IN-HOUSE MALPRACTICE INSURANCE: SHOULD YOU CONSIDER IT?
Liability Issues Facing In-House Counsel
Thursday, July 28, 2005
Pamela A. Bresnahan, Esquire
Vorys, Sater, Seymour and Pease LLP
1828 L Street, N.W.
Washington, D.C. 20036
(202) 467-8861 (telephone)
o The literature states that claims against in-house counsel are on the rise.
II. Where are claims against in-house counsel coming from?
o Third parties
• Claims against in-house counsel by employers, directors, officers and employees
often arise out of conflicts between the in-house counsel’s role as attorney for the
company and their perceived role as “attorney” for the individual receiving
• Model Rule 1.7 - Conflict of Interest: Current Clients
o The text of the Rule:
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the
representation involves a concurrent conflict of interest. A concurrent conflict of
interest exists if:
(1) the representation of one client will be directly adverse to another client;
(2) there is a significant risk that the representation of one or more clients will
be materially limited by the lawyer's responsibilities to another client, a
former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under
paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide
competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client
against another client represented by the lawyer in the same litigation or other
proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
o An attorney who represents a corporation does not necessarily represent
any constituent or affiliated organization, such as a parent or a subsidiary
o Board members need to consider whether the responsibility of the two
roles may conflict – for example, if the attorney is called upon to advise
the corporation in matters involving actions of individual directors.
• Model Rule 1.13 - Organization as Client
o The text of the Rule:
(a) A lawyer employed or retained by an organization represents the organization
acting through its duly authorized constituents.
(b) If a lawyer for an organization knows that an officer, employee or other
person associated with the organization is engaged in action, intends to act or refuses
to act in a matter related to the representation that is a violation of a legal obligation
to the organization, or a violation of law that reasonably might be imputed to the
organization, and that is likely to result in substantial injury to the organization, then
the lawyer shall proceed as is reasonably necessary in the best interest of the
organization. Unless the lawyer reasonably believes that it is not necessary in the best
interest of the organization to do so, the lawyer shall refer the matter to higher
authority in the organization, including, if warranted by the circumstances to the
highest authority that can act on behalf of the organization as determined by
(c) Except as provided in paragraph (d), if
(1) despite the lawyer's efforts in accordance with paragraph (b) the highest
authority that can act on behalf of the organization insists upon or fails to address
in a timely and appropriate manner an action, or a refusal to act, that is clearly a
violation of law, and
(2) the lawyer reasonably believes that the violation is reasonably certain to result
in substantial injury to the organization, then the lawyer may reveal information
relating to the representation whether or not Rule 1.6 permits such disclosure, but
only if and to the extent the lawyer reasonably believes necessary to prevent
substantial injury to the organization.
(d) Paragraph (c) shall not apply with respect to information relating to a lawyer's
representation of an organization to investigate an alleged violation of law, or to defend
the organization or an officer, employee or other constituent associated with the
organization against a claim arising out of an alleged violation of law.
(e) A lawyer who reasonably believes that he or she has been discharged because
of the lawyer's actions taken pursuant to paragraphs (b) or (c), or who withdraws under
circumstances that require or permit the lawyer to take action under either of those
paragraphs, shall proceed as the lawyer reasonably believes necessary to assure that the
organization's highest authority is informed of the lawyer's discharge or withdrawal.
(f) In dealing with an organization's directors, officers, employees, members,
shareholders or other constituents, a lawyer shall explain the identity of the client when
the lawyer knows or reasonably should know that the organization's interests are adverse
to those of the constituents with whom the lawyer is dealing.
(g) A lawyer representing an organization may also represent any of its directors,
officers, employees, members, shareholders or other constituents, subject to the
provisions of Rule 1.7. If the organization's consent to the dual representation is required
by Rule 1.7, the consent shall be given by an appropriate official of the organization other
than the individual who is to be represented, or by the shareholders.
o Rule 1.13 states that a lawyer employed or retained by an organization
represents the organization acting through its duly authorized constituents.
