EMPLOYED LAWYERS INSURANCE

Employed Lawyers Insurance, In-House Counsel Malpractice Insurance: FAQs

 

I. Employed Lawyers Insurance FAQs: what does it cover?

Defense costs and indemnity payments incurred to resolve claims made against an attorney for services rendered as in-house counsel of the organization that purchased the policy. Most policies also cover claims arising out of Moonlighting or Pro Bono services provided by in-house counsel.

II. Employed Lawyers Insurance FAQs: who does it cover? 

An organization’s in-house attorneys, employees who support them in providing legal services, i.e., paralegals, legal assistants, etc., and contract attorneys.

III. Employed Lawyers Insurance FAQs: why is it necessary, if an organization carries D&O and/or E&O insurance? 

D&O insurance protects a company, its officers, and its outside directors against liability arising from actions taken in the course of doing business.

Many companies rely on directors and officers (D&O) insurance policies to protect against lawsuits that name in-house counsel. However, the coverage will apply only if:

  • The in-house counsel who’s sued is a director or officer of the company.
  • The lawsuit is based on business advice that in-house counsel provided to the board, not legal advice. D&O policies exclude coverage for professional services, including legal services, so the insurer will deny coverage for any claim brought against in-house counsel that arises out of the rendering of legal services.

 So, if an organization carries D&O insurance, and its general counsel isn’t an officer, and thus not covered by its policy, then it can designate him or her as an officer, and have the insurer amend the policy to cover the GC. The insurer may even endorse the policy to cover all of the organization’s in-house attorneys.

However, the attorneys will still need Employed Lawyers coverage to protect against claims arising out of legal services they provide.

E&O coverage applies to mistakes made by a company in delivering professional services to customers. E&O policies routinely exclude coverage for legal malpractice, so in-house counsel shouldn’t rely on it for protection.

IV. Employed Lawyers Insurance FAQs: why should  organizations buy it?

A. Because in-house counsel have and will continue to take on greater responsibilities, as companies reduce their “spend” on outside counsel.

Besides the traditional tasks of contract drafting, employment matters, etc., today in-house counsel may handle litigation, IP, cyber-security, and regulatory compliance matters.

Greater numbers of in-house attorneys handling more matters and more complex matters, increases the risk of errors being made that result in malpractice claims. 

B. Asset protection for their employed attorneys: without insurance, an in-house attorney will have to fund his or her own malpractice claim defense and any indemnity payment made to the plaintiff, which may exhaust the attorney’s assets.

C. Professional claim handling v. handling the claim on your own: employed lawyers insurers employ professionals who handle these claims all day, every day, and have contracts with law firms that specialize in defending these claims. Corporations and in-house counsel don’t.

D. Recruitment: some in-house counsel won’t work for a company that doesn’t provide employed lawyers coverage, because they don’t want to have their personal assets at risk in case of a malpractice claim.

V. Employed Lawyers Insurance FAQs: what kinds of claims are filed against in-house counsel?

  • Claims by the in-house counsel’s employer for negligence.
  • Claims by coworkers for discrimination, harassment, or wrongful termination  arising out of the attorney’s legal work for the company.
  • Claims by individual employees the in-house attorney is assigned to represent, i.e. for conflict-of-interest and/or negligent representation.
  • Claims by non-client third parties, i.e., the employer’s creditors, customers, shareholders, trustees, etc.
  • Claims brought by the employer, the board of directors, and officers.
  • Claims arising out of pro bono representations.
  • Disciplinary actions/bar grievances
  • Claims arising out of moon-lighting activities.
  • Claims brought by the SEC or other regulatory body.
  • Government prosecutions of in-house counsel.

Contract drafting errors, negligent advice to the HR department, breach of duties to ERISA fiduciaries, malicious prosecution, and misrepresentation are the most common types of claims made against in-house counsel. 

Further, even if you’ve never incurred a malpractice claim, and pride yourself on practicing law safely, you never know when you’ll make a mistake or encounter a situation that leads to a claim being filed against you, even if you’ve done nothing wrong.

If that happens and you’re uninsured, then you’ll bear the time, effort, cost, and stress of handling the claim on your own, and all of your personal assets will be at risk.

That’s an enormous gamble to take when your employer can instead pay a relatively modest premium for a policy that will let you avoid those risks.

