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For years, general counsel didn’t worry much about their insurance coverage. The risk of getting sued was low, they felt. Plus, many assumed that they were fully covered by the directors and officers (D&O) insurance policies at their companies. Last year’s corporate scandals, however, have changed the picture considerably. A small but growing number of GCs have found themselves named as defendants in shareholder suits and government enforcement actions. More worrisome, new laws and regulations are sharply increasing the responsibilities of in-house lawyers � and hence their liability. These developments have prompted many general counsel to take a closer look at their insurance coverage, and they don’t like what they see. According to a review of five standard D&O policies obtained by Corporate Counsel, D&O insurance typically covers GCs only when they act in their capacity as corporate officers, not as lawyers. This assessment was supported in interviews with more than a dozen insurance company executives, general counsel, and law firm partners who specialize in insurance matters. “Normally, insurance companies see legal services as something that’s not part of D&O,” says Sean Fitzpatrick, chief underwriting officer at Chubb Specialty Insurance. But a general counsel might not even be covered for his duties as an officer. Everyone interviewed for this article agreed that an insurance adjudicator could determine that all of a GC’s actions should be classified as legal work � and hence wouldn’t be covered. Some in-house lawyers have known about the D&O loophole for years; others are just learning about it. There hasn’t been a test case yet in which a GC battles his insurance company to pay for his defense. But that’s just a matter of time, according to experts like Scott Univer, a Piper Rudnick partner and former general counsel at BDO Seidman, LLP. In the meantime, some GCs are trying to protect themselves with supplemental insurance, such as an employed lawyers professional (ELP) liability policy. Others have tried to limit their risk by avoiding any situations that could lead to liability [see "Whose Liability Is It Anyway?"]. But the best solution � better insurance coverage for in-house lawyers � doesn’t seem likely anytime soon. “I was just in a meeting the other day with an insurance company, and they say they are hearing quite a bit of discussion about [insurance options] from general counsel,” says American Corporate Counsel Association president Frederick Krebs. “Clearly, the whole liability issue is in question. There is a lot of uncertainty, a lot of angst, but unfortunately, not a lot of solace.” Running For Cover During the past year, the top lawyers at Tyco International Ltd., Enron Corp., Arthur Andersen LLP, Rite Aid Corp., and U.S. Wireless Corporation have all been sued by disgruntled shareholders or the Securities and Exchange Commission. “With GCs increasingly in the news, [they face] higher exposure and higher risk of being sued,” says William Cotter, chief underwriting officer and senior vice president of National Union Fire Insurance Company, the liability division of American International Group, Inc., the New York-based insurance giant. The chances of getting named in a complaint have only increased since the Sarbanes-Oxley Act became law last summer, says Chubb’s Fitzpatrick. “A lot will hang on how the SEC interprets and acts upon [the legislation],” he explains. At press time the agency was expected to issue its final rules on exactly how far corporate lawyers must go in reporting wrongdoing by their clients. The more that the SEC demands of in-house attorneys, the greater their potential liability will be. Even before the full impact of Sarbanes-Oxley takes place, insurers have had to cope with increasing demands. The average payment D&O carriers have made for shareholders’ claims has risen from $9.62 million in 2000 to $23.35 million last year, according to an April survey by Tillinghast Towers-Perin, an international actuarial and managing consulting firm. As a result, Cotter, Fitzpatrick, and their colleagues in the insurance industry have been recalculating the risk formulas they use to set premiums. In some cases, the cost of insurance has risen as much as 500 percent over the last year, according to a survey released in April by Foley & Lardner. There have been other post-Sarbanes-Oxley changes, too. Insurers, uncertain about the new risks, have generally switched from offering multiyear policies to single-year coverage. And according to a review last year in Insurance Journal, tougher language is being written into D&O policies, spelling out what types of fraudulent behavior and reporting malfeasances won’t be covered. One big change is that any misstatement on the insurance application by any officer or director at the company could cancel coverage for everyone else. Though insurance is costing more than ever, experts say now is a good time to consider additional coverage, such as an ELP policy. When Chubb and ACCA started marketing this form of liability insurance in 1996, it was advertised as protecting in-house lawyers from D&O’s gaps. In a sign of just how much faith in-house lawyers placed in their D&O coverage, many viewed ELP as a “novelty item,” says Chubb’s Fitzpatrick, and few companies purchased it. Even now, Fitzpatrick estimates that only about 5 percent of Fortune 500 companies carry ELP for their staff lawyers. But since Sarbanes-Oxley was passed, Chubb has seen a 60 percent increase in the number of inquiries about ELP, reports Laurie Sablak, an assistant vice president at the insurer. Submissions for coverage have increased 15 percent, she adds. Still, even ELP might not be enough. It only covers settlements and defense costs � not SEC fines or court judgments � and limits coverage to anything not covered by D&O. As a result, a GC might get caught in a fight between his ELP carrier and D&O carrier, says Joseph Finnerty III, a partner at Piper Rudnick who represents both insurance companies and corporate executives. Finnerty explains that the carriers might battle each other in court to see who’s responsible for paying, at least for the sake of precedent. According to ACCA’s Krebs, “It seems as though there isn’t an insurance product out there that is available to protect against Sarbanes-Oxley.” He adds, “It’s not something [insurance companies] want to cover. At most, they are going to provide defense costs. Insurance companies aren’t going to provide good insurance liability, because they don’t want to be [seen as] encouraging lawsuits.”

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