“Constituents” means the corporation’s officers, directors,
employees and shareholders. ABA Model Rules. R. 1.13,
comment 1; Calif. Rules of Prof. Conduct, R. 3-600; N.Y. Code of
Professional Responsibility, DR 5-108.
o Rule 1.13 sets forth how a lawyer for an organization must act in the best
interests of an organization and, under what circumstances an attorney is
permitted to disclose confidential information in order to protect the
o Rule 1.13 allows for an attorney to represent directors, officers,
employees, members, shareholders and other constituents, subject to the
provisions of Rule 1.7.
o The situation may become problematic when a corporate employee with
whom the attorney is dealing has interests that may conflict with those of
the corporation. In such dealings, the lawyer must explain that he
represents the corporation when it is apparent that the organization’s
interests are adverse to those of the constituents with whom the lawyer is
Rule 1.13 raises the question, to whom should the conflict be
apparent? The ABA has modified the model rules to change “it is
apparent” to “the lawyer knows or reasonably should know.” This
implies that the adversity must be apparent to an attorney of
reasonable prudence and competence.
• Model Rule 4.3 - Dealing with Unrepresented Person
o The text of the Rule:
In dealing on behalf of a client with a person who is not represented by counsel, a
lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or
reasonably should know that the unrepresented person misunderstands the lawyer's role
in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.
The lawyer shall not give legal advice to an unrepresented person, other than the advice
to secure counsel, if the lawyer knows or reasonably should know that the interests of
such a person are or have a reasonable possibility of being in conflict with the interests of
o In the corporate context, Rules 4.3 and 1.13 require that a lawyer clarify
his loyalties whenever he is dealing with an officer, employee or other
constituent whose interests are adverse to the corporation’s. The attorney
must make it clear that the unrepresented person cannot claim the
protections of the attorney-client privilege for communications with the
• Rule 5.5 Unauthorized Practice of Law; Multijurisdictional Practice of Law
o The text of the Rule:
(a) A lawyer shall not practice law in a jurisdiction in violation of the regulation
of the legal profession in that jurisdiction, or assist another in doing so.
(b) A lawyer who is not admitted to practice in this jurisdiction shall not:
(1) except as authorized by these Rules or other law, establish an office or other
systematic and continuous presence in this jurisdiction for the practice of law; or
(2) hold out to the public or otherwise represent that the lawyer is admitted to
practice law in this jurisdiction.
(c) A lawyer admitted in another United States jurisdiction, and not disbarred or
suspended from practice in any jurisdiction, may provide legal services on a temporary
basis in this jurisdiction that:
(1) are undertaken in association with a lawyer who is admitted to practice in this
jurisdiction and who actively participates in the matter;
(2) are in or reasonably related to a pending or potential proceeding before a
tribunal in this or another jurisdiction, if the lawyer, or a person the lawyer is
assisting, is authorized by law or order to appear in such proceeding or reasonably
expects to be so authorized;
(3) are in or reasonably related to a pending or potential arbitration, mediation, or
other alternative dispute resolution proceeding in this or another jurisdiction, if
the services arise out of or are reasonably related to the lawyer's practice in a
jurisdiction in which the lawyer is admitted to practice and are not services for
which the forum requires pro hac vice admission; or
(4) are not within paragraphs (c)(2) or (c)(3) and arise out of or are reasonably
related to the lawyer's practice in a jurisdiction in which the lawyer is admitted to
(d) A lawyer admitted in another United States jurisdiction, and not disbarred or
suspended from practice in any jurisdiction, may provide legal services in this
(1) are provided to the lawyer's employer or its organizational affiliates and are
not services for which the forum requires pro hac vice admission; or
(2) are services that the lawyer is authorized to provide by federal law or other
law of this jurisdiction.
