Road Map for Insurance Coverage
In reflections on 2007, the view from the rear window showed claims against in-house counsel pertaining to stock options backdating, fraud, discovery abuses, lying to investors and auditors, insider trading, litigation misconduct, violations of securities laws, Medicare and Medicaid fraud including violations of the False Claims Act,1 e-discovery errors, corporate governance violations, intellectual property and trade secret issues, as well as general allegations of legal malpractice. The road for some in-house attorneys ended with punishments ranging from prison sentences and fines to reprimands, suspension and disbarment.
Just as in-house attorneys believed that it was safe to go back on the road, in March 2007 the Securities and Exchange Commission commenced an action against two former in-house attorneys of Enron alleging violations of federal securities laws by making material misrepresentations in public filings for Enron and omitting material disclosures, all of which was part of the scheme to defraud investors.2
The trip through 2007 continues with new issues emerging including power struggles between chief legal officers and chief compliance officers. Recall earlier this year where general counsels were held personally liable for adopting compliance plans in violation of federal regulations governing compliance. We also see the growth of the U.S. government's reach with respect to global practice in general. In 2007 there has been a heightened interest in international money laundering as well as antitrust violations committed by foreign executives which all may ultimately impact in-house counsel. In this same lane, as the Sarbanes-Oxley Act of 20023 gains traction in the United States via proof of its successful results, these same types of regulations may be implemented in other parts of the world as well as other U.S. industry sectors such as nonprofit organizations.
Certainly from a practice perspective, in addition to new compliance and discovery rules, more attention has been given to global warming and disclosure requirements. Further, the subprime meltdown and the new threat of unstable corporate debt may be setting the speed limit for the highway ahead.
While the gas tank may appear to be running on empty, engines remained revved up for more pro bono work. Many corporations sought to establish official pro bono programs, and certain states continue to attempt to mandate pro bono as a requirement to maintain law licenses.
In response to all of these signs, many in-house counsel just fastened their seatbelts in anticipation of a bumpy ride. Yet those who wanted to stay ahead of the curve sought additional protections in the form of solid indemnification agreements from their employers as well as purchases of insurance coverage specifically designed to meet the needs of in-house counsel with limits of liability solely dedicated to them.
A fair number of in-house counsel, who were also officers of their employers, sought refuge in their directors and officers liability insurance policies (D&O policies). Many, however, found themselves in a gray area when advised that these insurance policies were not designed to address claims of legal malpractice, nor did boards of directors want to share their limits of liability with in-house counsel for legal malpractice claims.
In the face of a myriad of new and existing exposures, potential corporate insolvency, personal liability, and regulatory road rage, a separate stand-alone insurance policy for in-house counsel has gained appeal. This article highlights the mechanics of a standard insurance policy for in-house counsel, commercially known as employed lawyers professional liability insurance or employed lawyers policies. It also discusses key provisions - included under "Travel Tips" - that are commonly found in the most comprehensive employed lawyers policies.4
Who Is an Insured?
The typical employed lawyers policy provides coverage to the general counsel, as well as all other in-house counsel and administrative personnel who support the in-house counsel function. In addition, most policies provide coverage for contract attorneys from employment agencies. The list of those persons insured is most commonly included within the definition of Insured Person or Insured.
Insureds also include all legal departments of subsidiaries. Coverage for all insureds is worldwide, and extends to protect spouses, domestic partners, estates, and legal representatives.
Travel Tip: As an enhancement, certain policies provide coverage for attorneys who are independent contractors to the organization. Attorneys working on retainer or billing from outside law firms are not considered insureds.
Pursuant to their insuring agreements employed lawyers policies generally provide coverage to in-house counsel for any act, error, omission, breach of duty, or misleading statements, and defamation committed in the provision of legal or professional services performed on behalf of the organization.5 This typically includes the performance of pro bono work at the direction of the organization as well as moonlighting.
Under traditional circumstances, the organization indemnifies its in-house counsel and it is reimbursed by the insurer to the extent that it provides this indemnification. This organization reimbursement feature is known as Insuring Agreement B or more commonly referred to as Side B.
