In-house Counsel: Who Has You Covered?

Employed Lawyers Professional Liability Policies

Employed Lawyers Professional Liability (“ELPL”) policies (and endorsements) typically provide coverage directly for and to in-house counsel. ELPL policies, which are designed to provide coverage for claims directed against company lawyers, may be available to a variety of organizations, including public and private companies and nonprofit organizations. The policies' definition of, and coverage for, an “Employed Lawyer” generally includes any person admitted to practice law who is, was, or becomes employed as a lawyer for the company, but only with regard to wrongful acts that occur during the course of such employment. Non-lawyer employees who are, were, or become assistants of an employed lawyer, while acting under the direction and control of the employed lawyer in the performance of professional services for the company, also are covered.

An ELPL policy generally covers claims concerning wrongful acts of negligence, errors, omissions, breaches of duty, and misstatements, which are performed in connection with a company lawyer's provision of legal services to the company. A “Claim” is typically defined as a written demand for monetary, non-monetary, or injunctive relief, and may include a civil, administrative, regulatory, or arbitration proceeding. The definition of “Claim” also may encompass a judicial, administrative, bar association, or other proceeding against an employed lawyer concerning the eligibility or license of such employed lawyer to practice law.

An ELPL policy usually covers Sarbanes-Oxley reporting claims, as well as third-party claims of malpractice and negligence. An ELPL policy may also cover defense costs associated with a company's own claims against its in-house lawyer, but the policy's exclusions, which vary among insurers, may be broad and should be reviewed carefully to determine the precise scope of coverage afforded.

ELPL policies typically cover claims that are indemnifiable by the company, as well as non-indemnified claims. With regard to amounts that the company expends to indemnify its attorneys, the insurer will reimburse the company for such amounts in excess of the applicable deductible. For claims against attorneys that the company will not indemnify, the insurer usually will pay covered defense expenses and loss amounts without a deductible.

Several exclusions are common to ELPL policies. For instance, coverage is usually barred or limited for claims arising out of a criminal, fraudulent, or dishonest act by the employed lawyer. When such a claim is asserted, however, the insurer may nonetheless be obligated to defend the employed lawyer until there is, if at all, a judgment, final adjudication, adverse admission, or finding of fact against the employed lawyer. If there is such a final adjudication, the company may be called upon to reimburse the insurer for defense costs it has paid. An ELPL policy also typically excludes coverage for claims that other policies ordinarily cover, such as discrimination or other unfair employment practices, breach of duty or responsibility in connection with an employee benefit or pension plan, or relating to a purchase or sale of the company's securities.

ELPL coverage therefore may provide an effective solution to the increasing problem of in-house lawyer exposure. This is particularly so as it may provide broader coverage, more specific to in-house counsel's needs, than other lines of coverage (discussed below).

Directors and Officers Liability Policies

Another coverage option for in-house counsel is their, or their company's, purchase of additional coverage under the company's Directors and Officers Liability Policy (“D&O”), which may be relatively inexpensive depending on market conditions and other factors. D&O policies do not generally extend to all in-house counsel because not all company lawyers are officers or directors of their company, with the exception of the general counsel. In response to corporate policyholders' demands for broader coverage, most insurers now offer an endorsement to D&O policies that provides coverage for alleged wrongful acts by past, present, or future attorneys and legal staff employed by the company.

Coverage offered by a typical D&O policy is divided into three, sometimes four, sections or categories, which will be reflected in the attorney's endorsement. “Side A” or Executive Liability Coverage provides coverage for individual directors and officers for losses for which the company has not agreed or cannot agree to indemnify the individuals. “Side B” or Corporate Reimbursement Coverage allows the corporation to seek reimbursement for indemnification payments to its officers and directors made pursuant to a company's bylaws, statutory indemnification requirements, and/or contractual undertakings. “Side C” or Entity Coverage provides coverage for securities claims directed against the company itself for its alleged negligent acts, errors or omissions. “Side D” may provide coverage for other categories of liability, including Special Litigation Committee (“SLC”) investigations and other internal audits set up to investigate alleged wrongdoing.

