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This Wisdom of the Crowd, compiled from questions and responses posted on the Small Law Department eGroup and the WMACCA Chapter eGroup*, addresses the issue of acquiring insurance for in-house counsel. The issues discussed include:

I. Malpractice Protection
II. Insurance Prices and Policies
III. Additional Resources

* (Permission was received from the ACC members quoted below prior to publishing their eGroup comments in this Wisdom of the Crowd resource.)

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I. Malpractice Protection

Question:

I am curious what other in house lawyers do to protect themselves individually against claims of malpractice from their corporate client and/or its shareholders? Is it necessary or advisable to obtain Employed Lawyer Professional Liability coverage in addition to D&O coverage? Do your companies carry attorney malpractice insurance for your staffs?

Wisdom of the Crowd

    Response #1

First and foremost, your company should be carrying D&O insurance for the executives. By your question, I am merely presuming that your company is small enough (perhaps also privately held by family members who are the sole shareholders?) that you are concerned about a shareholder attempting to sue you for advice you gave "their" company that they believed was wrong. D&O insurance would insulate you from being accused of making the wrong choice in otherwise doing your normal job. Same goes for the CEO and CFO, for example, if this litigious shareholder seeks to try to overrule a business decision. If, on the other hand, your company is mid-to-large sized, while D&O insurance is still a necessity, I would say that the risk of a gadfly shareholder acting this way is substantially lower.

Secondly, don't confuse "malpractice" with merely upsetting the powers that be. Most companies simply fire people they don't like or whom they don't think are doing the job that they want them to do. So if you're "always" telling the CFO "no" to his crazy ill-advised risky and perhaps arguably borderline illegal schemes, most likely the CFO will just get you fired rather than wasting the effort of trying to have the company sue you for "malpractice". And advising the CFO to not embark the company on a crazy, ill-advised, risky, and possibly illegal path isn't malpractice, of course.

Third, if you're being cornered into handling things that are truly outside of your comfort zone and expertise (for example, immigration) and the company refuses to let you engage outside counsel to aide in those specialized areas, then I suppose you are faced with an ethical issue that comes closer to "malpractice". However, again, you can do your best to study-up on that area of the law and give your advice couched with the disclaimer that you really are not an expert in immigration law and that you really strongly advise that the company permit you to engage outside counsel for a second opinion. Done thusly, it'd be hard to support an action against you for malpractice. And, again, back to #2, they'll probably fire you and call you incompetent rather than waste the time of suing.

I'm curious what could have raised this fear in the first place. Are you fairly new to in-house practice, and just feeling unsure of how exposed you are, financially/personally? Did the company face some kind of "bet the company" lawsuit where you made a decision to handle the lawsuit one way, and in hindsight that choice ended up being more disastrous than you could have anticipated? Business people made "bad" decisions all the time. I remember my old boss from 30 years ago telling me that your goal should be to be right 51% of the time, because that means you're right more often than being wrong. The point being, don't let being afraid to make the wrong choice paralyze you from making any choice at all. Because doing nothing is, in itself, a choice.

Most malpractice cases involve lawyers who repeatedly fail to pay attention to deadlines, comingle client and personal funds, and fail to honor conflicts of interest. It's pretty rare for a malpractice case to be successful against a lawyer who did their level best, and the matter simply ended up not working out as planned despite those best efforts and otherwise reasonable approach. Sometimes things just work out poorly. But it doesn't mean you're so incompetent that you committed malpractice. 1

    Response #2

Please note that most corporate D&O policies specifically exclude coverage for professionals (of all stripes), the presumption being that they must be separately covered for acts or omissions that are related to the performance of their professional duties.

It's often very difficult for employed lawyers to prove that even what they would deem "business" advice should be covered, since if your title is SVP and GC of a company, it's clear that the reason you're in the room is likely because of the GC title and not because of the SVP title/role.