• Examples of conflicts and potential conflicts
o A Texas lawyer was sued for erroneously advising an employee that she
was required to assign her patent rights. The exposure arose from a failure
of the attorney to explain to the employee that personal representation was
not being provided. Dunbar v. Baylor College of Medicine, 984 S.W.2d
338 (Tex. App. 1998).1
o Fact Scenario 1:
In-house counsel for a national restaurant chain was negotiating
with a potential franchisee. The in-house attorney was involved in
the negotiation of a sale and rendered an opinion that a restaurant
could be built on land that the franchisee had selected. When it
turned out that the in-house attorney was incorrect, the franchisee
sued both in-house counsel and his employer, alleging breach of
fiduciary duty to the franchisee, conflict of interest and negligence
in rendering an opinion.
o Fact Scenario 2:
A stockbroker and her employer were accused of stock churning.
In-house counsel represented the stockbroker and her employer in
arbitration. The arbitration panel ruled against the broker, but not
the employer, and the broker was fired. The broker sued in-house
counsel, alleging a conflict of interest and negligence.
• To mitigate the risk of conflicts arising from what might be construed as
“personal” advice to directors, officers or employees of your company, consider
taking the following steps:
o Obtain authorization from your employer before offering advice.
o Obtain a written waiver from the employer in connection with the dual
representation that is also signed by the director, officer or employee.
o Encourage the director, officer or employee to obtain independent counsel.
The Court’s opinion was later withdrawn, at the parties’ request, apparently because the case was
settled. See Dunbar v. Baylor College of Medicine, 1999 WL 318801 (Tex. App., May 20, 1999)
IV. Third Party Claims
• Third party malpractice claims can arise out of a number of different services that
might be performed by in-house counsel, including:
o Legal services performed in connection with a company downsizing or
o Representations made to outside counsel or opposing parties during
o Reports or opinion letters to outside agencies or regulators.
o In-house legal review of materials being produced to the public.
o Review and approval of contract language for transactions with customers
o Work performed for a subsidiary companies that may be in a conflict of
interest with the parent company or another subsidiary.
o Responses to customer inquiries or complaints.
o Press releases or interviews.
V. Claims handling liability/Bad faith claims handling
• Archambault v. Roller, 254 Va. 210, 491 S.E.2d 729 (Va. 1997):
o An in-house attorney at the University of Virginia was sued by a medical
malpractice plaintiff for violating a state statute that prohibited medical
malpractice lawyers from contacting medical witnesses without the patient’s
consent. In-house counsel was charged with witness tampering for acting in
bad faith in the handling of his claims counsel function. The trial court found
for the plaintiff. The decision was reversed on appeal.
VI. Governmental Liability Exposure
• Several provisions of the Sarbanes-Oxley Act may work to impose risk on in-
house attorneys. Such provisions include:
o In-house lawyers are now required to go over the head of a superior in
o Whistleblower procedures reduce the chances of mishandling complaints.
o Disclosure controls must be implemented, reviewed and certified.
In September 2004, Stephen M. Cutler, the Director of the SEC’s Division of
Consistent with Sarbanes-Oxley’s focus on the importance of lawyers as
gatekeepers, we have stepped up our scrutiny of the role of lawyers in the
corporate frauds we investigate. We have named lawyers as
respondents or defendants in more than 30 of our enforcement actions
on the past two years. . . . We are also considering actions against
lawyers, both in-house and outside counsel, who assisted their companies
or clients in covering up evidence of fraud, or prepared, or signed off on,
misleading disclosures regarding the company’s condition. One area of
particular focus for us is the role of lawyers in internal investigations of
their clients or companies. We are concerned that, in some instances,
lawyers may have conducted investigations in such a manner as to help
hide ongoing fraud, or may have taken actions to actively obstruct such
• REPRESENTATIVE CASES
o The November 2003 Final Report of Neal Batson, Court-Appointed
Examiner, on the Role of Enron’s attorneys and in-house counsel
contained a 190 page appendix addressing only attorney liability issues
raised by the Enron transactions.
Batson stated that there was sufficient evidence from which a fact
finder could conclude that up to five (5) of Enron’s in-house
attorneys committed legal malpractice or breached their fiduciary
duties to the company.
