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Final Adjudication of Regulatory Enforcement Actions
and Its Effect on D&O Insurance Coverage

July 9, 2014
Gregory J. May

In the wake of the 2008 crash, federal regulators, including the Securities and Exchange Commission (‘‘SEC’’) and the Federal Deposit Insurance Corporation (‘‘FDIC’’), have markedly increased their investigation and prosecution of financial institutions and their executives. Directors, officers and entities facing civil and criminal investigations and proceedings brought by government agencies look to avoid or limit any liability on the best terms possible whether by taking the matter to trial or by reaching a settlement. Resolution of the proceedings short of trial obviously may result in incarceration or payment of penalties by the targeted directors or officers. The form and timing of the resolution may also affect whether there is coverage for the claims under the applicable directors and officers insurance (‘‘D&O’’) policy.

D&O policies uniformly contain provisions that bar coverage where a "final adjudication or judgment" determins that the insured has engaged in certain conduct giving rise to the insurance claim.

For example, most if not all D&O policies contain an exclusion barring coverage where the insured is proven by a "final adjudication or judgment" to have engaged in fraudulent or dishonest conduct.

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