The vast majority of situations wherein a GC's judgment or actions are questioned by management, lead to the counsel being fired, not to the counsel being sued—that's empirically supported. I would look to employed lawyer policies for coverage in circumstances where the in-house lawyer could be working on matters that involve the reliance of third parties, whom—if they think you've exercised bad judgment or acted incorrectly—are more likely than your clients to sue. 2

    Response #3

D&O usually excludes legal services. An in-house lawyer's equivalent protection is employed lawyers coverage. It can cover malpractice claims arising out of the course of your job, volunteer activities, and moonlighting. We found a better price by buying an add-on through our existing carrier rather than a separate product. I was especially happy to get coverage for volunteer activities since I'm on a few boards and it never fails that legal issues come up. 3

    Response #4

I had a conversation with our broker no too long ago about this type of insurance. It is my understanding that a D&O policy may exclude professional services such as legal advice or legal work. I was provided with the attached article, which also is a reminder that attorneys who are not directors or officers of the company are not covered by the D&O policy unless coverage is expanded to include employees. Employed Lawyers coverage is not very expensive. 4

    Response #5

E&O and D&O policies typically exclude exposures for the legal department. The cost of an employed lawyers' policy is a small price to pay for your peace of mind. 5

    Response #6

I agree that employed lawyer's coverage is relatively inexpensive and important. I do not have the GC title but essentially perform the role, so I also had my title specifically added to our D&O policy. We also added the Controller title and the VP of Tax title to our D&O policy. 6

    Response #7

Other reasons to consider E&O coverage for in-house counsel (i) D&O triggers for coverage are not the same as for malpractice coverage for lawyers/in-house counsel (D&O coverage may not be triggered under certain events where E&O coverage would be); (ii) though defense costs may be covered by the D&O policy, some damages may not be, though would be under the E&O coverage; (iii) deductibles under the E&O policy may be significantly lower than the D&O policy. 7

    Response #8

We have the unique situation of being a public entity, which complicates D&O. If we have D&O, then it waives the statutory immunities (which are strong in our state). Case law says the limits of the statutory immunity mirror standard D&O coverages, which excludes coverage for legal. Thus, we could add EL without waiving the statutory immunities for everyone else. We added a employed lawyer's coverage for a small price. 8

    Response #9

We do carry a separate employed lawyers insurance because attorney work can sometimes be outside the scope of D&O. Different agents will advise you differently on this issue. It is expensive, even for a small department. The bonus is that it can also cover endorsed pro bono. 9

    Response #10

We carry it for the reasons pointed out in another post. It may fill in some gaps you may have in other policies and may give you some coverage for professional activities (like pro bono) that aren't strictly job-related. And it's not that expensive relative to our other policies. 10

    Response #11

We have a malpractice policy as well. Another benefit our policy provides is coverage for any off-the-cuff advice you may give to third parties that would typically not be covered under the polices you mentioned. 11

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II. Insurance Prices and Policies

Question:

What carriers are best for this type of insurance? I've been looking into it for our small legal group (4) and have had limited success finding carriers with decent coverage at a reasonable cost. None of us has any prior claims, nor do we handle securities, litigation, or patent prosecution in-house, but the quoted cost is $10-21K/yr. depending on limits and retentions. We have some coverage under D&O. I'm interested in peace of mind, but we also have to justify the cost to the business.

Wisdom of the Crowd

    Response #1

We are bidding out coverage for our department of 4 attorneys and the price that you mention is quite a bit higher than the quotes we've received. I believe we're discussing a coverage amount of $1m.

One other point - employed lawyers coverage often will protect an in-house lawyer who is performing pro bono services. If you're working on or thinking about pro bono outside of a legal services type program (which usually provide coverage for volunteers), then this can be a great way to deal with what is otherwise a difficult hindrance to pro bono activities, and it can be a great recruiting/retention tool. 12

    Response #2

I have been looking into employed lawyer insurance for my company, and I asked a broker friend (Kara Altenbaumer-Price with USI - info below) for her thoughts. I have cut-and-pasted her response below - forgive the length, but I thought this was helpful information:

Employed Lawyers insurance provides coverage for the activities of in-house counsel in their role as lawyer to the company - basically malpractice insurance. It is designed to cover claim arising from their services as a lawyer, not their services as an officer. It is intended to cover gaps in D&O policies and EPL policies that may be created by professional services exclusions. Coverage is generally broad, but varies significantly policy to policy. It may include:

    Ethics and Licensing hearings

    Moonlighting

    Pro Bono Work

    Claims by employees the in-house lawyer is representing

    SEC and regulatory claims

    Third party claims

    Legal Advice given to individual executives

    Personal Injury

Some high-profile cases: (We don't know whether Employed Lawyer Coverage was available or used).

    GlaxoSmithKline - DOJ charged associate GC with six counts of making false statements, falsifying or concealing documents, and obstructing a 2002 investigation by the Food and Drug Administration into the company's unapproved marketing practices of the antidepressant Wellbutrin.

    Trace International - Chapter 7 trustee sued GC for not adequately advising the board as to its obligations to review a transaction that benefitted the controlling shareholder.