Following the issuance of the 2003 report, two (2) of the attorneys
discussed in the report were added as plaintiffs in a shareholders
derivative lawsuit and were also named as individual defendants in
securities class action litigation.
Three theories of liability were potentially applicable to the Enron
• Legal malpractice based on negligence;
• Aiding and abetting Enron Officers’ breaches of fiduciary
• Texas Rule 1.12.2
• “Gatekeeping” liability – John Isselmann, Jr., former general counsel of Electro
Scientific Industries was among the first general counsel to be penalized for
gatekeeper violations, following the implementation of the Sarbanes-Oxley Act:
o The SEC claimed that Isselmann did not do enough to stop the company’s
CFO from fraudulently misstating the company’s financial statements with
regard to benefits.
o The CFO decided to terminate certain employee benefits and to apply the
savings to the company’s bottom line. Isselmann was asked to get a legal
opinion from the company’s outside counsel on whether such a transaction
was allowed. Isselmann was not aware that the books had already been
altered. Outside counsel said the transaction was not proper. Isselmann
tried to tell the CFO at a disclosure meeting before the financial statements
were filed, but was not permitted to do so. Isselmann gave the CFO the
written opinion from outside counsel. The financial statements that
overstated the company’s quarterly income were filed anyway.
o Five months later, Isselmann found out that the benefits were eliminated
and the savings applied to the bottom line. Isselmann immediately
informed the auditors and outside counsel.
o Isselmann was faulted for not standing up to the CFO at the disclosure
meeting and for failing to notify the board and the outside auditors quickly
enough to prevent the fraud.
o Accordingly, even though Isselmann did not understand that there were
securities issues implicated in the CFO’s actions (he stated that he thought
it was an employment issue); and Isselmann did not participate in the
fraud, he paid a civil penalty ($50,000) and consented to cease and desist
from future securities law violations.
• Stock Option Advice by General Counsel - On January 15, 2005, the SEC
charged Google, Inc. with failing to meet the requirements of various exemptions
from registration for stock options issued to its employees prior to its Fall 2004
IPO. The SEC charged Google’s General Counsel, David Drummond, for having
Texas Rule 1.12 is similar to N.Y. Disciplinary Rule 5-109, and addresses what an attorney should
do when he or she represents an organization, and learns that a representative of the organization has
committed or intends to commit a violation of a legal obligation to the organization (such as a breach of
fiduciary duty) or a violation of law which reasonably might be imputed to the organization (such as the
dissemination of misleading financial information).
caused the violations. Google and Drummond settled the charges and agreed to
cease and desist from violating Section 5 of the Securities Act of 1933.
• Personal liability for private corporation’s bankruptcy – Philip Smith,
Secretary and General Counsel for Trace International, was sued by the trustee for
breach of fiduciary duty and unlawful payment of dividends and redemption of
preferred stock. As general counsel, Smith hired and supervised outside counsel.
He had other duties as secretary. There were no allegations that Smith received
any personal benefit from any of the transactions challenged by the trustee.
Rather, he was held to be legally liable for acts and omissions that occurred while
the company was in the “zone of insolvency,” but not actually insolvent. The
Court found Smith to be liable for damages in excess of $21 million dollars.
Pereira v. Cogan, No. 00-CIV-619 (S.D.N.Y., June 23, 2003).
VII. Options for In-House Attorneys
• E&O insurance
o Junior level corporate counsel may not qualify for coverage under normal
D&O liability policies.
o Errors and Omissions insurance might be the only type of coverage on
which corporate counsel could rely if faced with an adverse claim pursued
by his or her employer.
• What is Employed Lawyers Professional Liability Insurance (ELP)?
o ELP policies cover claims for malpractice arising out of the legal work an
in-house lawyer performs for the company or organization.
o In-house malpractice insurance policies are not Director & Officers
policies; rather, they are separate professional liability insurance policies
specifically designed for in-house counsel.
• D&O Insurance May Not Be Enough
o Traditional D&O insurance may not provide coverage to in-house
o Under other D&O policies, coverage for General Counsel who are officers
may be limited to “business” duties performed that are performed as an
officer – the policy may exclude “legal work” from coverage.
