Now that you are working as an in-house counsel, you no longer need to worry about liability for malpractice or buying malpractice insurance, right?

Maybe. Or maybe not. If you make a critical legal error, your employer will probably just fire you. But what about potential claims by third-parties, such as creditors or shareholders?

The risk of being sued for malpractice is not merely theoretical. In addition to potential liability to their employers, in-house counsel could at times be liable to others. For example, in-house counsel often perform pro bono legal services for clients unaffiliated with their employer. If one of those matters is botched, a legal malpractice claim could arise.

Malpractice claims could also be asserted by co-workers in some circumstances. In Yanez v Plummer, 221 Cal. App. 4th 180, 221 Cal. Rptr. 3d 309 (2013), an in-house counsel represented both his employer and an employee at a deposition. The in-house counsel did not inform the employee of the conflicts of interests between the employer and employee and did not obtain written consent to represent the employee despite the conflicts. After the deposition, the employer fired the employee based, at least in part, on the employee's testimony at the deposition. The employee then sued the in-house counsel for malpractice.

Even if a malpractice claim is successfully defeated, the cost of defense could be financially crippling. So what can in-house counsel do to protect themselves? In Georgia, there are at least two viable liability protections for in-house counsel.

Indemnity Agreements

Georgia Rule of Professional Conduct 1.8(h) prohibits a lawyer from making “an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement.” The purpose of the rule is to protect clients by preventing lawyers from using their position to take advantage of clients and remove any negative consequences for their malpractice.

So does this rule prohibit “hold harmless” agreements between in-house counsel and their employers? No. According to Georgia Formal Advisory Opinion No. 05-2, such “hold harmless” agreements are ethical when three criteria are met when:

• the employer makes an informed business judgment that such an agreement is preferable to malpractice insurance;
• the agreement is done on advice of counsel;
• and the agreement is permitted by law.

Opinion 05-2 states that consultation with in-house counsel satisfies the “advice of counsel” requirement under Rule 1.8(h) for two reasons. First, the superior position of the client as the employer and the typical sophistication of such an employer eliminates most concerns. Second, because the in-house counsel, as an employee, is subject to discharge by the employer, she does not avoid the negative consequences of malpractice.

Insurance

A typical directors and officers (D&O) policy does not necessarily cover malpractice claims against in-house counsel. Coverage will likely depend on the allegations made against the in-house lawyer. Many D&O policies either exclude or do not include legal services or legal advice. If the claim is clearly based on business advice, the D&O policy will probably apply. If based on legal advice provided by the in-house attorney, coverage may be denied. Also, any D&O policies would likely not cover lower level in-house lawyers.

One option for in-house counsel is employed lawyers professional liability coverage (ELP), which is basically malpractice insurance for in-house attorneys. Typically, an ELP policy would not apply if the in-house lawyer is sued by his or her employer. But the policy would help protect the in-house lawyer from suits by third parties, such as co-workers, shareholders or creditors. These policies can also provide protection from suits by a pro bono client, bar grievance proceedings, and other law-practice related claims.

ELP coverage can be purchased as a stand-alone policy or as a coverage extension to a D&O policy. If purchased as an endorsement to the employer's D&O policy, the lawyer needs to assess risk of not having full coverage. For example, if coverage is added as an endorsement to the D&O policy, the ELP shares the coverage limits with all other officers and directors of the company. So if the D&O policy is depleted by a large claim, then the in-house counsel risks being personally exposed for legal malpractice claims.

As with any insurance policy, in-house counsel need to consider the scope of the coverage and carefully analyze any exclusions, conditions, definitions, and ambiguous language. They should also be aware that some policies have diminishing limits, i.e., the cost of defense diminishes the coverage limit. Such a policy may leave the lawyer underinsured, if defense costs are high.

Conclusion

In-house counsel believing they no longer need to worry about liability for legal malpractice leave themselves at risk. While the risk may be low, the financial downside could be devastating. Entering into a hold harmless agreement with an employer and also obtaining employed lawyers coverage is a sound belt-and-suspenders approach to protect against loss for legal malpractice.

Jonathan E. Hawkins is executive vice president and general counsel at Village Park Senior Living. He is also of counsel at the Atlanta firm of Krevolin & Horst, where he provides general, business, and ethics counsel to lawyers and law firms.