” Any service definitions should clearly indicate “compliance consulting” (preferably including anti-bribery and anti-money laundering). Additionally, some carriers use exclusions for specific services. For example, a policy may exclude coverage for claims “based upon or arising out of any actual alleged performance of, or failure to perform services as a lawyer or auditor.” When attorneys or auditors act in a consulting role, it’s important to ensure the carrier provides clarifying language that “excepts” claims made against insureds who are licensed lawyers or auditors providing such consulting services.

Coverage For Investigations & Proceedings. Some E&O policies will contain incidental coverage for “pre claim inquiries” and “subpoena assistance.” While that coverage may be broad, it may also be severely limited -- to $10,000 or $25,000 in total. The scope of coverage can also vary. For example, some policies exclude coverage for subpoenas that specifically name the insured in the underlying action itself. Policyholders particularly concerned about being named in an investigation or regulatory proceeding may be able to secure broader coverage though a combined E&O/D&O policy form. But even when coverage appears intact, terms can differ greatly. Most policies only provide coverage for “formal proceedings and investigations.” That leaves costs at the informal stage uncovered. Additionally, many policy forms specify that coverage is only available if the action names wrongful acts of specific individuals (as opposed to the entity itself). Finally, policies often omit from “damages” costs to produce documents. These are just a sampling of items that should be reviewed when assessing coverage. And while it may be difficult to obtain broad regulatory coverage, it is always important to understand what risk is being mitigated and what isn't.

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