    Tenet Healthcare - SEC charged GC, saying he knew or should have known that the company overstated charges in its public filings.

    Qwest - Plaintiffs in securities class action claimed GC was responsible for misstatements in the public filings.

    Comverse - SEC entered into $3 million civil settlement with GC for stock options backdating.

Examples of actual claims on Employed Lawyers Policies:

Cause of Action Cost Facts
Negligent Misrepresentation in a Contract Damages Sought: $1.2 million General Counsel for a restaurant franchisor drafted a contract between the franchisor and a franchisee regarding development of a new franchise restaurant in an affluent community. When the restaurant did not attract a viable customer base and the franchisee experienced severe financial losses, the franchisee brought suit against the general counsel of the franchisor alleging negligent advice and negligent misrepresentation regarding the ultimate cost of the franchise and the terms of the franchise agreement.
Unauthorized Practice of Law Defense Costs: $212,000 A paralegal working for a nonprofit human services organization directed elderly clients of the organization to self-service estate planning forms on the Internet and assisted these individuals in interpreting and filling out the forms. The paralegal also made legal representations regarding how a particular estate planning device would affect the client's life circumstances. After an investigation, the state bar association filed a claim against the general counsel of the human services organization for failure to adequately supervise the paralegal, and against the paralegal for the unauthorized practice of law.
Conflict of Interest - Contract Negotiations Demand: Over $2 million
  • An attorney for BIG, a TV production company, drafted a joint agreement with two other pro An attorney for BIG, a TV production company, drafted a joint agreement with two other production companies, MICRO and PETIT, to produce a made-for-TV movie, and handled all negotiations with the television network and other service providers regarding the project. The movie had a much greater viewing share than anticipated and was made into a TV series for the fall schedule.
  • When the series' success resulted in substantial earnings for BIG and its affiliates, and smaller earnings for MICRO and PETIT and their affiliates, MICRO and PETIT brought suit against BIG and its in-house counsel, alleging misrepresentation and conflict of interest, and demanding an accounting of profits. production companies, MICRO and PETIT, to produce a made-for-TV movie, and handled all negotiations with the television network and other service providers regarding the project. The movie had a much greater viewing share than anticipated and was made into a TV series for the fall schedule. When the series' success resulted in substantial earnings for BIG and its affiliates, and smaller earnings for MICRO and PETIT and their affiliates, MICRO and PETIT brought suit against BIG and its in-house counsel, alleging misrepresentation and conflict of interest, and demanding an accounting of profits.
Malpractice - Pro Bono Representation Defense Costs: $23,000 An in-house transactional attorney for a financial institution defended an indigent client in a felony assault matter under the state bar association's mandatory pro bono requirement. After the client was convicted, he sued the attorney for malpractice, alleging ineffective assistance of counsel.
Negligence - Employment Law Settlement: $860,000 A not-for-profit inner city hospital experienced a layoff of employees after a funding shortage forced the hospital to downsize. In-house counsel handled the disparate impact analysis of the proposed layoff and determined that the layoff would not disproportionately affect employees with regard to age, race, gender, or other protected classes under relevant employment laws. After a former employee filed a national origin discrimination claim with the EEOC, the EEOC investigated the layoffs and brought an enforcement action against the hospital in federal court. The affected employees also brought an action against the in-house counsel for negligent design of the downsizing plan.
Conflict of Interest - Dual Representation Settlement: $325,000 The general counsel for a small public company represented both the company and its CFO in an investigation and subsequent action by the SEC regarding misrepresentation of financial information in the company's financials. The company fully complied with the SEC during the investigation, and charges were ultimately dropped against the company. The CFO was found liable, was fined by the SEC, and was fired by the company. Subsequently, the CFO filed a malpractice claim against the general counsel for conflict of interest and ineffective representation of counsel.
Misrepresentation - Opinion Letter Work Damages Paid: Approximately $600,000 A development company sought private financing in order to expand its business and issued debt instruments to 100 individual and corporate investors in order to raise revenue. In connection with these transactions, in-house counsel for the development company issued written opinion letters regarding the financial standing of the company and the viability of its new course of business. The expansion was never completed, the development company went bankrupt, and the investors filed a class action against the company and in-house counsel for breach of fiduciary duty, misrepresentation and professional malpractice.
Negligence in E-Discovery Defense and Settlement: $450,000
