Water cooler and triangular chairs

Key considerations crime and D&O insurers cannot a-fraud to ignore

15 November 2023. Published by James Wickes, Partner and Jessica Pease, Associate

The UK government is committed to reforming corporate criminal liability and making it "quicker and easier" to prosecute companies involved in fraudulent conduct.

These reforms will no doubt be welcomed by many where the nature and scale of fraud in the UK has evolved significantly and now constitutes more than 40% of all offences in England and Wales. However, it will inevitably have an impact on insurers, especially the D&O insurance market.

Failure to Prevent Fraud Offence

As part of the government's expansion of the scope of corporate criminal liability, a new failure to prevent fraud corporate criminal offence was granted royal assent and introduced as part of the Economic Crime and Corporate Transparency Act 2023 on 26 October 2023. It is hoped that once this new offence comes into force it will improve fraud prevention by closing loopholes which have historically allowed companies to avoid prosecution and protect victims of fraud. It is however important to note that the government is focused on ensuring that the burden on companies is proportionate and therefore this new offence will not apply to all companies. Instead, only large companies (i.e. those with two out of three of (i) more than 250 employees (ii) more than £36m turnover and (iii) more than £18m in total assets) fall within the scope. 

Similarly to the failure to prevent bribery and failure to prevent the facilitation of tax evasion offences, under this new failure to prevent fraud offence, covered companies (including subsidiaries and parent companies) will become criminally liable for failing to prevent fraudulent misconduct (including false accounting) which is carried out by its employees provided this benefits the company itself. This is regardless of the company not actually having knowledge of the underlying wrongdoing. 

The government will publish guidance as to the reasonable fraud prevention measures which may act as a defence to liability and prevent companies from receiving an unlimited fine. 

Key Considerations for Insurers 

We can expect companies to be conducting risk assessments and familiarising themselves with, and reviewing and updating, the fraud compliance policies and procedures currently in place in order to ensure that these are sufficient enough to (i) prevent any fraudulent wrongdoing and (ii) act as a defence to a failure to prevent fraud offence, if required. 

Related to this, we would recommend insurers make sure to conduct sufficient due diligence as to the adequacy of a company's policies and procedures when assessing and underwriting risk as, without sufficient procedures in place, we can expect to see an increase in claims/investigations/prosecutions against corporates and their directors and officers as (i) the scope of the current fraud offences widens to encompass more wrongdoing and (ii) it is quicker and easier for regulatory bodies/prosecutors to effectively prosecute and attribute knowledge to the companies. In particular, we can expect to see an increase in deferred prosecution agreements being entered into with the SFO/CPS and associated shareholder actions, such as we have seen in relation to the similar failure to prevent bribery offence. 

Linked to the above, we would also recommend insurers familiarise themselves with the additional changes being introduced under the Economic Crime and Corporate Transparency Act 2023 (such as the attribution of knowledge and additional corporate transparency reforms which place additional obligations on directors and officers) and keep abreast of the government's consultation and developments as to:

  1. The adequacy of the current disclosure regime governed by the Criminal Procedure and Investigations Act 1996 where many criminal cases are collapsing due to disclosure failures (the report is expected in the summer of 2024).
  2. Whether the fraud offences which fall under the Fraud Act 2006 (and the associated penalties) are sufficient enough to meet the challenges of modern fraud (the report is expected in spring 2025). 

Whether this will result in a shift in a company's / D&Os' risk profile and therefore increased insurance premiums remains to be seen, but the above will assist insurers with understanding the scope of due diligence to be undertaken in relation to company governance when assessing and underwriting risk.