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Protecting the Protectors: Considerations for maximizing coverage for your in-house legal counsel


McGriff, Seibels & Williams, Inc
Justin Comeaux

Your in-house counsel faces significant personal exposure not covered by your D&O policy when advancing your company’s position to customers, clients or especially to a regulatory body (i.e. SEC, DOJ, DOL, FDA, etc.). A recent example is the GlaxoSmithKline case where former vice president and associate general counsel advanced the company’s position to the FDA. According to the FDA, Lauren Stevens obstructed the FDA’s inquiry while serving as the liaison between her company and the FDA. At issue is whether Glaxo promoted, or knew certain doctors were promoting, use of an antidepressant drug for unapproved uses. In this case the government asserted that Ms. Stevens made false statements that all relevant evidence had been produced to the FDA and the company had not engaged in any improper conduct. Whether or not Ms. Stevens is found guilty, reimbursement or payment for her defense expenses will depend on indemnification obligations extended by her employer and other potential financial backstops such as Employed Lawyer’s Liability Insurance and Directors and Officers Liability Insurance. (Source: New York Times Online; Pub. Date 11/21/2010) Story linked here.

Ms. Steven’s case, filing linked here, is not an isolated instance; in the last decade, in-house counsel at other companies have faced similar allegations of obstruction, excessive loyalty as well as silence or acquiescence on issues affecting financial results. These cases include companies such as Tenet Healthcare, Chaquita Brands and Trace International.

Between Sarbanes-Oxley disclosure requirements and increased regulatory oversight, aligning your company’s indemnification requirements and management liability insurance policies as relates in-house counsel could prove especially valuable to your management team.

There are three primary ways that companies protect their internal counsel:

(1) Rely on the D&O ‘off-the-shelf’ policy to protect employed lawyers as part of the executive management team. Since D&O policies are not intended to protect executives in a legal capacity common coverage issues often include:

a. Sharing a policy limit with all directors and officers of the company;

b. The definition of Insured Person may not include in-house counsel in their capacity as such;

c. Potential application of exclusions in the D&O policy including an express exclusion for professional services or a common exclusion such as Insured v Insured and/or Entity v. Insured suits when brought by the company against in-house counsel;

d. No coverage for Moonlighting & Pro Bono, which would include informally offering advice to office associates.

(2) Endorsing the D&O policy to include Employed Lawyers is better than relying on an ‘off-the-shelf’ D&O policy, but still carries similar coverage pitfalls such as:

a. Sharing a policy limit with all directors and officers of the company;

b. Most policies still carry an exclusion for Insured v Insured and/or Entity v. Insured suits when malpractice claims are brought by the company or another insured against in-house counsel;

c. Some policies do not include coverage for pro bono or moonlighting work for others or to paralegals or other non-attorneys within the legal department

(3) A dedicated Employed Lawyers Liability (E&O) policy would:

a. Provide a dedicated policy limit separate from the directors and officers of the company, typically with a much smaller retention;

b. Include defense cost coverage for claims brought by the Entity employer or other Insureds;

c. Cover Moonlighting, Pro Bono or other legal services which would include informally offering advice to office associates.

The excerpt below is from an article co-authored by John Tanner of McGriff, Seibels and Williams. The article was published in ACC Docket under the title, Does the Gatekeeper Lawyer Need Insurance? [September 2008, p. 106]

Framework for Evaluating Whether Your In-house Legal Department Needs Malpractice Insurance

1. Assess the liability exposures facing your legal department.

  • Malpractice Claims—What is the likelihood that current management or directors would cause the company to sue you for professional negligence?
  • Malpractice Claims Following a Change in Control—What is the likelihood that current management or directors will be replaced? Is your company subject to bankruptcy exposure, potentially exposing you to claims by a court-appointed trustee, examiner, or comparable authority?
  • Government/Regulatory Exposure—Do you appear and practice before the SEC? Does your legal work include other areas of heightened regulatory oversight?
  • Securities Litigation Exposure/Third-Party Claims—Does your legal work include preparation of SEC filings? Do you issue legal opinions or certifications to third parties?

2. Determine the scope of your company’s indemnification/advancement obligations to in-house lawyers.

  • Review the applicable state statute governing corporate indemnification. Keep in mind that the parent company and subsidiary companies may be incorporated under the laws of different states.
  • Review the company’s indemnification grant in its Articles of Incorporation and Bylaws.
  • Review any written indemnification agreements or policies between the company and its in-house lawyers.
  • Consider state bar opinions/rules of professional conduct as to viability of hold harmless agreements. (see, for example, Georgia Formal Advisory Opinion 05-2)

3. Determine the extent to which indemnification is extended to non-officer in-house lawyers and employees generally

4. Consider whether any such indemnification is mandatory or permissive. Is the company required to fund a defense or settlement short of a final adjudication that the attorney did not satisfy the requisite standard of conduct for permissible indemnification? Or, is the decision whether to defend and indemnify in-house lawyers left entirely to the discretion of the board of directors in place at the time of the claim?

5. Consider scenarios where the company may be legally or financially unable to fund a defense.

  • Financial insolvency—Your indemnification protection is only as strong as your company’s ability to pay.
  • Derivative claims—Under the law in some states, a company is legally prohibited from indemnifying settlements or judgments in claims brought by or on behalf of the company.
  • Change in Control—What happens if a new board of directors wrongly determines that the requisite standard of conduct for permissible indemnification was not met? Is the indemnification grant subject to retroactive amendment?

6. Review your existing corporate insurance policies to determine the scope of coverage already afforded to your in-house lawyers in their capacities as directors, officers, or as employees generally.

7. Identify potential gaps in coverage. Review available employed lawyers insurance policy forms and endorsements with your risk management department and outside insurance broker.