In the rare event that the organization cannot or will not indemnify its in-house counsel, pursuant to Insuring Agreement A (also referred to as non-indemnifiable loss or Side A), coverage is triggered so as to protect the in-house attorney from the inception of the claim following satisfaction of a minimal retention, if any.
1. The most comprehensive employed lawyers policies now offer non-rescindable Side A coverage which means that the policy cannot be rescinded for any reason as to the innocent insureds. This is a long sought-after policy enhancement.
2. An Order of Payments provision is also included in the most comprehensive employed lawyers policies. This provision specifies that the insurer will first pay for Side A (non-indemnifiable loss) and then reimburse the entity (Side B). This is a strong enhancement particularly where in-house counsel may find themselves without corporate indemnification thereby invoking Side A coverage.
• Certain insurers sell Side A Only coverage while others will only sell it upon request.
• Many insurers will sell Pro Bono Only policies or Pro Bono plus Moonlighting coverage.
Well-defined terms on an insurance policy can often mean the difference between receiving coverage and a coverage denial. Here, we highlight select terms that historically have had a significant impact on an insurer's coverage position with respect to employed lawyers professional liability insurance.
Claim. This term ordinarily includes any written demand for monetary or non-monetary relief. Therefore, all civil actions and alternative dispute resolution proceedings generally constitute a Claim. In addition, the definition captures any judicial, administrative, regulatory, bar association or disciplinary proceeding that involves the in-house counsel's ability to practice law or his or her compliance with the Sarbanes-Oxley Act of 2002. Perhaps most critical for in-house counsel of publicly traded companies is that the definition of Claim also includes Securities Claims. The definition of Securities Claims often appears on employed lawyers policies as claims made against in-house counsel arising out of legal work performed relative to securities matters. Further, on certain policy forms, shareholder derivative actions are also included within the definition of Claim.
Travel Tip: The most comprehensive employed lawyers policies will also include criminal proceedings as well as civil, regulatory, administrative or criminal investigations within the definition of Claim. This modification, however, generally only pertains to claims involving the purchase and sale of securities.
Legal or Professional Services. Although all employed lawyers policies do not include Legal or Professional Services as a defined term, if the term is included, it should be as broad as possible. The typical definition includes all legal services performed on behalf of the employer by in-house counsel or other insureds. This definition also includes pro bono and moonlighting services.
1. The most comprehensive employed lawyers policies include notary services within the definition of Legal or Professional Services.
2. A good enhancement to this definition, as provided by one insurer, includes personal legal services. This includes incidental advice to co-workers regarding personal legal matters.
Loss/Damages. These definitions are often interchangeable and generally include any monetary amount that must be paid as a result of judgments, settlements, or arbitration awards. This definition includes pre-judgment and post-judgment interest as well as punitive, exemplary and multiple damages to the extent that these damages are insurable by law.
Most often, the definition of Loss/Damages also includes defense costs which is typically defined as any reasonable and necessary legal fees and expenses incurred in the defense of a Claim.
Traditionally, Loss/Damages does not include coverage for fines, penalties, sanctions, taxes or any other form of punishment that would be against public policy to insure.
As a practical matter, only a select few exclusions have been invoked by insurers to deny coverage.
Conduct Exclusions. Coverage is not available for fraudulent/criminal acts, intentional or knowing violations of the law (including libel and slander), and claims alleging the gaining of any personal profit to which an in-house attorney is not legally entitled. Insurers, however, will provide coverage for defense costs up until a final adjudication is made. If it is determined that any of the aforementioned acts did in fact occur, then insurers will seek the return of any insurance monies paid.
Typically, insurers build in severability for the conduct exclusions which means that the finally adjudicated knowledge or "bad acts" of one insured cannot be imputed to other innocent insureds who will still be entitled to coverage.
Travel Tip: Although generally not available, severability as to all policy exclusions as well as the policy application is preferable.
Insured Versus Insured Exclusion. Although an individual insured bringing a claim against another individual insured is not eligible for coverage, all policies provide defense-cost coverage for claims brought by the corporate employer.
1. Given the volume of bankruptcies declared, the most comprehensive employed lawyers policies provide coverage for claims against in-house counsel brought by trustees in bankruptcy, receivers, liquidators, and related parties.