Most D&O policies define “Claim” to include written demands for monetary or nonmonetary injunctive relief, civil, criminal, administrative, regulatory or arbitration proceedings, investigations and other demands. Most insurers agree that civil lawsuits, criminal indictments, and cease and desist letters demanding monetary relief are claims. Insurers, however, may take the position that administrative and regulatory actions such as SEC inquiries and investigations do not satisfy a D&O policy's definition of “Claim.”

Many D&O policies attempt to narrow coverage by agreeing to cover “any administrative or regulatory proceeding commenced by the filing of a notice or charges, formal investigation order, or other document ' ” Other policies attempt to limit coverage by referencing specific documents, such as policies that cover specific types of official proceedings (i.e., civil, criminal, administrative, or arbitration proceedings). Insurance companies often take the position that language limiting coverage to formal proceedings eliminates their obligation to reimburse defense fees incurred when the corporation first learns of an administrative action or possible investigation.

Policyholders, however, can find support for their coverage position that informal investigations fit the D&O policy's definition of “Claim” in the SEC's Enforcement manual (published Oct. 8, 2008), which memorialized the procedures for conducting informal and formal investigations that have been followed for many years. The manual describes the SEC's broad discretion to open informal investigations upon the mere suspicion of a securities violation. The SEC typically commences its activities through an informal inquiry, referred to as a Matter Under Inquiry or “MUI.” When a matter changes from a MUI to an investigation, it is called a “formal investigation.” If the company under investigation is cooperating with the SEC, there is no need to commence a formal investigation. Thus, policyholders can reasonably urge that costs of complying with informal SEC inquiries or MUIs should be covered because insurance companies should not penalize policyholders for complying with an informal investigation. Insurers' refusal to cover the costs of complying with informal SEC investigations could lead to the perverse incentive of encouraging policyholders to not comply with informal SEC inquiries.

Many courts have held that subpoenas constitute covered actions under a typical D&O policy's definition of “Claim.” See e.g., Polychron v. Crum & Forster Ins. Co., 916 F.2d 461, 463 (8th Cir. 1990). Some newer policies expressly include the receipt of a subpoena or target letter within the definition of “Claim.” See National Union Fire Insurance Company Executive and Organization Liability Insurance Policy, Form 75010 (2/00) (“in the case of an investigation by the SEC or a similar state or foreign government authority, after the service of a subpoena upon such 'Insured Person'”); Federal Insurance Company's ForeFront Portfolio policy (defining “Claim” as including “a formal civil, criminal, administrative, or regulatory investigation commenced by the service upon or other receipt by the Insured Person of a written notice from the investigating authority specifically identifying the Insured Person as a target individual against whom formal charges may be commenced ' “).

A New York court has likewise held that a grand jury investigation and the criminal charges that followed constituted a claim under the terms of the policy. MTB Bank-in-Liquidation v. Lloyd's, 7 A.D.3d 276, 776 N.Y.S.2d 789 (N.Y. App. Div. 2004). Another court held that expenses incurred in response to the SEC's “Order Directing a Private Investigation and Designating Officers to Take Testimony,” accompanied by a later cease and desist order, also were covered under a D&O policy's terms. Minuteman Int'l, Inc. v. Great American Ins. Co., No. 03C6067, 2004 U.S. Dist. LEXIS 4660, at *22 (N.D. Ill. Mar. 22, 2004) (an SEC subpoena “is not a mere request for information, but a substantial demand for compliance by a federal agency with the ability to enforce its demand”).

