In the following guest post, Daniele Favalli and Alessio Zolpi take a look at the availability of D&O insurance in connection with criminal proceedings in Switzerland. Daniele is an attorney admitted to the Zurich bar. He is a partner and co-head of the Dispute Resolution Team of the Zurich-based law firm VISCHER. Alessio is an attorney admitted to the Zurich bar and an associate in the Dispute Resolution Team at VISCHER. I would like to thank Daniele and Alessio for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Daniele and Alessio’s article.
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A. D&O coverage in criminal proceedings against the insured
Directors & Officers (D&O) insurance is a form of collective liability insurance taken out by companies for their executives. The company is the policyholder, not the insured person. Typically, insured individuals include those entrusted with the management of the company as well as “de facto organs” who, while not formally members of management, significantly influence the company’s decisions.
A D&O insurance protects executives from personal liability risks. It generally covers the payment of legitimate damages claims (damage cover) and provides (passive) legal protection to defend against unjustified claims. Covered services primarily include damage claims as well as court and attorney fees (defense coverage).
Ordinarily, a D&O policy excludes coverage if the claims in question arise from criminal conduct of the insured executives (conduct exclusion). Intentional acts are generally not covered, although gross negligent actions are commonly included in D&O policies.
Fines and penalties are excluded from coverage, as they are considered personal and cannot be insured. In other words, it would undermine the purpose of punishment if it was possible to have the penalty covered by an insurance company. Additionally, following a conviction, executives may be required to reimburse payments already made under the policy by the insurance, such as attorney fees and procedural costs, since the conviction means there is no coverage. The insurer should ensure that the conduct exclusion includes a carve-back for defense costs (without any sublimit) to guarantee proper defense coverage until final adjudication. In an international context, the carve-back should be part of the master policy to prevent any gaps in coverage (DIC or FINC coverage).
B. Criminal proceedings are often a substitute for civil proceedings
In Switzerland, there are no discovery procedures comparable to discovery under U.S. federal rules of civil procedure. Discovery is a key part of civil litigation in the U.S.A., allowing parties to gain a broad overview of the relevant documents and to assess the evidence, even before initiating civil proceedings. A significant advantage of discovery over civil procedural law is the fact that the parties are required to produce all relevant information, including electronic documents, such as e-mails or chat logs (“eDiscovery”). U.S. discovery and the England & Wales disclosure procedures are complex but powerful procedural instruments. They perfectly illustrate the extent to which Anglo-Saxon law differs from Continental European (civil) law.
In Swiss civil proceedings, the defendant is not subject to any similarly extensive obligations. On the contrary, while the defendant has a general obligation to participate in the proceedings and the court may order the production of certain documents (in Switzerland, e.g., according to art. 160 Civil Procedure Code), such orders cannot be enforced by coercive measures and no sanctions can be imposed. The defendant’s obligation is a procedural duty rather than a legal obligation. If the defendant fails to comply with a court order, the court will simply take their non-compliance into account when evaluating evidence.
Due to the limited access to evidence in civil law countries, a notable trend has emerged in recent years: parties at times choose to file a criminal complaint (against both the executive and the company) rather than pursuing civil proceedings. By doing so, they hope to gain access to evidence through the investigative powers of the prosecutors. Parties, thereby, attempt to get access to evidence they would otherwise not have been able to obtain through civil litigation. As will be shown, such attempts often fail to achieve the desired results.
Once a criminal complaint is filed, only the public prosecutor has control over the proceedings. They decide, among other things, whether to initiate an investigation, on the procedural steps to be taken, and the taking of additional investigative measures as the investigation progresses. The prosecutor also has considerable discretion in deciding whether to press charges and bring the matter before a criminal court. In many cases, the prosecutor at least initially opens an investigation since the threshold for doing so is relatively low. It is sufficient to have preliminary indications and suspicions that a criminal offense may have occurred.
Contrary to the party’s expectations, however, investigations by the prosecutor, frequently, do not advance much further than the actual opening of the investigation, which may be attributed to various factors. Typically, the reported crimes are economic offenses. Such allegations are often factually complex and require substantial investigative efforts. If the prosecutor perceives that the party is attempting to call for criminal investigation to advance civil damages claims or to gather evidence to be used in civil litigation, prosecutors tend to be reluctant to proceed with the investigation as they do not want their efforts to be exploited for civil claims.
Additionally, prosecutors in Switzerland often have only limited (financial) resources to investigate their cases and on top of that they have a high volume of ongoing criminal cases to deal with. Without imminent suspicion and/or specific evidence, there often is little incentive to conduct a thorough investigation. Moreover, in complex economic criminal matters, prosecutors may sometimes lack the necessary expertise. While in larger cities there may be commercially specialized departments within the prosecutor’s office, prosecutors in other places, however, have to investigate all variety of matters without any personnel with expertise in the specific subjects.
These factors may result in limited investigative activities by the prosecutor, with no further investigative steps taken. Ultimately, the case may be closed, sometimes years later.
C. The potential second life of any D&O coverage
The closure of a criminal case plays a significant role for D&O insurance. If no criminal proceedings are pursued and no charges are filed, coverage under the D&O policy may become available, even if, initially, insurers may have declined coverage because of the instigation of criminal investigations by the public authorities.
Unlike in the U.S.A., European and Swiss D&O policies do not exclude internal liability cases (“I v. I Exclusion”). These cases involve situations where executives may have caused damage either directly to the company through duty violation, or by triggering a third-party claim against the company. Accordingly, after the criminal case is closed, third-party claims or claims of the company against an executive (under the D&O policy) may be covered after all, as the alleged violation of duty did not constitute a criminal offense (otherwise, the prosecutor would have filed charges).
D. Summary
Typically, insurers exclude coverage under the D&O policy as soon as they become aware of the fact that an investigation has been initiated. Often, the insured individuals and/or the policy-holding companies may not even report the matter to the insurer when an investigation is initiated, assuming from the outset that coverage will be excluded.
In this context, it is important to note that the initiation of a criminal proceeding in continental European jurisdictions does not necessarily lead to a criminal conviction.
In fact, as shown before, prosecutors often refrain from taking investigative actions and criminal cases are frequently closed without further progress (a conviction is, statistically speaking, the least likely outcome of a criminal investigation).
Therefore, it should not be assumed “prematurely” that there is no coverage under a D&O policy that excludes criminal conduct solely on the basis that a criminal case has been opened in Switzerland (or generally in Europe).
Insured individuals and companies are advised to always notify the insurer of the initiation of criminal proceedings and this would also aid in keeping in mind a potential D&O coverage. Insurers should include a limitless carve-back for defense costs to assure adequate defense until final adjudication.