VI. Employed Lawyers Insurance FAQs: what specific kinds of claims have been filed against in-house counsel?

  • A treasurer of a publicly held financial corporation was required to obtain a certain license from the Office of Thrift Supervision as part of his employment.When applying for the license, he failed to disclose a prior misdemeanor arrest, which led to the denial of his application, and his termination.He sued his former employer and its corporate counsel, alleging that she had advised him to omit the prior arrest on his application. He claimed negligence, negligent supervision and retention, legal malpractice, defamation/ injury to reputation, and breach of contract, and demanded over $9 million for damages, plus attorneys’ fees and costs. The matter was settled for $1 million.
  • A former vice president/general counsel sued his former employer to collect a severance package. The employer filed a counterclaim for malpractice, alleging that counsel had negligently supervised the company’s outside lawyers.
  • A city attorney was sued by the city for allowing a default judgment against the city.
  • An insider-trading claim against a publicly held company alleged that the company misstated its earnings. In addition to insider trading claims, the in-house lawyer was charged with giving improper advice to the company’s managers and directors as to what kinds of earnings could be stated in the company’s disclosures.
  • Yanez v. Plummer, 2013 Cal. App. LEXIS 891 (Cal. App. 3d Dist. Nov. 5, 2013): the California Third District Court of Appeals overruled summary judgment in favor of an in-house lawyer sued by an employee of the corporation.The in-house lawyer represented the employee during a deposition involving a workplace accident. The employee had previously provided two written statements describing the workplace accident, and was concerned that his testimony in the deposition would be harmful to the position of his employer.During the deposition, in-house counsel highlighted inconsistencies between one of the written statements and his deposition testimony (thus undermining one of her clients). The employee was terminated for dishonesty, ostensibly due to the difference between his written statements and his deposition testimony. He sued his employer for wrongful termination, and in-house lawyer for malpractice.

    The California Court of Appeals reversed the summary judgment, finding that the in-house lawyer had failed to inform the employee of the lawyer’s potential conflicts, and failed to obtain the employee’s written consent to his representation after disclosure of the conflicts. This was sufficient to constitute evidence of malpractice and a breach of fiduciary duty. The Court permitted the malpractice claim of the employee against the in-house lawyer to proceed to trial.

VII. Legal Malpractice Insurance FAQs: what policy limits should I buy?

The minimum malpractice insurance limit is $100,000 per claim/$300,000 annual agg-regate. This means that the insurer will pay a maximum of $100,000 for defense and indemnity costs for any one claim made against in-house counsel, and a maximum of $300,000 for all claims made during the policy period, which is one year.

The next level of limits is $250,000/$250,000, then $250,000/$500,000; $500,000/$500,000; $500,000/$1M; etc., up to $10M/$10M, which is the maximum that the major insurers offer. We can procure higher limits in the excess insurance market.

The right policy limits for your legal department depends mainly on its attorney count and the types of matters that it handles. 

Your firm’s broker should review the legal department’s operations every year, and tell you if its limits are adequate; if they’re not, have your broker solicit quotes for higher limits, and then decide if they’re worth the higher premium.

Here are some guidelines:

For a one-attorney legal department, handling mostly routine contract and employment matters, a limit of $500,000/$500,000 is sufficient. Solo in-house counsel who handle IP, litigation, or securities matters should purchase a limit of at least $1 million/$1 million.

Multi-lawyer legal departments need higher limits, due to their greater number of lawyers, i.e., a minimum limit of $1 million/$1 million for a 2-lawyer department, $1. 5 million/$1.5 million for a 3-lawyer firm, etc.

The limits per attorney tend to decrease as firm size increases. For example, a one-attorney legal department that does ‘high-risk’ work may carry a $1M limit, but a four-attorney department doing the same work will a carry $3M limit, not a $4M limit, and a 10-lawyer department would likely carry a $5M – $6M limit, not $10M.

Note: You should raise your policy limits as your legal department’s headcount, revenue, and prior acts exposure  increases.

VIII. Employed Lawyers Insurance FAQs: what else do I need to know about policy limits?

Most legal malpractice policies have “claim expenses within the limits” (CEIL), which means that legal fees and related costs are deducted from the limit as they’re paid, which leaves that much less for indemnity payments (settlement or judgment).

Too, once the limit is exhausted, the policy will no longer pay claim expenses or indemnity costs, so the firm will have to fund any additional costs out-of-pocket. These are also called “eroding limits” policies.

Policies that have “claim expenses outside the limit” (CEOL), don’t have legal fees de-ducted from the limit, so the entire per claim limit is available for indemnity payments; further, there’s no limit on defense costs. This is the broadest – and most expensive – coverage, but if you have it, you can buy a policy with a lower limit, which partly offsets the extra cost.

Most insurers underwrite CEOL coverage case-by-case; you have to request it, and they may decline to offer it.

When deciding what policy limit to buy, determine whether the quotes you get are for policies that have CEIL or CEOL; if they’re for CEIL, consider buying a higher limit to offset the “eroding limits”.

Note: some insurers offer a modified version of CEOL, i.e., a policy with a separate limit for defense costs. Example: if a firm buys a policy with a $500K/$1M limit, it may receive a separate $500K limit for defense costs, leaving its entire per claim limit of $500K avail-able to pay any judgment or settlement. If defense costs exceed $500K, the separate limit will be used up, and any further defense costs will be paid out of the per claim limit, thus eroding it.

