Employed Lawyers Coverage: It’s Probably Not What You Think
Sometimes a client/in-house lawyer will call, uneasy with a legal project. Perhaps the lawyer has been asked to give aggressive advice, represent the company in a high stakes deal, or to handle a type of matter with which they have no experience. Ultimately, the lawyer will ask whether their company’s Employed Lawyers Coverage will provide protection if something goes wrong. Usually, I bear bad news: Employed Lawyers Coverage does not protect the in-house lawyer against claims asserted by their employing company.
The core protection provided by Employed Lawyers Coverage is against claims asserted by third-parties (not the employing company or any other insured) for legal malpractice committed by the lawyer in representing their employing company. This means that the universe of claimants that might actually assert potentially covered claims is limited. After all, who other than the employing company/client would suffer from an in-house lawyer’s legal malpractice? Perhaps there would be coverage if a shareholder of the employing company pursues a derivative claim for legal malpractice (without the solicitation, assistance or intervention of the employing company or any other insured) or for claims brought by governmental agencies or regulators in administrative proceedings or by authorities in bar association/ethics proceedings.
Beyond the claimant-related limitation of Employed Lawyers Coverage, the coverage is also typically limited by subject matter exclusions. Employed Lawyers Coverage is often provided as part of a more comprehensive E&O policy, whether in the policy form or by endorsement. The subject matter exclusions of the larger E&O policy would serve to eliminate the basis for most obvious third-party claims, including exclusions related to securities, employment and ERISA claims, for example. Of course, those sorts of claims might be covered by D&O, EPL, and Fiduciary liability insurance policies, which may be good news for in-house lawyers, but that just serves to prove the limited use of Employed Lawyers Coverage.
The scope of Employed Lawyers Coverage varies substantially from one insurer, or policy form, to another. I’ve seen policies and promotional materials indicating broader coverage for malpractice claims brought by certain categories of third-parties based on legal representation provided to those third-parties (not the employing company) by the in-house lawyer. Examples include not-for-profits and other pro bono clients; friends, neighbors, and family members; even paying clients with which the in-house lawyer might moonlight. I’ve also seen articles indicating that defense cost coverage for claims by the company against the lawyer might be available on the market, but I’ve never seen an policy providing that sort of Employed Lawyers Coverage.
Here is the takeaway. Employed Lawyers Coverage should be purchased with open eyes, based on contemplated exposures that realistically may be covered by the Employed Lawyers Coverage and not elsewhere. This requires thoughtful advanced planning and negotiation. For example, if the in-house lawyer’s real concern is malpractice risk associated with low exposure charitable pro bono endeavors, then Employed Lawyers Coverage may address that risk, but you need to check the policy. If the concern is to address the risk presented by potential claims asserted by the employing company, most likely, off-the-rack Employed Lawyers Coverage would not address the risk, and, at best, maybe there would be defense cost coverage. If this risk is addressed intentionally, an insurer on a large program might be open to a manuscript form or endorsement providing defense and indemnity exposure, given some (disadvantageous) combination of pricing, deductible/retention and/or limits/sub-limits. Apart from the scope of coverage, a large self-insured retention might eliminate any realistic benefit of Employed Lawyers Coverage altogether. It is possible that an in-house lawyer that is a corporate officer might luck into coverage for malpractice claims brought by the employing company under certain advantageous Side A Excess & DIC D&O Liability Insurance Policy forms. But that’s virtually the only possible circumstance in which insured company v. in-house lawyer coverage might exist without thoughtful advanced planning and negotiation.
Contact Scott Hecht for more information.