Do in-house counsel need additional insurance?

  • Subtitle: Practising In-house
Written by  Posted Date: July 13, 2015
Do in-house counsel need additional insurance?In the last 15 years there has been an increase in the number of lawsuits brought against in-house counsel. The tide seems to have turned with the Enron case in 2001 and in 2005 when the issue of stock-option backdating gained a wider audience. All of a sudden activist shareholders, securities regulators, and the courts seemed ready to place in-house counsel under closer scrutiny.

Their liability is being expanded as their profile within the corporation is being raised. In-house counsel have duties to various entities: the corporation, including its board of directors and its shareholders; the corporation’s other employees; third parties such as the public and others who rely on counsel’s statements, and to regulatory bodies.

As in-house roles have expanded, the number of potential conflicts in carrying out their respective roles has also increased.

Duty of care

Just as lawyers in the private sector can be sued by their clients for negligence, theft, or fraud, so, too, can corporate employers bring such claims against their in-house counsel.

It used to be assumed a lawyer only owes a duty of care to his or her client. In an increasing number of cases, however, lawyers have been held liable for misrepresentations where there was a reasonable expectation that the statements would and could be relied on by third parties.

Securities regulators view in-house counsel as gatekeepers and will take them to task if they fail to point out risks to their clients. There have been a number of instances where in-house counsel have had a hand in charting a risky strategy and because they failed to explain the risks to their clients, they have been found to have taken the business decision themselves rather than to have merely provided legal advice.

Below I have provided a brief review of forms of indemnities that may be available to in-house counsel to cover off their personal exposure under various insurance policies.

Professional E&O coverage

Provincial law societies insure their members against negligence in the rendering of legal support. Coverage extends to claims made by their employers. While coverage is mandatory for private-sector lawyers (through LawPRO in Ontario) it is optional in Ontario if in-house counsel provides legal advice solely to his or her employer. In most cases employers are willing to pay the premium for this insurance.

Errors and omissions coverage will only apply, however, if the claim relates to the provision of legal support, versus business advice that would be out of bounds, and not covered. This could present problems where counsel is a member of the business team and the nature of the advice given has aspects of a commercial or corporate nature.

Another option available is for the corporation to provide an indemnity agreement. Care should be taken in drafting the indemnity however to ensure that it affords appropriate protection and that it does not appear to be a fee-for-service agreement, which would be contrary to the Solicitors Act.

Professional liability insurance

Excess E&O insurance is available in Canada through insurers such as Chubb and Intact for legal malpractice where professional E&O insurance coverage fails to cover a given exposure or an exemption applies (for example the exemption for in-house counsel providing legal support exclusively to his or her employer).

LawPRO’s coverage is capped at a certain amount per claim. Excess insurance can be purchased to provide coverage for claims in over and above those covered by LawPRO.

Professional liability insurance can also be purchased to cover other members of the legal team such as paralegals, clerks, patent administrators, and the like.

Of course such coverage only applies to the extent that counsel provides legal advice to its client, the corporation. Coverage would likely be denied where support is provided to an individual employee, officer, or director for personal matters outside the scope of counsel’s responsibilities.

There are a number of reported cases where the courts have held lawyers acting outside the scope of their traditional roles responsible for complying with the professional standards relevant to the applicable industry. In such cases, insurance coverage would be denied.

For example a lawyer providing investment advice must meet the standard of a reasonably competent investment adviser. The same would apply to in-house counsel providing advice beyond his or her role as legal adviser.

Some cases draw a distinction between in-house lawyers acting as legal advisers and corporate secretaries, denying coverage under professional liability insurance for certain administrative activities taken as corporate secretary, deeming them not to be legal in nature.

Comprehensive general liability

Restrictions in CGL policies typically exclude claims for professional liability. CGL policies are usually restricted to claims for death and bodily injury whereas professional liability claims, for the most part, relate to economic losses. That being said, to the extent that faulty legal advice gives rise to a death or bodily injury claim in-house counsel may be covered under the corporation’s CGL policy for such losses.

Directors’ and officers’ liability

The increased blurring of the line between the roles of in-house counsel as an adviser to the corporation and as a director or officer as well as the ethical dilemmas these dual roles can create, make it practically imperative that counsel who act as corporate directors, and either are or may be found to be, officers of the corporation cover their exposure through D&O insurance.

With the number of recent high-profile cases where general counsel have been found liable while sitting on corporate boards, it has become difficult for companies to persuade counsel to join the board unless such coverage is in place (over and above a director’s indemnification agreement).

The courts typically will not hold directors and officers responsible provided they act in good faith and do not breach fiduciary and statutory duties. In-house counsel who sit on boards, however, are held to a higher standard of care than lay directors as they are deemed to know the law and have a responsibility to ensure the corporation acts ethically, reputably, and consistent with the corporation’s responsibilities to its constituents and the public.

Conclusion

It is important to be aware that even with all of the above policies in place potential gaps in coverage may exist.

To protect oneself against personal liability, it would be prudent to adopt measures to ensure when providing business advice your client is clear the advice is on a business point and outside the scope of legal services. For example, prefacing remarks to that effect before weighing in. A different form of memo or form might be used when commenting on a business matter.

It’s fine to be a “team player” but be aware that when acting as a corporate director you will be held to a higher duty of care, and if you fail to point out material risks to your client in regard to a risky strategy, the actions or inactions taken may be deemed to be your own, exposing you to personal liability.

It is also crucial to review the wording of professional liability policies, understand where the gaps and exclusions are, and appreciate the extent of the coverage you actually have in place.

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Renato Pontello

Renato Pontello is legal counsel to Solantro Semiconductor Corp,.  He was formerly vice-president legal, general counsel and corporate secretary to Zarlink Semiconductor Inc. He can be reached at renatopontello@aol.com.

 

Column: Practising In-house

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