Modified CEOL is less expensive and more readily available than CEOL, and may be a good option for your firm.

IX. Employed Lawyers Insurance FAQs: what deductible should I buy?

A deductible applies to every claim.

The minimum is $1,000; higher options are $2,500, $5,000, $10,000, $15,000, $25,000, $50,000, $100,000, etc. The higher a firm’s deductible, the lower its premium, but in-surers will offer only as a high a deductible as they believe a firm can afford to pay, based on its annual revenue, etc. Nearly all firms whose malpractice insurance pre-mium is below $10,000 have a deductible of $1,000, $2,500, or $5,000 per claim, be-cause insurers won’t offer them anything greater.

There are three types of deductibles:

1. Loss & Expense Deductible: applies to indemnity payments (loss) and claim ex-penses, i.e., legal fees; most legal malpractice policies have this type of deductible. The firm must pay all losses and claim expenses until the deductible has been fully paid; the insurer won’t make any payments until then. Most firms satisfy their deductible by paying legal fees, because they’re usually the first expenses that are incurred on a malpractice claim.

2. Annual Aggregate Deductible: applies to loss and claim expenses, which the firm pays until it has reached the annual aggregate. No further deductible applies during the policy period, even if the firm incurs more claims.

3. Loss Only Deductible, a/k/a First Dollar Defense: applies to indemnity payments, but not claim expenses, which the insurer pays from the first dollar. Claim expenses are usually incurred on a malpractice claim before any indemnity payment is made, and of-ten no indemnity payment is made, because the law firm prevails. Thus, a law firm that has this type of deductible usually doesn’t pay anything, which is why insurers charge extra for it.

Note: the size of the deductible doesn’t have a major effect on the premium, so you’ll save only about 3% if you double your deductible, 6% if you quadruple it, etc.

However, there are still savings to be had, so it’s worth looking into, i.e., as your firm’s annual revenue increases. 1.5% – 2.25% of annual revenue is a reasonable guideline, i.e., $10,000 if your revenue is $500,000, $25,000 if it’s $1M, $50,000 if it’s $2M.

If that’s higher than your current deductible, and the extra risk makes you apprehensive, at least obtain quotes, so you’ll know how much the potential savings are.

Higher revenue gives you more financial leverage, and assuming a higher deductible in return for a lower premium is one way to take advantage of that leverage.

X. Employed Lawyers Insurance FAQs: what is Prior Acts coverage?

Prior Acts coverage a/k/a Retroactive coverage, covers an organization’s in-house counsel for alleged malpractice it committed before the inception date of its current employed lawyer coverage (hence the name “prior acts coverage”).

Without it, counsel is covered only for malpractice that occurred on or after the policy inception date; however, many malpractice claims aren’t filed until several years after the alleged wrongdoing, i.e., before the current policy’s inception date.

Insurers won’t provide prior acts coverage when a company buys its first emplopyed lawyers policy, but once it does buy a policy, as long as it renews it every year without letting it lapse,  its insurer will offer it prior acts coverage back to the inception date of its first policy, i.e., in the second year of coverage, in-house counsel will have one year of prior acts coverage, in its third year, it’ll have two years of prior acts coverage, etc. Even if the company switches insur-ers, the new insurer will offer the same prior acts coverage as the prior insurer.

Insurers charge extra for prior acts coverage in each of the first four years that a firm renews its coverage, as explained here, in the section on ‘step-rating’, which increases the premium. However, buying a policy without prior acts coverage is a poor risk man-agement strategy, so we advise against it.

XI. Employed Lawyers Insurance FAQs: what else do I need to know?

Time frame: some insurers can provide quotes in as few as three days, but if you send your application to a broker that close to your renewal or desired policy inception late, you’ll get just a few quotes, because most insurers need more time than that.

It generally takes about two weeks to find the best available terms in the market. Further, you should allow a few days to revise your application after your broker has reviewed it.

Bottom line: try to send your application to your broker at least three weeks before your organization’s current policy expires, or its desired policy inception date (if it’s uninsured).

XII. Employed Lawyers Insurance FAQs: how do I obtain the best possible terms?

A. Provide a complete submission: application, addendum (if necessary; see XI.B.2), all required supplemental apps., and any other required documents (see our Applications page).

B. Allow sufficient time to shop, i.e., at least three weeks (see XI. A).

C. Solicit quotes from a wide range of insurers: work with a broker that has access to all of the major employed lawyers insurers, and will scour the market on your behalf to obtain the best terms.

 

FURTHER READING

Lawyers Malpractice Coverage Goes In-House

What Every General Counsel Needs to Know About Employed Lawyers Coverage

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