Corporate officers in every industry have to be on guard when it comes to enforcement of federal laws and, according to insurance broker Marsh, healthcare executives in particular are starting to see increasing oversight of the Food, Drug, and Cosmetic Act (FDCA).
As part of this regulatory activity, federal regulators are imposing the Responsible Corporate Officer doctrine (RCO doctrine) to punish violators of the FDCA. The doctrine states that individual corporate officers in positions of authority can be held criminally liable if they don’t correct a wrongdoing within a corporation, even if they have no knowledge or intent of the wrongdoing. They can face fines or penalties.
In studying emerging trends and exposures, Marsh saw there was an elevated level of RCO doctrine investigations in general and in the healthcare sector in particular. That discovery led to the broker teaming with insurer Allied World to develop RCO Corporate Response coverage.
Maureen Gorman, senior vice president of Marsh in N.Y., says federal officials have been zeroing-in on healthcare organizations’ violations of the RCO doctrine.
“What has happened is large healthcare organizations have come under more scrutiny and have seen where the government has imposed fines and penalties on large corporations because certain behaviors have failed to be corrected,” says Gorman.
Gorman says under the doctrine, corporate officers can be penalized with fines or barred from doing business with federal or state healthcare programs, including Medicare and Medicaid.
“This penalty of exclusion is meant to be a deterrent,” says Gorman. “The punishment bars these officers from working with federal healthcare programs and could be a career-ending situation.”
According to Gorman, the new RCO coverage is a strict liability policy so there cannot be any intent on the part of the corporate officers. The policy provides coverage for defense costs incurred in the investigation of an RCO violation, or defense of any misdemeanor criminal proceeding, as well as the costs associated with RCO administrative debarment proceedings. Defense cost coverage is also available for potential RCO claims.
In addition, the policy features a continuation of salary/compensation for excluded or debarred executives, and reimbursement of a corporate officer’s compensation that would be returned in the event of an adverse judgment or settlement.
Gorman says the salary reimbursement feature is the major difference between this coverage and a regular directors and officers policy “The question comes up: isn’t there defense under a D&O policy? There may be coverage for defense, but the salary continuation and recoupment loss component is unique in the marketplace.”
Policy limits are currently available up to $15 million, and there may be certain sublimits per officer if there are several executives to be covered. The policy targets anyone involved in the healthcare and life sciences sectors, including pharmaceutical companies, laboratories, hospitals, medical device companies and nursing homes. It is customized to match each entity’s organizational structure.
Gorman says the RCO doctrine can be applied to other companies, but the coverage is currently targeted specifically towards the healthcare segment because this is the area Marsh identified as having the greatest need for coverage at this time.
“[The enforcement of this doctrine] is a way to encourage better behavior – a watchdog effect – in terms of trying to affect the behavior and compliance,” she says. “If you are targeting these individuals, they are going to pay attention as they see more activity.”
Gorman says the focus for the first quarter was to get the word out about the product.
“It has been interesting. It is a unique product so it does take a little while to explain it and talk about the concept, but it is a very prevalent problem,” she says. “Most people in the health care industry are aware of the RCO doctrine, and it’s a common topic in the industry.”
She says the most important thing to keep in mind is that corporate officers can be completely innocent and nonetheless be subject to the penalties of an RCO violation.
“This is a not a hypothetical exposure,” says Gorman. “There are increased mandates and watching of the FDCA, as well as increased penalties for companies under investigation.”