While a D&O policy may provide definite coverage for in-house counsel, the company and counsel should be aware of certain potential limitations. The relevant policy's aggregate limit will, for example, apply to all of the insureds and, therefore, the policy's limit of coverage may be reached quickly where there are multiple insureds. Additionally, coverage under the endorsement may be subject to the company's deductible or self-insured retention, which can be substantial. Moreover, this endorsement may provide coverage to an attorney if and only if a director or officer also is named as a defendant. Furthermore, if coverage for counsel is added by endorsement, care should be taken to ensure that any contrary exclusions are eliminated or modified. See Young v. Illinois Union Ins. Co., No. 09-15054, 2010 U.S. App. LEXIS 3600, at **1-2 (9th Cir. Feb. 22, 2010) (underlying allegations against counsel arose out of his professional services as an attorney for the insured and, therefore, the D&O policy's professional services exclusion barred coverage).

Thus, although a D&O policy may be triggered for covered claims and/or covered defendants, litigation often involves claims and/or defendants (e.g., the company itself) that may not be fully or adequately covered under the policy. In such instances, defense and indemnification costs may need to be allocated between allegedly covered and uncovered claims/parties, and the D&O policy may not provide an express or bright-line method by which an allocation determination may be made. When this is the case, the proper method of allocation between covered and uncovered claims/parties may become a source of contention and litigation, and resolution of the allocation issues can vary depending on whether the involved expenses are for defense costs and indemnification (i.e., settlement or judgments).

The more widely accepted standard for the allocation of defense costs is the “reasonably related” standard. This standard, which the Maryland Supreme Court first articulated, provides as follows: “[s]o long as an item of service or expense is reasonably related to defense of a covered claim, it may be apportioned wholly to the covered claim.” Continental Cas. Co. v. Board of Educ. of Charles County, 302 Md. 516, 532 (1985).

There is a split in authority with regard to the allocation of indemnity costs. One method of allocation applies the “relative exposure” rule, whereby the allocation of an indemnity payment is made as an approximation and according to “some notion of relative fault.” See Pepsico, Inc. v. Continental Cas. Co., 640 F. Supp. 656, 662 (S.D.N.Y. 1986). There are several factors that may be considered when using the relative exposure rule for allocation, which include, without limitation, the identity of each beneficiary of the settlement and the likelihood of an adverse judgment against each in the underlying action. See Safeway Stores, Inc. v. Nat'l Union Fire Ins. Co., No. C-88-3440, 1993 U.S. Dist. LEXIS 2006, at *14 (N.D. Cal. Feb. 5, 1993).

Other courts have adopted the alternative “larger settlement” rule, which provides as follows: “[o]nly if the corporation were liable for a claim for which the directors and officers lacked any responsibility, or if the corporate liability increased the amount of loss, would the amount of liability exceed that amount for which [the insurer] was 'legally obligated' to pay.” Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1433 (9th Cir. 1995) (citation omitted). Under this rule, a court will allocate an amount to the company only if there is some amount of corporate liability that is “both independent of and not duplicated by liability against the directors and officers.” Id.

In summary, while an endorsement to the D&O policy is an option for covering company lawyers, the complications associated with this method of obtaining coverage for in-house counsel may include:

• The aggregate limit will apply to all insureds and needs to be shared by them;
• Without a specific priority of payment provision, coverage extended to other insureds will erode and reduce the policy's limits;
• Coverage may be subject to the company's substantial deductible;
• There may be coverage for the attorney only if a director or officer also is named as a defendant; and
• The proper method for allocating between covered and uncovered claims and defendants may not be express and may result in disputes.

Thus, while an endorsement to the D&O policy may be an inexpensive option, there may be hidden costs when in-house counsel seek protection under such an endorsement.

Errors and Omissions Liability Policies

A company's Errors and Omissions Policy (“E&O”) might appear to be the most obvious place to look for coverage when claims are asserted against in-house counsel and their professional services are questioned. E&O policies, however, generally cover the acts, errors, and omissions of the insured in delivering a professional service to others for a fee. Because businesses rarely sell legal advice, legal services offered within a corporation may be regarded as beyond the definition of services that are covered under an E&O policy. For this reason, E&O policies may (depending on their precise terms) provide little or no coverage for claims against in-house counsel. Furthermore, it may be argued that a company's claims against its own lawyers are not covered because many E&O policies exclude coverage for claims between insureds. In-house counsel should carefully read these policies before a claim presents and before in-house counsel or their companies assume that their E&O policies provide adequate protection to corporate lawyers.

