Dallas Bar Association

D&O Insurance for In-House Counsel: Are You Protected?

by Kara Altenbaumer-Price

Many general counsel and other in-house counsel mistakenly believe they are protected by their company’s Director & Officer (D&O) insurance when they or the company they serve is sued. However, they are often not protected fully, and in some cases, not at all. This article explores the scenarios in which coverage may be lacking and offers solutions for protecting GCs and other in-house counsel.

D&O insurance is designed to protect executives, outside directors and the companies they serve against liability arising from actions taken in the course of doing business. It, in tandem with indemnification, is designed to protect against the legal expenses of fighting litigation, as well as the underlying liability exposure.

Claims against officers and directors come in many forms, from common law claims for breach of fiduciary duty to securities shareholder class actions. For attorneys, the claims often take the form of legal malpractice from the company, securities enforcement actions by regulators, securities claims by shareholders, or employment actions by disgruntled employees. A few examples:

  • Trace International–Chapter 7 trustee sued GC for not adequately advising the board of its obligations to review a transaction benefiting the controlling shareholder.
  • Tenet Healthcare–SEC charged GC, saying he knew or should have known that the company overstated charges in its public filings.
  • Qwest–Plaintiffs in securities class action claimed GC was responsible for misstatements in the public filings.
  • Comverse–SEC entered into $3 million civil settlement with GC for stock options backdating.

Even when these allegations are baseless, individuals may still face significant defense and settlement costs.

Are you an officer?

Before determining whether in-house counsel are covered by a D&O policy, we must first determine whether the counsel is an “officer” at all. Most GCs, when posed this question, answered yes. To answer this question from an insurance perspective, we must dig deeper to determine the meaning of “officer” for the given company.

In public companies, this question is often answered by the listing of officers in its public filings. If the general counsel is not listed, looking to the definition of officer found in the securities rules and regulations can help determine if the counsel is an officer. The answer may also be found in the company’s charter, bylaws, or other organizational documents.

For private companies, the question is more complex. Many insurance policies do not define “officer.” In such cases, we must look to the organizational documents to determine how “officer” is defined, if at all. The question primarily arises because  considering the meaning of “officer” without a definition raises this issue: What titles should be included in coverage? In one company, the GC may be equivalent to a C-level officer. In another, he or she may be a vice president—a title often too common to necessarily be an officer.

The question also arises for members of an in-house legal department who are not General Counsel. Without some further consideration, lower-level in-house attorneys are generally not covered by a D&O policy.

Simply put, the title General Counsel, without more, does not answer the question.

In what capacity were you acting?

D&O policies cover directors and officers acting “in their capacity as such.” GCs often have many roles within a company, including: a member of the management team; the company’s lawyer; corporate secretary; Chief Compliance Officer; Risk Manager; or business advisor. Whether a GC has insurance coverage often depends on the role in which the GC was acting at the time of complained-of actions. If filling the role of corporate secretary or business advisor, the GC should be afforded coverage in the same manner as any other officer acting in that capacity.

However, if acting as the company’s or the executive’s lawyer, the GC may have no coverage because many carriers will consider such action as the provision of professional services, which is typically excluded from coverage in D&O policies. (It is important to note that while Errors & Omissions insurance policies are designed to coverage liability arising from the provision of professional services, E&O is intended for professional services sold by a company, not performed for it. The legal services by in-house counsel are for the insured, not its customers.)

What are the options for ensuring coverage?

One solution—particularly for a private company—is to expressly include an-in house counsel in the policy by: including the title “General Counsel” in the definition of “insured;” including in-house lawyers as a group in the definition of “insured” or by endorsement; or amending corporate documents to include the GC as an officer.

There are multiple options for addressing the more complex question of capacity under a policy. Presuming the GC has been determined to be an officer, one option for addressing the coverage issue is to delineate the duties of the GC in the corporate documents to include the provision of legal services to the company. 

Another is to amend the definition of “wrongful acts” within the D&O policy to remove references to actions taken “solely” in the GC’s capacity as an officer or director. Instead, consider language covering all actions done in the GC’s officer capacity, even when they are interrelated with actions taken in other capacities.

Another option for addressing the issue outside of insurance is to enter into an Indemnification Agreement with the company, separate from any indemnification provided for in corporate bylaws or other documents. 

Finally, a company can consider Employed Lawyers coverage, which is a sort of legal malpractice policy designed to cover the activities of in-house counsel in their role as lawyer to the company, rather than their role as a member of management. Such policies can also cover in-house attorneys who are not GCs, as well as paralegals and contract attorneys.

Kara Altenbaumer-Price, J.D., is Director of Complex Claims & Consulting for USI. She can be reached at kara.altenbaumer-price@usi.biz.

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