- Of the pressures company directors face, the threat of investigations is one of the more significant.
- Forthcoming legislation is set to increase the powers of the SFO and the accounting regulator to investigate directors.
- As well as taking action to ensure continued compliance with their legal and regulatory obligations, directors should review the scope and extent of the investigations cover provided by their company’s directors’ and officers’ / management liability policies (D&O/ML) policies.
Context: increasing threat of investigations
It’s not an easy time to be a company director. With the ever-evolving threat of shareholder activism, the risk of personal liability for board decisions, and the need to balance competing stakeholder interests in a constantly shifting political landscape, directors have a lot on their plates.
Of the pressures companies and their directors face, the threat of investigations – by professional bodies, regulators, governmental agencies and other investigative authorities – is one of the more significant. It is often the directors themselves who are front and centre of these investigations, especially when the company has become insolvent.
The Financial Conduct Authority, for example, has the power to investigate and bring enforcement action against individuals who have been “knowingly concerned” in their company’s misconduct. Two high-profile examples of the FCA deploying this power are the cases of Carillion and of Metro Bank. With Carillion, the FCA issued a Decision Notice proposing fines against the company’s former CEO and financial directors for being knowingly concerned in the publishing of misleading announcements about the company’s financial performance. As for Metro Bank, the FCA fined the former CEO and CFO for being knowingly concerned in the inaccuracy of the financial results the company published in 2018. In both cases, the FCA chose not to fine the companies themselves. The decisions against the directors are currently with the Upper Tribunal, which will decide whether to uphold them.
The Economic Crime and Corporate Transparency Act 2023 is due to come into force in September 2025. Described by the Director of the Serious Fraud Office, Nick Ephgrave QPM, as “the most significant boost to the [SFO]’s ability to investigate and prosecute serious economic crime in over 10 years”,[1] this legislation expands the grounds for director disqualification (for example, for persistent breaches of companies legislation) and introduces a new corporate offence of “failure to prevent fraud”. This offence aims to encourage companies to implement robust fraud prevention measures by holding large organisations accountable if an employee or agent commits fraud intending to benefit the organisation, even if directors or senior managers were unaware of the fraud.
There’s change coming for the regulation of auditing, accountancy and actuarial firms and their directors as well. The Draft Audit Reform and Corporate Governance Bill will create a new accounting regulator – the Audit, Reporting and Governance Authority (or “ARGA”) – which will replace the Financial Reporting Council. This draft legislation includes plans for increased investigative powers of the regulator, and widens the net of directors that the regulator can sanction. Despite it being on the cards for a while now, the prominence of the Bill in the King’s Speech on 17 July 2024 (where it was mentioned second only to the Budget Responsibility Bill), suggests that it is being given priority by the new government.
With directors also facing new and increasing responsibilities in areas such as ESG, cybersecurity and AML, it’s hardly surprising that a recent survey on global trends for D&O/ML in 2025 conducted by Global Insurance Law Connect amongst its member firms found that the factor having the greatest influence on the D&O/ML market was increased regulation and legislation.[2]
Insurance coverage: nature and extent of investigations cover under D&O/ML policies
Needless to say, constant review and action is required on the part of directors to ensure continued compliance with the ever-expanding remit of their duties. But that can’t mitigate the possibility of investigations entirely. This is where investigations cover comes into play.
Investigations cover is an additional cover frequently found within a D&O/ML policy that covers costs and expenses incurred by directors, or the company on their behalf, in attending, or providing documents or information for the purposes of, an investigation. It is distinct from the primary cover afforded under a D&O/ML policy for the costs of dealing with claims against directors, and it doesn’t usually require a wrongful act to be identified or alleged – only for an insured person to be required to respond to or assist with a covered investigation.
The types of investigations covered depend upon the policy wording. They commonly include investigations carried out by regulators, governmental bodies, professional bodies and other authorities as well as criminal investigations. Whether routine regulatory reviews (for example FCA thematic reviews) and internal investigations are covered, and if so from what point in their lifecycle, will vary according to the policy.
Cover for directors’ legal costs is usually subject to insurers’ prior written approval, and it is normally a requirement that such costs are “reasonable” and/or “necessary” in nature and extent. However, cover for costs which are incurred in circumstances where it is not possible to obtain insurers’ prior written consent may be provided for by way of an “emergency costs” extension.
Careful examination by insurers and their solicitors of directors’ legal costs is perfectly understandable, but directors should be wary of attempts by insurers to whittle down a defence costs claim on the grounds of “reasonableness” of the costs. The case of Woodford and Hillman -v- AIG [2018] EWHC 358 concerned insurers’ refusal to fund the defence costs of two former directors of a company under its D&O policy on the grounds that they were not “reasonable” (which was a requirement of the policy). Insurers also claimed that their liability for the directors’ defence costs should be determined by a costs assessment, such as the kind that takes place at the end of proceedings to determine how much of the winning party’s costs the losing party is liable to pay. The court rejected this argument. On the reasonableness of the costs, the requirement under the policy was that defence costs should be “reasonable with regard to the complexity and significance of the case”. Since the proceedings against the directors concerned complex issues in a specialist area of law, involved serious allegations which had reputational significance, and would involve a 3-week High Court trial, the court found that the costs the directors had incurred were reasonable for the “complexity and significance of the case”.
Comprehensive investigations cover will extend to employees involved in investigations into their employer companies, as well as retired directors, and provide for personal expenses incurred during an investigation, such as travel and accommodation costs, living expenses following orders to confiscate or freeze assets, counselling services to provide psychological support to directors and employees during stressful investigations, and “crisis costs” for expenses incurred in reducing or mitigating the reputational damage that can be caused by an investigation.
Cover for criminal and civil fines and penalties and deliberately fraudulent conduct is normally explicitly excluded from D&O/ML policies for public policy reasons. However, cover is sometimes available for certain civil fines and penalties, for example, in relation to unintentional conduct.
Conclusion
With increasing regulatory scrutiny, the costs of dealing with investigations, even those that do not result in any formal allegations or enforcement action, are potentially significant exposures for companies and their directors, not to mention a substantial drain on management time when board members should be focused on the needs of the business rather than coping with the distractions of an investigation without legal support. Accordingly boards will give consideration to purchasing D&O/ML cover, particularly where the company is active in a regulated area with the prospect of lengthy and expensive investigations and potentially high fines.
At Indemnity, we are experienced in dealing with coverage disputes involving investigations cover, including acting on behalf of directors and other insured persons to establish whether cover exists, obtaining the policy documents where necessary, and negotiating with insurers both to confirm cover and recover defence costs. We are also happy to take a look at D&O/ML policies to confirm the extent and scope of the cover provided, and advise on any gaps in coverage where attention might be required.
[1] https://www.gov.uk/government/news/robust-new-laws-to-fight-corruption-money-laundering-and-fraud
[2] https://www.globalinsurancelaw.com/2025/02/10/do-landscape-shifts-as-basket-of-risk-widens-driving-up-demand/