Conclusion

Before a claim is made, companies and their lawyers should carefully review their insurance programs to determine the scope of their insurance coverage for in-house counsel and the legal department's staff. If necessary and as appropriate, companies should consider purchasing an ELPL policy or adding supplemental coverage by endorsement to their D&O policy, which will adequately protect their legal protectors. Insurance brokers, familiar with such coverage, are available to help.

Sherilyn Pastor, a member of this newsletter's Board of Editors, chairs and is a partner in the Insurance Coverage Group of McCarter & English, LLP, resident in the firm's Newark, NJ, office. Charles T. Lee is a partner and Jennifer Black Strutt is an associate in the firm's Insurance Coverage Group, both practicing in the Stamford, CT, office.

Because in-house counsel are increasingly popular targets when claims are brought against their employers, their insurance protection becomes especially important. This article discusses some of the types of insurance policies available to companies that may provide coverage to company lawyers, including Errors and Omissions, Directors and Officers, and Employed Lawyers Professional Liability insurance.

Background

In recent years, civil litigation and criminal investigations have involved in-house attorneys with greater frequency. For example:

• In January 2009, Jordan Mintz, former General Counsel of Enron's Global Finance group, and Rex Rogers, Enron's former Associate General Counsel, settled a civil lawsuit brought by the Securities and Exchange Commission (“SEC”) alleging securities fraud and aiding and abetting fraud. See Kristen Hays, An Enron Settlement Sought; Two Lawyers File to Have SEC Case Halted, Houston Chronicle, Oct. 29, 2008, at 3; Around the Region, Houston Chronicle, Jan. 17, 2009, at 3.
• In 2007, three former Purdue Frederick executives, including former General Counsel Howard Udell, pleaded guilty to misdemeanors tied to the marketing of the painkiller OxyContin and agreed to pay $34.5 million in fines. See Barry Meier, Narcotic Maker Guilty of Deceit over Marketing, N.Y. Times, May 10, 2007, at A1.
• Mark Belnick, General Counsel of Tyco International, was indicted (and later acquitted) for grand larceny stemming from allegations that he took a $17 million bonus as a reward for helping to conceal corporate wrongdoing. See Brooke A. Masters & Carrie Johnson, Former Tyco Executive Acquitted, Washington Post, July 16, 2004, at E1.
• According to a recent survey, the U.S. government prosecuted actions against in-house counsel in more than 60 cases, most commonly concerning securities fraud claims, between June 2003 and June 2008. See www.insidecounsel.com.

At least three types of coverages may protect in-house counsel facing allegations of wrongdoing, specifically their companies' Errors and Omissions, Directors and Officers, and Employed Lawyers Professional Liability policies. Given their potential benefit, each are discussed below in order of their effectiveness.

Employed Lawyers Professional Liability Policies

Employed Lawyers Professional Liability (“ELPL”) policies (and endorsements) typically provide coverage directly for and to in-house counsel. ELPL policies, which are designed to provide coverage for claims directed against company lawyers, may be available to a variety of organizations, including public and private companies and nonprofit organizations. The policies' definition of, and coverage for, an “Employed Lawyer” generally includes any person admitted to practice law who is, was, or becomes employed as a lawyer for the company, but only with regard to wrongful acts that occur during the course of such employment. Non-lawyer employees who are, were, or become assistants of an employed lawyer, while acting under the direction and control of the employed lawyer in the performance of professional services for the company, also are covered.

An ELPL policy generally covers claims concerning wrongful acts of negligence, errors, omissions, breaches of duty, and misstatements, which are performed in connection with a company lawyer's provision of legal services to the company. A “Claim” is typically defined as a written demand for monetary, non-monetary, or injunctive relief, and may include a civil, administrative, regulatory, or arbitration proceeding. The definition of “Claim” also may encompass a judicial, administrative, bar association, or other proceeding against an employed lawyer concerning the eligibility or license of such employed lawyer to practice law.