2. The most comprehensive employed lawyers policies now provide defense-cost coverage plus indemnity payments for settlements/judgments for claims made in a bankruptcy proceeding.
3. Many employed lawyers policies have been enhanced to provide coverage for defense costs for cross-claims and claims for contribution by third parties.
4. Inasmuch as in-house counsel view their client to be the corporate employer they often seek some form of indemnity payments (for settlements or judgments) in the event that a claim is made by the corporate employer. This is a coveted enhancement made on a case-by-case basis.
Beware of Road Conditions. Although not an exclusion, a limitation that insurers specify is that employed lawyers policies are designed to act as excess coverage to D&O insurance which should provide primary coverage for claims against in-house counsel who are officers, particularly for securities actions.
Speed Bumps Ahead. Other exclusions invoked by insurers include: claims arising out of pending or prior litigation or proceedings; violations of the Employee Retirement Income Security Act (ERISA) by in-house counsel acting as fiduciaries as opposed to legal advisers to an ERISA fiduciary; employment practices claims for discrimination or harassment allegedly committed by an in-house attorney as opposed to legal counseling with respect to the employment practices of others; and pollution claims.
Travel Tip: Seek to delete exclusions or modify them to minimize their effects. The most comprehensive employed lawyers policies reclaim coverage for claims involving pollution where the legal services performed were not the direct cause of the pollution claim.
Taking the Scenic Route?
The D&O Route. As an alternative to obtaining a stand-alone employed lawyers policy, organizations may seek to add this type of coverage onto their D&O policies. Certainly, from a cost perspective, this oftentimes results in a minimal increase, if any. In terms of the breadth of coverage offered, protection frequently does not extend to all members of the legal department, but rather to in-house attorneys only or perhaps only to the legal department heads.
In addition, D&O policies are not designed to respond to allegations of legal malpractice, disciplinary proceedings, investigations regarding law licenses, claims brought by the corporate employer, pro bono or moonlighting claims. It is evident from the D&O policy exclusions that this type of coverage for in-house counsel was not contemplated when compared to all of the modifications to coverage provided by the stand-alone employed lawyers policies.
Boards of directors advise that they do not want to share the D&O policy limits with in-house counsel for legal malpractice claims. Certainly, there is no dedicated limit of liability to in-house counsel if a securities class action or other high-exposure claim rides down the road to put the gas tank on empty and exhaust all of the D&O policy limits. While this route remains an alternative to many, it requires a lot of road construction.
Intersection Highway. Certain organizations have creatively provided insurance coverage for in-house counsel by seeking to include them as insureds on a combination of insurance policies. Thus, to create $3 million in insurance policy limits an organization may seek $1 million as a sub-limit from each of a general liability policy, professional liability policy, and a D&O policy. Although these additions may be of little or no financial cost to the organization, the definitions, exclusions, and other terms and conditions of these policies are not typically designed to address the insurance coverage needs of in-house counsel.
The Finish Line
At our final destination, the road ahead into 2008 will likely keep in-house counsel wheels spinning as they navigate around obstacles and detours presented by corporate employers, regulators, and outside third parties. The issues of backdating, fraud, corporate governance, e-discovery, compliance, antitrust abroad, global warming, and consequences of the subprime meltdown remain backseat drivers on this trip. At the end of the journey, however, in-house counsel who know their exposures and address them adequately will have an easier ride on the Corporate America Highway.
Susan F. Friedman is a senior vice president, claims advocate, and the national practice leader of the Employed Lawyers Product Practice at Marsh. She can be reached at Susan.F.Friedman@marsh.com.
1. 31 USC 3729 et seq. 1863 as amended 1986.
2. SEC v. Jordan H. Mintz and Rex R. Rogers, Civil Action No. 07-1027 (S.D. Texas) (March 28, 2007).
3. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).
4. This article contains summaries of certain insurance policy terms selected by the author and it is not intended to supplement or replace a full reading of an employed lawyers professional liability policy.
5. This is generally the definition of the term "Wrongful Act" in policies that include it as a defined term.