Do In-House Lawyers Need Insurance Coverage for Malpractice?

As the litigation environment for directors and officers gets more intense, in-house lawyers are asking the question: Do I need malpractice insurance? It’s a good question. If needed, the type of insurance in-house counsel should explore is called employed lawyers professional liability insurance.

This insurance product responds when an in-house lawyer—think general counsel or a staff employee—is accused of malpractice. 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 specifically. If you are working elsewhere, this blog post will provide you with a framework that you can use to consider 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 among in-house lawyers is being sued by an employer for malpractice. As a practical matter, employers don’t sue their in-house attorneys for malpractice; they just fire them. But that begs the question: What if they fire you and then also want to sue you?

Unlikely.

California Labor Code Section 2802 says that employers must indemnify employees for losses incurred as part of their job function:

2802. (a) An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful …

In other words, if your California employer sued you, they might have to turn around and indemnify you. If you are not in California, you may want to check to see if your controlling state labor code offers similar protection.

In addition, Delaware General Corporations Code Section 145 provides indemnification for agents of Delaware corporations. A similar framework for indemnification exists in California under California Corporations Code Section 317.

So, Do You Need Employed Lawyers Insurance?

Employed lawyers insurance is probably not useful for the main worry expressed by in-house attorneys—that their employers will sue them for malpractice.

So, when is employed lawyers insurance useful? Here are a few scenarios:

Someone Other Than the Employer Perceives an Attorney-Client Relationship with You

Say, for example, during your day-to-day dealings with other employees, someone casually asks a question about whether he should exercise his options, or about a speeding ticket or an apartment eviction. If this person now perceives that you are his lawyer because of that exchange, it’s possible that he could sue you for malpractice.

Employed lawyers insurance gives an extra layer of protection here, but it’s certainly better to avoid casually giving advice to folks who are not your clients. Your best practice is to be deliberate about refraining from giving legal advice to those with whom you do not want to have an attorney-client relationship.

If you’re in a work environment where, as a cultural matter, you feel obligated to answer these types of questions, employed lawyers insurance is something you might consider. The same is true if part of your job is to give advice to third parties that are not technically the same as your employer, for example the charitable trust “arm” of your employer.

You Are Moonlighting

Employers sometimes encourage their employees to moonlight on a pro bono basis. Employed lawyers insurance responds if you are sued for malpractice as a result of these activities. The insurance will also typically provide your defense costs should you find yourself the subject of a hearing in front of the California Bar.

You Are Concerned That Your Employer Won’t Indemnify You

You may work for an employer whom you perceive will not defend you if a third party (a vendor or customer, for example) decides to sue you for legal malpractice for whatever reason, or you are worried that your company might be insolvent (and thus can’t indemnify you) at the time of the suit.

How Employed Lawyers Insurance Works

Employed lawyers insurance can cover the general counsel of a company, other staff attorneys and, in some cases, legal assistants and paralegals acting under the supervision of an in-house attorney. Some policies cover attorneys who are not employed by a company but who are acting on behalf of the company pursuant to a written agreement.

Typical limits for employed lawyers policies range from $1 million to $5 million. The limit a company will purchase depends on factors like the risk tolerance of the company, number of employed lawyers on staff, and the nature of the legal services provided.

The policy usually covers:

• All claims made against employed lawyers (unless specifically excluded) that arise out of the performance of or alleged failure to perform legal services for the employer
• Legal fees and expenses incurred in defense of employed lawyers accused of legal malpractice
• Amounts paid in damages or settlements in some cases
• Punitive damages with “most favorable jurisdiction” language (with some insurers)

Some typical exclusions are as follows, though many can be negotiated away or are no longer a problem on more modern forms:

• Securities claims (some carriers will give back this coverage for additional premium)
• Professional liability other than for legal services or professional legal liability for services taken other than at the direction of corporate counsel
• Employment practices claims against the employer (some policies can include coverage for claims made against employed lawyers by current or former directors, officers or employees)
• Other applicable insurance (such as D&O insurance)
• Fines, penalties, punitive, or exemplary damages
• Trade secret misappropriation
• ERISA (and related acts) violations
• Bodily injury, emotional distress, and property damage
• Pollution liability
• Prior acts, prior knowledge or prior notice of a claim, or circumstance before a policy’s inception date
• Prior and pending litigation
• Wrongful acts committed prior to the retroactive date (including interrelated wrongful acts)

Another typical exclusion is the insured versus insured clause, which refers to claims against general counsel by another insured person or employer. Some policies carve back the exclusion to provide coverage for claims brought against the employed lawyer by past or present directors and officers.

Another typical carve back to this exclusion is the provision of defense costs for claims brought by the employer against its in-house counsel.

Another Choice: Personal Indemnification 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 indemnification agreement from their employers.

An indemnification agreement is a contract between you and the company you serve in which the company promises to protect you for activities undertaken on behalf of the company.

These agreements promise to (1) advance legal fees, and (2) pay loss (indemnification) on your behalf if you are named in a lawsuit in your capacity as an officer. (You can read more about this in an earlier article I wrote about indemnification agreements.)

So, for example, in the rare event a corporation might attempt to sue you, you could turn right around and ask for your legal fees to be advanced pursuant to your pre-negotiated indemnification agreement.

In California there is a technicality that can arise with indemnification agreements that’s worth noting. Professional Conduct Rule 3-400 prohibits a member of the State Bar of California from contracting with a client to limit liability to the client for malpractice. And, of course, in-house counsel’s only client is the corporation that employs them.

Having said that, it’s common practice for general counsel to request and receive an indemnification agreement from the company just like any other officer would.

Backup Plan: D&O Insurance

As in-house counsel and an officer, you also have access to the protections of the company’s D&O insurance. This insurance will respond on your behalf for the usual lawsuits that you may be named in, so long as the actions in question were within the course and scope of your job.

(For more on what D&O insurance covers, see my article on D&O Insurance 101.)

Employed Lawyers Insurance: A Good Choice for Some, But Not All

There are some in-house lawyers for whom employed lawyers insurance makes sense. Each in-house legal department is different. The risks faced by in-house attorneys depend greatly on how the legal department is structured and what specifically they do.

You’ll want to work with your trusted advisors to determine whether or not in your specific case purchasing employed lawyers insurance is a prudent choice. When analyzing whether or not to purchase an employed lawyers 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 an employed lawyers insurance policy does and does not cover. This will put you in the best position to determine if an employed lawyers insurance policy is right for you.

As an officer of the company, know that you will be afforded the protections of your corporate D&O insurance. Many senior in-house lawyers also seek a personal indemnification agreement as an added layer of protection.