An ELPL policy usually covers Sarbanes-Oxley reporting claims, as well as third-party claims of malpractice and negligence. An ELPL policy may also cover defense costs associated with a company's own claims against its in-house lawyer, but the policy's exclusions, which vary among insurers, may be broad and should be reviewed carefully to determine the precise scope of coverage afforded.

ELPL policies typically cover claims that are indemnifiable by the company, as well as non-indemnified claims. With regard to amounts that the company expends to indemnify its attorneys, the insurer will reimburse the company for such amounts in excess of the applicable deductible. For claims against attorneys that the company will not indemnify, the insurer usually will pay covered defense expenses and loss amounts without a deductible.

Several exclusions are common to ELPL policies. For instance, coverage is usually barred or limited for claims arising out of a criminal, fraudulent, or dishonest act by the employed lawyer. When such a claim is asserted, however, the insurer may nonetheless be obligated to defend the employed lawyer until there is, if at all, a judgment, final adjudication, adverse admission, or finding of fact against the employed lawyer. If there is such a final adjudication, the company may be called upon to reimburse the insurer for defense costs it has paid. An ELPL policy also typically excludes coverage for claims that other policies ordinarily cover, such as discrimination or other unfair employment practices, breach of duty or responsibility in connection with an employee benefit or pension plan, or relating to a purchase or sale of the company's securities.

ELPL coverage therefore may provide an effective solution to the increasing problem of in-house lawyer exposure. This is particularly so as it may provide broader coverage, more specific to in-house counsel's needs, than other lines of coverage (discussed below).

Directors and Officers Liability Policies

Another coverage option for in-house counsel is their, or their company's, purchase of additional coverage under the company's Directors and Officers Liability Policy (“D&O”), which may be relatively inexpensive depending on market conditions and other factors. D&O policies do not generally extend to all in-house counsel because not all company lawyers are officers or directors of their company, with the exception of the general counsel. In response to corporate policyholders' demands for broader coverage, most insurers now offer an endorsement to D&O policies that provides coverage for alleged wrongful acts by past, present, or future attorneys and legal staff employed by the company.

Coverage offered by a typical D&O policy is divided into three, sometimes four, sections or categories, which will be reflected in the attorney's endorsement. “Side A” or Executive Liability Coverage provides coverage for individual directors and officers for losses for which the company has not agreed or cannot agree to indemnify the individuals. “Side B” or Corporate Reimbursement Coverage allows the corporation to seek reimbursement for indemnification payments to its officers and directors made pursuant to a company's bylaws, statutory indemnification requirements, and/or contractual undertakings. “Side C” or Entity Coverage provides coverage for securities claims directed against the company itself for its alleged negligent acts, errors or omissions. “Side D” may provide coverage for other categories of liability, including Special Litigation Committee (“SLC”) investigations and other internal audits set up to investigate alleged wrongdoing.

Most D&O policies define “Claim” to include written demands for monetary or nonmonetary injunctive relief, civil, criminal, administrative, regulatory or arbitration proceedings, investigations and other demands. Most insurers agree that civil lawsuits, criminal indictments, and cease and desist letters demanding monetary relief are claims. Insurers, however, may take the position that administrative and regulatory actions such as SEC inquiries and investigations do not satisfy a D&O policy's definition of “Claim.”

Many D&O policies attempt to narrow coverage by agreeing to cover “any administrative or regulatory proceeding commenced by the filing of a notice or charges, formal investigation order, or other document ' ” Other policies attempt to limit coverage by referencing specific documents, such as policies that cover specific types of official proceedings (i.e., civil, criminal, administrative, or arbitration proceedings). Insurance companies often take the position that language limiting coverage to formal proceedings eliminates their obligation to reimburse defense fees incurred when the corporation first learns of an administrative action or possible investigation.