Coverage for non-officer employees may only exist, if at all, for
Coverage for non-officer employees may only exist, if at all, if the
employee is a co-defendant with an officer or a director.
If in-house counsel is not covered by the company’s D&O policy,
then the in-house attorney may find himself at the mercy of the
company as the company determines whether or not it will
indemnify the employee attorney.
• Even if a company offers indemnification, there might be
no protection if the company becomes insolvent or files for
• Considerations in determining whether a need exists to obtain E&O or ELP
insurance for in-house counsel
o Can the company afford to indemnify corporate counsel or otherwise
provide for the payment of outside defense costs for corporate counsel?
o What is the company asking corporate counsel to do – does corporate
counsel provide legal advice to persons within the organization; do they
sign off on opinion letters; do they certify corporate information? The
more they do, the more likely it is that a claim might be made against
o What is the potential for liability exposure for the type of work performed
by the individual attorneys, or the department as a whole?
o Would obtaining E&O insurance lead to more lawsuits against the
• Indemnification provisions are subject to attack
o See ACCA’s Amicus Brief in the Tenth Circuit, U.S. v. Lake and Wittig,
Nos. 05-3217 and 05-3218, filed July 12, 2005.
o Recently, the United States District Court for the District of Kansas
decided that certain officers of a corporation were not entitled to the
advancement of fees and indemnification provided under the Company’s
by-laws. The government successfully argued to the lower court that the
executives' reimbursements under these policies should be cut off. The
Defendants were executives at Westar and were indicted by the
government for alleged criminal activities related to their employment
with the company.
VIII. Tips To Increase The Potential For Claims Coverage
• Notice and Coverage for Potential Claims
o Initial notice of a potential claim can come from any level within the
o Does your company have a clear reporting structure for notifying
management or legal counsel of the potential for litigation? Do the people
in the organization who are most likely to hear about claims know what to
do if they receive notice of a potential claim?
o Compromising a company’s coverage position because of late notice of
claims is another potential liability faced by in-house counsel. Similarly,
trying to defend a lawsuit in-house or hiring outside counsel without
notifying the carrier of the claim can give the insurance carrier grounds to
disclaim coverage for late notice.
o Even if the insurance company accepts late notice and provides a defense,
they may refuse to approve your current outside counsel to continue as
defense counsel and try to replace them with carrier-appointed counsel.
o Even claims that are handled in house may need to be disclosed on
applications for many types of insurance coverage, including E&O, D&O
and EPLI policies. Failure to disclose claims, however minor, can result
in policy rescission.
o Once a potential claim is discovered, there are a few steps to take to
maximize potential coverage for the claim:
Step 1 – determine what legal issues are potentially implicated by
Step 2 - analyze what kind of insurance policies your company has.
Step 3 – provide notice of claim, in accordance with the terms of
your policy, as soon as possible under any policy(ies) of insurance
that may provide coverage for the potential claim.
Step 4 – promptly follow up with each insurance carrier regarding
their coverage positions.
Step 5 – carefully analyze the coverage position taken by each
• If the carrier issues a reservation of rights letter that
potentially creates a conflict between your company and
the insurance carrier, your company may have the right
under its policy to hire defense counsel of its choice and to
control the defense of the case. The insurance company
may still hire defense counsel to work with your counsel or
to monitor the case.
• If the insurance company accepts the defense of a claim,
even under a reservation of rights letter, one of several
things will happen: (1) the insurance company may
appoint defense counsel to defend your claim; (2) your
policy may allow you to choose counsel from a “panel” of
insurance company approved law firms; or, (3) you may
retain the right to hire counsel of your choice at rates
approved by the carrier.
o Depending on the significance of the risk, you may
want to hire outside counsel to monitor the defense
at the company’s expense.
• If the carrier issues a reservation of rights or disclaims
liability for coverage for your claim, outside coverage
counsel should be consulted to review the insurance
company’s position and to address coverage issues with the