How to Protect Your GC from Liability
from
July/August 2007
Here's what Heidi A. Lawson and Dora M. Gruner of Debevoise & Plimpton think boards should be doing.
In-house counsel may be surprised to learn how little indemnification and insurance coverage they have if they are named in a lawsuit. True, there are several layers of potential protection, including directors’ and officers’ liability insurance and company-paid policies taken out in the counsel’s name. But these protections often have significant gaps. With more attorneys being named in lawsuits brought against a company, and given the ever-present specter of a possible malpractice suit brought by the corporation itself against one of its own in-house lawyers, inhouse counsel should get serious about protecting themselves.
The first line of defense is indemnification. This is most commonly offered through a company’s bylaws and is generally used to protect directors and officers, though under most state statutes it can be extended to include other employees, including in-house attorneys. Another option is for an in-house lawyer to secure a personal indemnification agreement with the company; this course has the additional advantage of protecting an individual against any changes in the bylaws, and also gives the attorney the opportunity to spell out a far more specific deal than the bylaws might describe.
Many companies carry employed-lawyers’ insurance on behalf of their in-house counsel. This is nice to have, although most often the policy protects a lawyer only from third-party suits and not ones brought by the corporation that employs her. In addition, employed-lawyers’ policies are often poorly worded, and while they are generally meant to complement a corporation’s directors’ and officers’ liability policy, the coverage provided is significantly more limited. These policies also frequently contain several exclusions, notably the “insured versus insured” clause. It specifies that an insurance carrier will usually not provide coverage for a lawsuit between two persons or entities covered by the same policy, namely the company and its lawyer.
A more attractive alternative for in-house counsel is to be included in a directors’ and officers’ liability policy. Those who provide legal services to a company are usually excluded from D&O insurance, but coverage can be extended to include them, so long as the company and carrier agree to the change. There are ways to structure these policies to make sure an in-house lawyer is not stuck without insurance coverage because of the insured-versusinsured exclusion.
Despite those options, there may still be legal restrictions on the extent to which an in-house counsel can limit her liability to a “client,” in this case her employer. For example, many state-bar rules of professional conduct, notably California’s, prohibit an attorney from prospectively contracting with a client to limit her malpractice liability. Therefore a state-specific analysis is always required to determine what, if any, limits may be imposed on an in-house lawyer’s ability to be indemnified by her employer.
In short, the key to limiting an in-house attorney’s personal exposure is a careful review, analysis, and, if necessary, modification of all the various layers of insurance and indemnification protection—before she actually needs them.
Heidi A. Lawson is international counsel in the London office of Debevoise & Plimpton LLP and has a background in management and director liability. Dora M. Gruner, an associate in the firm’s New York City office, focuses on management and director liability and insurance issues.