Policyholders, however, can find support for their coverage position that informal investigations fit the D&O policy's definition of “Claim” in the SEC's Enforcement manual (published Oct. 8, 2008), which memorialized the procedures for conducting informal and formal investigations that have been followed for many years. The manual describes the SEC's broad discretion to open informal investigations upon the mere suspicion of a securities violation. The SEC typically commences its activities through an informal inquiry, referred to as a Matter Under Inquiry or “MUI.” When a matter changes from a MUI to an investigation, it is called a “formal investigation.” If the company under investigation is cooperating with the SEC, there is no need to commence a formal investigation. Thus, policyholders can reasonably urge that costs of complying with informal SEC inquiries or MUIs should be covered because insurance companies should not penalize policyholders for complying with an informal investigation. Insurers' refusal to cover the costs of complying with informal SEC investigations could lead to the perverse incentive of encouraging policyholders to not comply with informal SEC inquiries.

Many courts have held that subpoenas constitute covered actions under a typical D&O policy's definition of “Claim.” See e.g. , Polychron v. Crum & Forster Ins. Co. , 916 F.2d 461, 463 (8th Cir. 1990). Some newer policies expressly include the receipt of a subpoena or target letter within the definition of “Claim.” See National Union Fire Insurance Company Executive and Organization Liability Insurance Policy, Form 75010 (2/00) (“in the case of an investigation by the SEC or a similar state or foreign government authority, after the service of a subpoena upon such 'Insured Person'”); Federal Insurance Company's ForeFront Portfolio policy (defining “Claim” as including “a formal civil, criminal, administrative, or regulatory investigation commenced by the service upon or other receipt by the Insured Person of a written notice from the investigating authority specifically identifying the Insured Person as a target individual against whom formal charges may be commenced ' “).

A New York court has likewise held that a grand jury investigation and the criminal charges that followed constituted a claim under the terms of the policy. MTB Bank-in-Liquidation v. Lloyd's , 7 A.D.3d 276, 776 N.Y.S.2d 789 (N.Y. App. Div. 2004). Another court held that expenses incurred in response to the SEC's “Order Directing a Private Investigation and Designating Officers to Take Testimony,” accompanied by a later cease and desist order, also were covered under a D&O policy's terms. Minuteman Int'l, Inc. v. Great American Ins. Co., No. 03C6067, 2004 U.S. Dist. LEXIS 4660, at *22 (N.D. Ill. Mar. 22, 2004) (an SEC subpoena “is not a mere request for information, but a substantial demand for compliance by a federal agency with the ability to enforce its demand”).

While a D&O policy may provide definite coverage for in-house counsel, the company and counsel should be aware of certain potential limitations. The relevant policy's aggregate limit will, for example, apply to all of the insureds and, therefore, the policy's limit of coverage may be reached quickly where there are multiple insureds. Additionally, coverage under the endorsement may be subject to the company's deductible or self-insured retention, which can be substantial. Moreover, this endorsement may provide coverage to an attorney if and only if a director or officer also is named as a defendant. Furthermore, if coverage for counsel is added by endorsement, care should be taken to ensure that any contrary exclusions are eliminated or modified. See Young v. Illinois Union Ins. Co., No. 09-15054, 2010 U.S. App. LEXIS 3600, at **1-2 (9th Cir. Feb. 22, 2010) (underlying allegations against counsel arose out of his professional services as an attorney for the insured and, therefore, the D&O policy's professional services exclusion barred coverage).

Thus, although a D&O policy may be triggered for covered claims and/or covered defendants, litigation often involves claims and/or defendants (e.g., the company itself) that may not be fully or adequately covered under the policy. In such instances, defense and indemnification costs may need to be allocated between allegedly covered and uncovered claims/parties, and the D&O policy may not provide an express or bright-line method by which an allocation determination may be made. When this is the case, the proper method of allocation between covered and uncovered claims/parties may become a source of contention and litigation, and resolution of the allocation issues can vary depending on whether the involved expenses are for defense costs and indemnification (i.e., settlement or judgments).

