Companies Act stipulates that indemnification of a director’s legal costs by their company is not allowed if the director is found guilty in a prosecution

UK executives have been warned of the impact plea bargains in the US could have on their indemnity and directors’ and officers’ (D&O) insurance.

Plea bargaining is increasingly commonplace in the US legal system and can appear attractive rather than run the gauntlet of a jury trial and potentially a longer sentence or more severe financial consequences: on average only 5% of federal criminal cases go to trial.

In December, the NatWest Three, all UK citizens, pleaded guilty to a single count of wire fraud in a plea bargain; and three other UK executives involved in alleged price fixing of marine hoses entered a plea bargain with US officials.

Matthew Rolph, managing director of Marsh's Management Liability practice, said: ‘A primary concern, besides the emotional strain, for an executive called to task for their actions involving the US is clearly a question of financial support. A D&O insurance policy should provide the executive with an additional backdrop and level of financial protection not always provided by indemnities available from their employer.’

The 2006 Companies Act in the UK stipulates indemnification of a director’s legal costs by their company is not allowed if the director is found guilty in a prosecution, said Marsh. There are provisions for companies to loan costs to directors, but these are subject to repayment of legal costs if the director is found guilty.

‘Whilst a D&O policy will not generally be able to cover fines and penalties, a good policy will advance legal costs and if necessary pay the costs on behalf of the executive to defend an action of fraud and dishonesty,’ continued Rolph.

However, upon a final adjudication by a court or the admission of guilt by an executive, certain insurers will state in their policy that they have a right of recovery over any costs they have advanced or incurred.

‘Under the terms of a plea bargain, the executive may have to make an admission of guilt, but admitting to certain conduct can preclude cover under some D&O policies. The good news for most executives is that the fraud of one executive is not attributable to another when insurers consider whether to restrict coverage,’ said Mr Rolph.

‘The costs of defending an action in the US will normally run to seven figures and sometimes more. Putting the regulators behind you may not be the end of the problems. Insurers seeking repayment could be the very unwelcome icing on the cake.’