Mission to Corporate Counsel: Understand Exposures and Protection for In-House Counsel
Just as rockets soar into space, so too has the list of potential liabilities for in-house counsel risen to galactic proportions. Although the norm at one time involved claims alleging missed statutes of limitations, conflicts of interest, malicious prosecution/abuse of process, unauthorized practice of law, general negligence in rendering legal advice, failure to disclose, and related assertions, the universe of exposures has shifted dramatically for in-house counsel.
During the past three to five years a growing number of high profile cases have involved in-house counsel. Most of the cases involved:
- backdating stock options: insider trading and other securities laws violations;
- bribery and related violations of the Foreign Corrupt Practices Act (FCPA);
- conspiracy; anti-trust violations; multi-million dollar frauds; whistleblower actions; failure to conduct appropriate due diligence particularly with respect to the global financial crisis;
- violations of attorney-client privilege;
- electronic discovery errors, such as spoliation/destruction of electronic evidence; and failure to disclose and/or monitor;
- defamation and infringement via social media; and
- a myriad of regulatory issues.
The professional work of in-house counsel has also been the subject of corporate investigations by the Internal Revenue Service, Department of Justice, Securities and Exchange Commission (SEC), Food and Drug Administration, Environmental Protection Agency, Federal Communications Commission, Federal Aviation Administration, and the United States Congress, among others. Penalties for in-house counsel have included termination of employment, significant fines, disbarment, and imprisonment.
The continuing trend of in-house counsel serving multiple roles as gatekeeper, corporate confidante, compliance officer, transaction/due diligence specialist, and information technology discovery expert, to cite a few, has kept them on the radar screen both internally (to senior management) and externally (to the plaintiffs’ bar and regulators). As a result, in-house attorneys may find themselves sinking further into a "black hole” of a lengthy list of potential liabilities for which they may be blamed.
In the not too distant past a fair number of in-house attorneys who were also officers of their employers submitted claims under their directors and officers (D&O) liability insurance policies. Some, however, were advised that these insurance policies were not devised to address claims of legal malpractice, nor did boards of directors necessarily want to share their limits of liability with in-house counsel for legal malpractice claims. Conversely, a severe D&O claim could potentially exhaust insurance policy limits thereby leaving no coverage for claims against in-house counsel.
Insurance Market Solutions
In response to this potential D&O dilemma and the seemingly meteoric rise in exposures associated with practicing law in-house, insurance markets have revitalized and/or introduced employed lawyers professional liability insurance, which is specifically designed to provide insurance coverage to in-house attorneys and their staffs for claims alleging negligent acts, errors, or omissions in the performance of their duties on behalf of the corporation. Employed lawyers policies have significantly gained in appeal because the protection afforded by them may counteract threats of personal liability as well as act as an additional buffer from regulators, shareholders, outside third parties, and the corporate employer. These policies provide limits of liability strictly dedicated to in-house attorneys and their staffs, which makes them particularly attractive to corporate counsel.
Employed lawyers policies are “duty to defend insurance policies” that provide reimbursement to the employer for all sums that the employer pays to defend and indemnify in-house counsel. Should the employer set forth a claim against in-house counsel, these policies all provide defense cost coverage. Notably, certain insurers now provide for a sublimit of liability for settlements/indemnity for claims made against in-house counsel by the corporate employer. Similar to D&O insurance, employed lawyers policies have a “Side A” feature that provides coverage from the inception of a claim subject to a minimal retention/deductible, if any, in the event that the employer cannot or will not indemnify an in-house attorney. Further, the majority of insurers highlight that “Side A” coverage is non-rescindable. In this same regard, a number of employed lawyers policies include an order of payments provision whereby payments for “Side A” non-indemnifiable loss are made first by the insurer, and then reimbursement is made to the entity for costs that it incurs.
The majority of employed lawyers policies provide coverage for Section 307 violations of Sarbanes Oxley1 disciplinary proceedings; alleged ethics violations; formal investigations (predominantly civil); limited coverage for criminal proceedings; claims made by regulatory bodies and outside third parties; claims for personal injury perils such as libel, slander, and invasion of privacy; pro bono and moonlighting activities; notary services; as well as a degree of coverage for securities violations.
Policy definitions are typically broad enough to encompass the professional duties of in-house counsel, exclusions have been modified to accommodate for work done in-house, and the coverage is worldwide.
As added enhancements to coverage certain insurers provide the following: multi-year policy periods; choice of counsel; six-year extended reporting periods; loss control services/hotlines/publications; retention waivers under certain circumstances; defense costs for disciplinary proceedings outside the limits of liability; the option to purchase tail coverage following employment termination or retirement; the ability to purchase “Side A” only or pro bono only coverage; defense cost coverage for claims alleging violations of the Consolidated Omnibus Budget Reconciliation Act (COBRA), unpaid wages, as well as claims by bankruptcy trustees/liquidators; coverage for counseling regarding anti-trust issues; coverage for counseling human resources representatives regarding workers’ compensation, social security and disability benefits; coverage for temporary attorneys and independent contractors; among other noteworthy features.
Looking ahead toward the close of 2010 and into 2011, in-house counsel remain on red alert with respect to existing exposures and contemplate new risks emanating from: financial regulatory reform via the Dodd Frank Act; the rise in FCPA investigations, compliance and enforcement actions; global warming cap and trade laws; the electronic and social media explosion; and modifications to laws enacted internationally as the global economy progresses toward recovery. It has become increasingly clear that the new regulations as well as reinvigorated existing laws require substantial compliance efforts by in-house counsel, and unfortunately will perpetuate their “target” status as the first line of a company’s defense from regulators, lawmakers and the plaintiffs’ bar.
In order to manage the risks associated with practicing law in-house, it is advisable that risk officers meet with their in-house legal teams to conduct assessments as to the type of legal work performed, the sorts of regulatory bodies imposing restrictions on their industry sector, and the processes in place that act as checks and balances on in-house attorneys, inclusive of corporate codes of conduct. Understanding the exposures of in-house counsel and the protection available to address these liabilities can pave the runway for a safe financial landing.
Section 307 of the Sarbanes Oxley Act is an “up the ladder” reporting provision applicable to all attorneys, inclusive of in-house attorneys, such that they are required to report violations of the securities laws to the Chief Legal Officer and higher as mandated by SEC rules.
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