Thank you for sharing!

Your article was successfully shared with the contacts you provided.
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 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 liabilities. 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 magazine [an affiliate of Legal Times], 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 a GC’s actions should all be classified as legal work � and therefore are not covered. SEEKING ADDITIONAL PROTECTION 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 employed lawyers professional (ELP) liability policies. Others have tried to limit their risk by avoiding any situations that could lead to liability. 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 Frederick Krebs, president of the Association of Corporate Counsel (ACC). “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.” During the past year, the top lawyers at Tyco International Ltd., the Enron Corp., Arthur Andersen LLP, the Rite Aid Corp., and the U.S. Wireless Corp. have all been sued by disgruntled shareholders or the Securities and Exchange Commission. RUNNING FOR COVER “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 the National Union Fire Insurance Co., 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 says. 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 Sarbanes-Oxley, insurers had to cope with increasing demands. The average payment made by D&O carriers 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 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 during the last year, according to a survey by Foley & Lardner. There have been other changes since Sarbanes-Oxley, 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 a company could cancel coverage for everyone else there. CARRIER VS. CARRIER? Though insurance is costing more than ever, experts say that now is a good time to consider additional coverage, such as an ELP policy. When Chubb and ACC started marketing this form of liability insurance in 1996, it was advertised as protecting in-house lawyers from gaps in D&O. 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. Since Sarbanes-Oxley was passed, Chubb has seen a 60 percent increase in inquiries about ELP, says Laurie Sablak, an assistant vice president. Submissions for coverage have increased 15 percent, she adds. Still, even ELP might not be enough. It covers only 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 his D&O carrier, says Joseph Finnerty III, a partner at Piper Rudnick who represents both insurance companies and corporate executives. Finnerty explains that carriers might battle each other in court to see who’s responsible for paying, at least for the sake of precedent. According to ACC’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.” Eriq Gardner is a staff reporter at Corporate Counsel magazine.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.