The more widely accepted standard for the allocation of defense costs is the “reasonably related” standard. This standard, which the Maryland Supreme Court first articulated, provides as follows: “[s]o long as an item of service or expense is reasonably related to defense of a covered claim, it may be apportioned wholly to the covered claim.” Continental Cas. Co. v. Board of Educ. of Charles County , 302 Md. 516, 532 (1985).

There is a split in authority with regard to the allocation of indemnity costs. One method of allocation applies the “relative exposure” rule, whereby the allocation of an indemnity payment is made as an approximation and according to “some notion of relative fault.” See Pepsico, Inc. v. Continental Cas. Co. , 640 F. Supp. 656, 662 (S.D.N.Y. 1986). There are several factors that may be considered when using the relative exposure rule for allocation, which include, without limitation, the identity of each beneficiary of the settlement and the likelihood of an adverse judgment against each in the underlying action. See Safeway Stores, Inc. v. Nat'l Union Fire Ins. Co., No. C-88-3440, 1993 U.S. Dist. LEXIS 2006, at *14 (N.D. Cal. Feb. 5, 1993).

Other courts have adopted the alternative “larger settlement” rule, which provides as follows: “[o]nly if the corporation were liable for a claim for which the directors and officers lacked any responsibility, or if the corporate liability increased the amount of loss, would the amount of liability exceed that amount for which [the insurer] was 'legally obligated' to pay.” Nordstrom, Inc. v. Chubb & Son, Inc. , 54 F.3d 1424, 1433 (9th Cir. 1995) (citation omitted). Under this rule, a court will allocate an amount to the company only if there is some amount of corporate liability that is “both independent of and not duplicated by liability against the directors and officers.” Id.

In summary, while an endorsement to the D&O policy is an option for covering company lawyers, the complications associated with this method of obtaining coverage for in-house counsel may include:

• The aggregate limit will apply to all insureds and needs to be shared by them;
• Without a specific priority of payment provision, coverage extended to other insureds will erode and reduce the policy's limits;
• Coverage may be subject to the company's substantial deductible;
• There may be coverage for the attorney only if a director or officer also is named as a defendant; and
• The proper method for allocating between covered and uncovered claims and defendants may not be express and may result in disputes.

Thus, while an endorsement to the D&O policy may be an inexpensive option, there may be hidden costs when in-house counsel seek protection under such an endorsement.

Errors and Omissions Liability Policies

A company's Errors and Omissions Policy (“E&O”) might appear to be the most obvious place to look for coverage when claims are asserted against in-house counsel and their professional services are questioned. E&O policies, however, generally cover the acts, errors, and omissions of the insured in delivering a professional service to others for a fee. Because businesses rarely sell legal advice, legal services offered within a corporation may be regarded as beyond the definition of services that are covered under an E&O policy. For this reason, E&O policies may (depending on their precise terms) provide little or no coverage for claims against in-house counsel. Furthermore, it may be argued that a company's claims against its own lawyers are not covered because many E&O policies exclude coverage for claims between insureds. In-house counsel should carefully read these policies before a claim presents and before in-house counsel or their companies assume that their E&O policies provide adequate protection to corporate lawyers.

Conclusion

Before a claim is made, companies and their lawyers should carefully review their insurance programs to determine the scope of their insurance coverage for in-house counsel and the legal department's staff. If necessary and as appropriate, companies should consider purchasing an ELPL policy or adding supplemental coverage by endorsement to their D&O policy, which will adequately protect their legal protectors. Insurance brokers, familiar with such coverage, are available to help.

Sherilyn Pastor, a member of this newsletter's Board of Editors, chairs and is a partner in the Insurance Coverage Group of McCarter & English, LLP, resident in the firm's Newark, NJ, office. Charles T. Lee is a partner and Jennifer Black Strutt is an associate in the firm's Insurance Coverage Group, both practicing in the Stamford, CT, office.