Is there a lesson about what insurance does and doesn’t cover in the indictment of Elizabeth Holmes, the once high-flying founder of the lab-testing company Theranos?
Of course there is.
The background first, though. Holmes and the company’s former president, Ramesh Balwani, were indicted on June 15 for allegedly defrauding investors out of hundreds of millions of dollars as well as deceiving patients and doctors.
The indictments came about three months after the SEC filed civil fraud charges against the two.
Holmes, in case you missed the story, was a Silicon Valley star, promoting what she claimed as a simple blood test that would revolutionize health care. The Wall Street Journal, however, exposed her with reporting that revealed flaws in the company’s technology.
Holmes and Balwani now face two counts of conspiracy to commit wire fraud and nine counts of wire fraud. The indictment alleges the two knew that many of their representations about the company’s blood analyzer were false. They lied, prosecutors said, about the capability of their technology, about revenues, about their clients.
For us, the case raises an important point about directors and liability insurance policies.
D&O covers directors and officers for claims made against them while serving on a board of directors or as an officer of a corporations. Any business with a corporate board or advisory committee should consider D&O insurance. Indeed, it can be written to cover the directors and officers of for-profit businesses, privately held firms, not-for-profit organizations and educational institutions.
In effect, D&O policies function as management “errors and omissions liability insurance,” covering claims resulting from managerial decisions that have negative financial consequences.
Directors and officers are sued for a variety of reasons related to their company roles, including:
Illegal acts or illegal profits, however, are not covered under D&O insurance. In fact, these policies typically include a securities liability exclusion that precludes coverage for claims against the company and its executives alleging violations of securities laws. In other words, fraud and deliberate criminal acts by directors and officers are not covered.
So, was what Holmes and Balwani did illegal? The justice system will decide that. As a general rule, an insurer will defend an executive on the basis that they are innocent until proven guilty. But any D&O policy that Theranos might have had in place isn’t likely to pay should Holmes and Balwani be found guilty.
Brian Parks is CCIG’s Commercial Lines Sales Director. Reach him at 720-330-7923 or BrianP@thinkccig.com.
CCIG is a Denver-area insurance brokerage with the full-service capabilities of a national brokerage. We do more than make sure you have the right policy. We help you manage your long-term cost of risk with our risk and claims management expertise and a commitment to service excellence.
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