In the following guest post, Nelson Kefauver and Kilauren McShea review the considerations they believe in-house counsel should take into account in connection with their professional liability insurance arrangements. Nelson is the Head of Profin, North America and Kilauren McShea is the President of Management Liability at Intact Insurance. I would like to thank Nelson and Kilauren for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Nelson and Kilauren’s article.

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The evolving role of in-house counsel carries an increased risk of professional liability. In today’s complex and dynamic legal landscape, corporate and nonprofit lawyers face diverse threats ranging from external claims to internal disputes.

While traditional law firms have long relied on malpractice insurance, the landscape is more complex for general counsel and their teams. Astute legal leaders must consider factors beyond just policy selection when mitigating the financial and reputational consequences of potential missteps.

Legal considerations

There are three key liability protection options to consider:

1. The lawyer can do nothing and rely on the indemnification provisions of the entity for which they are employed.
2. The lawyer can rely on coverage provided by a D&O insurance policy purchased by the entity.
3. The lawyer can purchase a malpractice policy, known as an employed lawyers policy.

Most employment agreements, by state law, mandate that employers must indemnify executives who face lawsuits for actions taken within the course and scope of their employment. This means that in many circumstances, including if the employer itself files a malpractice claim against a corporate counsel, the lawyer will tender the claim back to the employer for indemnity.

What are the concerns with relying only on indemnity?

Indemnity offers protection in some situations. However, it’s important to be aware of its limitations. Consider these examples where it could leave you vulnerable:

• If the employer has financial troubles, the personal assets of the indemnified corporate lawyer might be at risk. The employer may not have the financial means to defend the attorney against a lawsuit.
• If the employer believes the employed lawyer acted fraudulently, the employer may be able to withhold its indemnity obligation.
• Without an insurance policy, whether D&O or an employed lawyer’s policy, defending a lawsuit against the employed lawyer could drain the employer of significant financial resources.
• Without employed lawyer coverage, specific coverage enhancements will not be available to the employed lawyers.

What about relying on the employer’s D&O insurance policy? 

Virtually all modern D&O policies specifically name the general counsel as an executive, and, therefore, an insured person under the policy. This insurance will cover the usual lawsuits that may name a general counsel, if the alleged actions fall within your employer’s scope of duties.

While a D&O policy provides valuable protection, it’s important to remember that it doesn’t cover every potential risk. Consider the following:

•  A D&O policy typically has a shared limit for all executives and the insured entity. The employed lawyer might not have adequate limits if there is a material legal situation.
•  It may have a very large, self-insured retention. In contrast, an employed lawyer’s policy is often available, with retentions starting as low as $1,000.
• Many D&O policies have other policy wording that excludes a claim against an employed lawyer. Commonly noted provisions related to this topic are the insured versus insured exclusion and the professional services exclusion. You might hope a carrier would not use these exclusions, but every claim is different. In unique circumstances, these would be key policy provisions of concern for employed lawyers on a D&O policy. 

Is an employed lawyer’s policy the right solution for your in-house counsel?

While an employed lawyer’s policy offers valuable advantages, it’s important to be aware of its potential downsides as well. Key considerations include:

• These policies often include attractive enhancements, such as coverage for pro bono work, moonlighting, notary services, and even personal legal matters. However, it’s crucial to understand that these benefits may vary significantly between policies and may not always offer complete protection. For instance, if the general counsel were to provide informal legal advice to the CEO about their son’s reckless driving charge and the outcome was unfavorable, the policy might not fully cover the resulting claim.

• Coverage for legal services to foundations, charitable trusts, political action committees, and other nonprofits where the employer requests such.

• A lower retention, separate limits from the D&O policy, coverage extensions to paralegals, and, in some cases, coverage extension to independent contractor attorneys.

• It may limit coverage specifically for claims made by the employer against the employed lawyer. This wording could specifically waive certain provisions of an insured versus insured exclusion.

Prepare for what’s ahead

Understanding the options to protect an employed lawyer can help decide which methods are best for general counsel, other employed lawyers, and their employer. Work with your broker and legal team to discover what’s right for you beyond malpractice.

Nelson Kefauver is the Head of Financial Lines and Kilauren McShea is the President of Management Liability at Intact Insurance.  They oversee Intact’s Employed Lawyer product and other Financial Lines products.