Corporate directors and officers have a long list of things that can keep them up at night. Personal liability for civil fines and penalties arising out of negligence or even gross negligence committed in the course of their service to the company should not be one of them. But recently, in United States v. Trek Leather, Inc., 767 F.3d 1288 (Fed. Cir. 2014) (en banc), a federal appeals court held that the government could hold a corporate officer liable for a civil penalty based on gross negligence committed by the officer or his or her agents acting in the scope of their duties to the company, and without the government establishing fraudulent intent or attempting to pierce the corporate veil. Following the decision, a representative of the Department of Justice, although speaking for himself and not the DOJ, sought to downplay the effect of Trek Leather by—perhaps unwittingly—stating that the result in Trek Leather simply reaffirms long-standing government policies. In light of the decision in Trek Leather, as well as at least one Justice Department attorney’s belief that it is wholly appropriate to pursue individual directors or officers in their personal capacities for fines and penalties without even having to establish fraud or wrongful conduct by the director or officer himself or herself, a director or officer might understandably sleep a little less soundly.

For directors and officers facing similar risks, it is important to ensure that the company’s directors’ and officers’ liability (“D&O”) insurance program includes comprehensive coverage for non-indemnifiable Claims against corporate directors and officers (“Side A” coverage), including coverage for civil fines and penalties (to the extent insurable under applicable law), in the event the company is unable or unwilling to pay or indemnify for civil fines and penalties. Excess Side A-only/Difference-in-Conditions (“DIC”) policies may further provide an additional, critical backstop to personal liability. A comprehensive DIC policy may provide both excess Side A D&O coverage and also may “drop down” and serve as primary Side A D&O coverage in the event civil fines and penalties or other loss assessed against directors and officers cannot be indemnified and the company’s full-side D&O policies cannot respond to the claim due to exhaustion, insolvency or a coverage issue.

Don’t wait to ensure that your officers and directors are covered. If your company’s D&O insurance program lacks this coverage, request that your carriers extend coverage for civil fines and penalties levied against directors and officers at the company’s next renewal or placement. If your company is inheriting or potentially inheriting liabilities through a transaction or merger, assess and address these risks during negotiations, and put in place (or require the seller to put in place) adequate indemnification and insurance protections to shield directors and officers from personal liability. As the insurance maxim goes, you’ll be glad you have it when you need it.