  • An animal rights organization sued a manufacturer of canine chew toys, alleging that certain chemicals in the toys' plastic coating were causing severe illness in dogs when fragments of the coating were ingested by the dogs during aggressive play. During discovery, plaintiff sought information related to the development and testing of the toys, including communications between scientists and engineers and the manufacturer. In-house counsel of the manufacturer used an outside law firm to manage the discovery process and hired an e-discovery service provider to retrieve e-mail correspondence and other documents related to the chew toys from the defendant's computer systems.
  • During trial, it became apparent that defense witnesses were poorly prepared to testify and the defendant manufacturer had failed to produce numerous communications within the scope of the discovery requests. A special magistrate investigated the discovery errors and determined that in-house counsel failed to give adequate direction to the e-discovery company and was negligent in supervising outside counsel. The trial judge sanctioned in-house counsel, who also was brought before the state bar association in a lengthy disciplinary proceeding
Malpractice - Personal Legal Services Damages Alleged: $200,000 As a favor to his employer, in-house counsel of an agricultural supply company appeared in court to assist his CEO's son in defending a traffic matter related to an automobile accident. When all the evidence against the teenager had been presented and the judge issued the harshest punishment possible for the violation-license revocation-the CEO terminated the in-house counsel's employment and joined in a malpractice claim filed by his son.
Sarbanes-Oxley Liability Defense Costs: Over $500,000
  • General Counsel for a private, wholly owned subsidiary of a public company sought an outside legal opinion whether certain benefits transactions needed to be reported in the entity's financials. Outside counsel opined that reporting was required, and the general counsel advised the subsidiary's CFO accordingly. Prior to the public company's financials release, the general counsel discovered that the transactions had not been included in the company's financial report, and he left a telephone message for the parent company's CFO, stating that he had an "urgent matter" to discuss.
  • The parent company's CFO never returned the call, and the company's financials were disclosed, unchanged. A subsequent SEC investigation revealed the misstatement, and the general counsel was found liable under Section 307 of the Sarbanes-Oxley Act of 2002. The general counsel was fined and suspended from appearing or practicing before the SEC for his negligence in not following up with his employer or the company's parent to ensure that the transactions were reported correctly.
Defamation $500K settlement, with $1M for defense
  • This is a defamation case by 2 attorneys against the Named Organization and one of its in-house attorneys. Plaintiffs allege that the in-house attorney wrongfully accused them of conspiring with the court clerk to alter the filing date of a summons and complaint in a patent infringement suit. The suit was mistakenly filed a day early by the plaintiffs, but the clerk allegedly re-stamped the complaint for the next day. The in-house counsel had a blog site, found out about the alteration of the filing date, and stated that plaintiffs attorneys wrongfully influenced the clerk to change the date (tampering with a court document is a felony and accusing an attorney of doing so is defamatory). Plaintiffs demanded in excess of $2M.
  • Resolution: After negotiations, the matter was settled for $700K with $500K being contributed under the CCP policy on behalf of the Insured in-house counsel. Legal fees in excess of $1M were also paid under the CCP policy for the defense of the Insured in-house counsel.
Wrongful Termination / Negligent Advice $450K settlement
  • As a condition of employment as Treasurer of the Named Organization, Plaintiff was required to obtain a certain license from the Office of Thrift Supervision (OTS). Plaintiff, at the alleged advice of the Insured Corporate Counsel, neglected to include in his application information about a prior misdemeanor arrest. The OTS later discovered the omission and denied the application for license.
  • Plaintiff alleges that the Named Organization later admitted to the OTS that the omission was the result of legal advice from Corporate Counsel. One month later, the Named Organization terminated Plaintiff's employment because he could not obtain the requisite licensing. Plaintiff's demand against Named Organization and the Insured Corporate Counsel alleges causes of action for Negligence, Negligent Supervision and Retention, Legal Malpractice, Defamation/Injury to Reputation, Breach of Contract and Costs and Expense.Plaintiff specifically sought damages for personal injury compensatory damages of $9 million and attorneys' fees and costs.
  • Resolution: Matter resolved globally at mediation for $1 million against the Named Organization and the Insured Corporate Counsel. The CCP policy contributed $450K on behalf of the Insured Corporate Counsel.
Wrongful Termination $500K + in defense
  • This claim began as a wrongful termination claim (Named Organization EPLI coverage with another carrier) that was filed by the Named Organization's former General Counsel. In its responsive pleading, the Named Organization filed a counter-claim against the General Counsel. The counterclaim included an allegation of legal malpractice against the General Counsel, which triggered a defense of the General Counsel under the CCP policy. The policy outlines reserved rights regarding any indemnity obligation based on, among other defenses, the insured v. insured exclusion.
  • Resolution: Defense counsel has advised that the cost to defend the General Counsel action will likely exceed $500,000. Resolution via negotiation is being pursued in concert with the Named Organization's EPLI carrier before substantial amount of defense fees are incurred.

