As the litigation environment for directors and officers intensifies, in-house attorneys are asking the question: do I need malpractice insurance? It’s a good question. If necessary, the type of insurance that in-house attorneys should explore is called staff attorney professional liability insurance.
This insurance product kicks in when an in-house attorney, think of a general counsel or an employee, is accused of professional misconduct. But being sued for malpractice as an employee is rare.
In this article, I’ll help separate fact from fiction with a focus on California in particular. If you work elsewhere, this blog post will provide you with a framework you can use to review the issues, but you will want to explore the law of the state where you are employed.
The big concern: being sued by your employer
One of the biggest concerns for corporate lawyers is being sued by an employer for malpractice. In practice, employers do not sue their in-house lawyers for malpractice; they just saw them. But that begs the question: what if they fire you and then want to sue you?
California Labor Code Section 2802 states that employers must compensate employees for losses incurred in the course of their employment:
2802. (a) An employer shall indemnify his employee for all necessary expenses or losses incurred by the employee as a direct result of the performance of his duties or his obedience to the instructions of the employer, even if unlawful, unless that the employee, when obeying the instructions, believed them to be illegal…
In other words, if your California employer sues you, they may have to turn around and compensate you. If you’re not in California, you might want to check to see if your controlling state’s labor code offers similar protection.
Besides, Section 145 of the Delaware General Corporate Code provides indemnification to agents of Delaware corporations. A similar compensation framework exists in California under Section 317 of the California Corporations Code.
So, do you need salaried attorney insurance?
Staff attorney insurance is probably not helpful for the primary concern expressed by in-house attorneys, which is that their employers will sue them for malpractice.
So, when is salaried lawyer insurance useful? Here are some scenarios:
Someone other than the employer perceives an attorney-client relationship with you
Suppose, for example, that in your daily interactions with other employees, someone nonchalantly asks you a question about whether to exercise their options, or about a speeding ticket or being kicked out of a car. ‘apartment. If this person now perceives that you are their lawyer because of this exchange, it is possible that they could sue you for malpractice.
Staff attorneys insurance provides an extra layer of protection here, but it’s certainly best to avoid giving advice casually to people who aren’t your clients. Your best practice is to deliberately refrain from giving legal advice to those with whom you do not wish to have an attorney-client relationship.
If you are in a work environment where culturally you feel compelled to answer these kinds of questions, staff attorney insurance is something you might consider. The same applies if part of your job is to give advice to third parties who are not technically the same as your employer, for example the charitable “arm” of your employer.
You work in the dark
Employers sometimes encourage their employees to moonlight on a pro bono basis. Staff attorneys insurance covers if you are sued for malpractice as a result of these activities. The insurance will also usually cover your defense costs if you find yourself the subject of a hearing before the California bar.
You fear that your employer will not compensate you
You may work for an employer who you believe will not defend you if a third party (such as a supplier or customer) decides to sue you for malpractice for any reason, or if you are concerned that your business is not insolvent (and therefore cannot indemnify you) at the time of the lawsuit.
How Staff Lawyer Insurance Works
Staff attorney insurance can cover a company’s general counsel, other staff attorneys, and, in some cases, legal assistants and paralegals acting under the supervision of a corporate attorney. Some policies cover attorneys who are not employed by a company but act on behalf of the company pursuant to a written agreement.
Typical limits for employed attorney policies range from $1 million to $5 million. The limit a company will buy depends on factors such as the company’s risk tolerance, the number of lawyers employed on its staff, and the nature of the legal services provided.
The policy generally covers:
- All claims made against employed attorneys (unless specifically excluded) arising out of the performance or alleged failure to perform legal services for the employer
- Legal fees and expenses incurred in the defense of staff attorneys accused of professional misconduct
- Amounts paid in damages or settlements in certain cases
- Punitive damages with “most favorable jurisdiction” wording (with some insurers)
Some typical exclusions are as follows, although many can be negotiated or are no longer a problem on more modern forms:
- Security claims (some insurers will return this coverage for an additional premium)
- Professional liability other than for legal services or professional indemnity liability for services provided other than at the direction of a corporate lawyer
- Employment practices claims against the employer (some policies may include coverage for claims made against attorneys employed by current or former directors, officers, or employees)
- Other applicable insurance (such as A&D insurance)
- Fines, Penalties, Punitive or Exemplary Damages
- Misappropriation of trade secrets
- Violations of ERISA (and related acts)
- Bodily injury, emotional distress and property damage
- Pollution liability
- Prior acts, prior knowledge or notification of a claim, or circumstance prior to the effective date of a policy
- Previous and ongoing litigation
- Wrongful acts committed before the retroactive date (including interrelated wrongful acts)
Another typical exclusion is the insured versus insured clause, which refers to claims against the General Counsel by another insured person or another employer. Some policies remove the exclusion to cover claims brought against the staff attorney by past or present directors and officers.
Another typical exception to this exclusion is the provision of defense costs for claims brought by the employer against its in-house counsel.
Another Choice: Personal Indemnity Agreements
Senior in-house attorneys who feel they may be in the “line of fire” with the Securities and Exchange Commission or other regulators often negotiate to receive a personal compensation agreement from their employers.
An indemnity agreement is a contract between you and the business you serve in which the business promises to protect you for activities undertaken on behalf of the business.
These agreements promise to (1) advance legal costs and (2) pay the loss (compensation) on your behalf if you are named in a lawsuit in your capacity as an officer. (You can read more about this in a previous article I wrote about indemnification agreements.)
So, for example, in the rare event that a company tries to sue you, you could turn around and ask for your legal fees to be advanced in accordance with your pre-negotiated indemnification agreement.
In California there is a technicality that can arise with indemnity agreements worth noting. Rule of Ethics 3-400 prohibits a member of the California State Bar from entering into a contract with a client to limit the client’s liability for malpractice. And, of course, the only client of in-house counsel is the company that employs them.
That said, it is common for the General Counsel to request and receive an indemnification agreement from the company, just as any other executive would.
Backup Plan: D&O Insurance
As a corporate lawyer and executive, you also have access to the protections of the company’s A&D insurance. This insurance will respond on your behalf for the usual lawsuits in which you may be named, so long as the actions in question were within the scope and scope of your job.
(For more on what D&O insurance covers, see my article on D&D Insurance 101.)
Staff Lawyer Insurance: A Good Choice For Some, But Not All
There are in-house lawyers for whom employee lawyer insurance makes sense. Every in-house legal department is different. The risks faced by in-house counsel largely depend on how the legal department is structured and what it specifically does.
You will want to work with your trusted advisors to determine whether or not, in your particular case, purchasing salaried attorney insurance is a prudent choice. When analyzing whether or not to purchase an employee attorney policy, a good first step is to assess the structure and functions of your in-house legal department.
After that, work with your trusted insurance broker to understand the nuances of what a staff attorney insurance policy does and does not cover. This will put you in the best position to determine if a staff attorney insurance policy is right for you.
As a manager of the company, know that you will benefit from the protections of your company A&D insurance. Many experienced in-house attorneys also seek out a personal indemnity agreement as an added layer of protection.