If you haven’t heard Snap, better known as Snapchat, is being investigated for its disclosures leading up to its IPO in 2017. You can find a good overview at TheStreet about the ins and outs of the case, but here are the two major allegations:
- Snap withheld information regarding the level of competition it faced from Instagram.
- A former worker alleged that it was inaccurately calculating and reporting daily active users (DAU), a key metric investors use for social media companies.
Snap is an example of why D&O insurance is more challenging for companies with the three year window of their public offering, and that can be summed up in one phrase – “failure to disclose.” “Failure to disclose” is one of the most common claims we see and when the stock doesn’t perform well the odds of a claim are exacerbated. Whether these allegations end up being true or not, it will be costly for Snap to defend themselves and could very well exceed their retention (deductible), meaning the insurance company will be need to contribute.
The Snap story brings up another important issue with D&O insurance and that is investigative costs. Investigative costs should be covered by your D&O policy, but if your broker isn’t paying attention then investigative costs could very well be excluded or limited. We will assume that you have coverage for investigative costs, but what typically happens before the SEC initiates a formal investigation? The SEC will informally ask that you provide documents and information, otherwies known as an informal investigation. These requests cost money and can be lengthy, but technically you are not being formally investigated so the D&O insurer will look to exclude coverage until there is a formal investigation.
This does not have to be the case. Informal investigation costs can be covered by the policy but insurance companies aren’t excited to offer the coverage so your broker needs to ask for them to be covered. If the insurance company will not offer full coverage for informal investigations that does not mean it is a lost cause. At the very least, your broker should be able to secure a sub-limit for informal investigation costs, this is not optimum but it is better than nothing.
Informal investigations are nothing new and I am sure at some point insurance carriers got stuck paying them so they changed the policy language to better protect themselves so they would not have to pay them in the future. Now carriers are more willing offer coverage or they will at least offer a sublimit, and as I always say, when a carrier provides a sublimit it is a sign for the insured/broker to be cautious, as it means the insurance company knows the probability of a claim for that risk of is higher.
By the way, in case you were wondering you can find me on Snapchat, my handle or screen name is mattcorc1, and here is proof.