Limits Analysis

Based on our research, companies of your size who purchase Employed Lawyers Insurance typically buy between $5 million and $10 million in limits. [This sentence is directed a smallish public company]. One point to consider in purchasing Employed Lawyers coverage is whether the purchase is being made to protect the attorney from suits by the company or the company's balance sheet from suits by third parties or employees. While Employed Lawyers Insurance typically covers defense for in-house counsel when they are sued by the company, there are circumstances in which the underlying indemnity is not covered.

[And later follow-up email stated:]

I was thinking about this one over the weekend (briefly) and for $1M I think a representative pricing for this would be in the $3000 - $6000 range (excess an approx.. $10k SIR/depending on services performed and number # of EL's). However, a few things of note to note:

    Who is covered - some forms (Chartis for example) include a WIDE array of support staff with broad language. Some forms, like Chubb or ACE, are not as baseline expansive but can be modified.

    What is covered - below, the point is made about pro bono work and that is included in some forms automatically, some by endorsement and some carriers do not have/offer the language. If there is a great deal of pro bono or a specific subset that is being worked on internally (i.e., the below mentioned Patent work) this may effect pricing (higher) and/or limit the scope of cover. Need to be out front on that.

    Carrier Specific Concerns - ACE Limits defense costs for claims in some forms, Chubb has limited base language and some carriers (like ACE on the private co side) often automatically offer a sublimit of employed lawyer cover on the D&O placement. Have to be careful as there is also language in BOTH policies (a combo employed lawyers D&O and a dedicated employed lawyers policy) that state they are excess any other applicable cover. This could stop cover applying while fingers (and policies) are pointed at each other. 13

III. Additional Resources

1 Laura Vogel, Assistant General Counsel, The Auto Club Group (Small Law Departments, July 6, 2012).
2 Susan Hackett, CEO/CLO/Principal, Legal Executive Leadership, LLC (Small Law Departments, July 10, 2012).
3 Brandy Olson, General Counsel, Director of Legal and Regulatory Services, Muscatine Power and Water (Small Law Departments, July 10. 2012).
4 Janet Pelzel, General Counsel, PEAK Technologies, Inc. (Small Law Departments, Sept. 7, 2012).
5 Anonymous (Sept. 2012).
6 Kristie Scott, Associate General Counsel, Vocus, Inc. (Small Law Departments, Sept. 10, 2012).
7 Dennis Stryker, General Counsel, Rick Engineering Company (Small Law Departments, Sept. 10, 2012).
8 Brandy Olson, General Counsel, Director of Legal and Regulatory Services, Muscatine Power and Water (Small Law Departments, Sept. 11, 2012).
9 Janine Greenwood, Chief Legal Officer, National Student Clearinghouse (WMACCA General Counsel, Aug. 15, 2012).
10 Ona Alston Dosunmu, General Counsel, The Brookings Institution (WMACCA General Counsel, Aug. 17, 2012).
11 Vanessa Phillips Flores, General Counsel, Kotarides Developers (WMACCA General Counsel, Aug. 17, 2012).
12 Todd Murtha, VP Business and Legal Affairs, Wize Commerce (Small Law Departments, Sept. 12, 2012).
13 Dena DeNooyer Stroh, General Counsel and Corporate Secretary, Murchison Oil & Gas, Inc. (Small Law Departments, Sept. 19, 2012).
14 Janet Pelzel, General Counsel, PEAK Technologies, Inc. (Small Law Departments, Sept. 7, 2012).
15 Dena DeNooyer Stroh, General Counsel and Corporate Secretary, Murchison Oil & Gas, Inc. via KaraAltenbaumer-Price, Director of Complex Claims & Consulting, USI Southwest/USI Northwest (Small Law Department, Sept. 19, 2012).
16 Dena DeNooyer Stroh, General Counsel and Corporate Secretary, Murchison Oil & Gas, Inc. via KaraAltenbaumer-Price, Director of Complex Claims & Consulting, USI Southwest/USI Northwest (Small Law Department, Sept. 19, 2012).
17 Dena DeNooyer Stroh, General Counsel and Corporate Secretary, Murchison Oil & Gas, Inc. via KaraAltenbaumer-Price, Director of Complex Claims & Consulting, USI Southwest/USI Northwest (Small Law Department, Sept. 19, 2012).

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