PF&M at a Glance

Lawyers-in-house counsel

House counsel. Definition - Noun: A lawyer employed by a business to work in-house on its legal matters.

The roles and risks of practicing as in-house counsel have grown over the years, and companies must review their insurance coverage to protect both themselves and their employees. At one time the role of the in-house general counsel was to provide little more than relatively inexpensive general legal advice.

However, the nature and expectations of general counsel and law departments began to change and expand dramatically in the 1970s, as companies attempted to reduce their costs by substituting less expensive, inside legal resources for increasingly expensive, outside legal services.

Companies soon recognized the need to upgrade the quality of their legal staff by offering compensation commensurate with that of major law firms. While these departments became larger and more expensive, the demand for outside legal services expanded as well because of the need to handle an ever-increasing volume of litigation, in addition to the transactional demands brought on by the new realities of present-day business.

Since the passage of the Sarbanes-Oxley Act (SOX) in 2002—a major concern for directors and officers, prompted in part by the Enron scandal—the role of in-house lawyers has expanded to include being gatekeepers of corporate conduct. Section 307 of SOX requires counsel to immediately investigate and report any alleged or suspected internal criminal activity, fraud or breach of fiduciary responsibility.

General counsel faces an increasingly wide array of criminal and civil charges and their attendant penalties for failure to carry out their compliance duties. They are instructed to act in the best interests of their employer when dealing with illegal conduct by executive officers. Regulators likely will continue to expand their vigorous pursuit of any suspicious activity or allegations involving in-house lawyers when corporate frauds or scandals occur or are suspected.

In addition to these pressures, companies are asking even more of their in-house counsel. They are increasingly called on to systematically oversee outside attorneys through vendor management techniques to monitor billings. Many lawyers also are being asked to offer pro bono services as an important contribution to their corporate social responsibility program. They may also offer moonlighting services to coworkers, friends and family outside the formal scope of their employment.

Professional liability insurance is available for in-house lawyers under adaptations of policies available for law firms. It is designed for their special needs and their increasing responsibilities for legal representation of their employers in a growing number of matters formerly handled by outside counsel. This coverage is written on a claims-made basis and pays compensatory damages resulting from a negligent act, error or omission related to the performance of, or failure to perform, professional services.

Since this coverage is not standardized, it is important to check the “built-in” features and options in a given insurer’s program. Defense costs are usually included within the limit of liability, but some insurers offer the option to cover these costs in addition to the specified limits for an additional premium charge. This coverage option should be considered because defense costs and awards have gone up dramatically. Options for extended claim reporting periods should also be considered.

Professional liability coverage offers both the employer and the entire in-house legal staff peace of mind from claims of any actual or alleged negligent act, error, omission, breach of duty, misstatement or misleading statement, and helps to protect the entire company. These attorneys are gatekeepers who ensure that the financial strength, reputation and contractual agreements entered into by their employers, and their decisions and opinions form part of the foundation of the business. Because their role is so important, insuring their professional liability is in the company’s best interest. However, this coverage alone may not be enough.

Directors and officers (D&O) insurance covers the general counsel of a company with respect to the advice given to the company concerning business operations, but it usually does not cover their other legal work. It also does not cover the other lawyers in the company. For this reason, both the general counsel and other members of the legal staff need coverage for everything they are asked to do. An “employed lawyer” extension to the D&O policy provides this additional coverage to in-house counsel and their staff.

A healthy business must attract and retain the best legal talent. The best in-house counsels recognize and embrace their expanded roles and understand that their broader responsibilities bring greater exposures. A conscientious and competent attorney may decide that the company that provides solid professional liability insurance protection in these areas is the better employer.

In addition, board members benefit by having a legal staff properly covered if a wrongful act is alleged. Because the nature and extent of litigation today forces companies to carefully review their insurance coverages, the company that provides proper protection for its in-house counsel assures itself that its legal staff can perform their daily duties with a high degree of peace of mind.

This is only a brief overview of the coverages available. The PF&M Analysis from The Rough Notes Company, Inc., contains broader and more thorough discussions of these and other related subjects. Producer OnLine subscribers can refer to PF&M Sections 384.4-2, Directors And Officers Liability Insurance Coverage Form Analysis and 386.4-2, Lawyers Professional Liability Coverage Form Analysis, for a detailed evaluation, discussion and additional information on these and related subjects.