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October 1, 2010
NACDL's 6th Annual Defending the White Collar Case Seminar – “Making Ends Meet: Obtaining Insurance Advancement & Indemnity in White Collar Cases,” Friday, October 1, 2010
In his “Advice to a Young Tradesman,” Benjamin Franklin included the time honored maxim that “time is money.” If that is clear to anyone, it is clear to defense attorneys. Evan Jenness, an NACDL Board member, and Lee Shidlofsky, offered helpful advice to defense practitioners interested in maximizing their ability to collect attorney fees from employers and insurers. This third breakout session of the final morning of the seminar provided several tips for obtaining advancement and indemnity for defense costs from an insurance company during an investigation and any subsequent prosecution or enforcement action. Jenness who practices in Santa Monica, CA, and Lee Shidlofsky of Austin, TX, addressed the issues thoroughly.
Jenness first summarized the multiple sources of indemnification. They include corporate charters and by-laws, partnership agreements, employment contracts, employer insurance policies, and severance agreements. In some states, there are statutes requiring companies to indemnify (e.g., California)
Jenness reminded the audience that advancement is separate from, though related to, indemnification. Companies often try to avoid or delay advancing fees. Clients are often asked for an undertaking requiring the employee to repay the company if the employee is ultimately convicted of a crime, and sometimes are even asked for security to make the undertaking enforceable. Jenness encouraged challenges to those attempts on the basis that the company could have required a secured undertaking in its by-laws or employment contract.
Jenness also encouraged defense attorneys who are unable to get a written promise from the company or its insurer to pay right away to challenge it immediately. As backup protection against recalcitrance from the company, defense attorneys may need to include language in retention agreements requiring a retainer from the client to be used if initial efforts to get paid by the company and insurance company fail.
Jenness discussed Delaware’s provision of nearly unlimited capacity for companies to indemnify employees and officers, and noted that even if an employee is employed at will, some states provide that advancement and indemnity are available.
Jenness offered several pracice tips: 1) Don’t assume your client isn’t entitled to coverage under a D&O policy due to lower rank in the company. Many policies are interpreted to cover lower ranking employees. 2) Find sample indemnity agreements by industry on the internet. Use them in negotiating the terms of employment and severance contracts. 3) There is no requirement that you share work product and privileged information with the third party fee payer. Redact bills that are forwarded to the third party payer. If the company/carrier balks because they don’t know what they are being asked to pay for, then very narrow descriptions may have to be included.
Shidlofsky reported that D&O policies are typically broad. Just because a client is under investigation for criminal or intentional conduct and there are “bad conduct” exclusions in the policy, it does not mean there is no coverage. And, most policies require a final determination of the bad conduct before coverage can be denied. There may be coverage disputes, but they are worth fighting.
Shidlofsky also offered a few key practice tips: 1) Provide notice to the insurer as soon as you obtain knowledge of the investigation. Failure to provide prompt notice can result in reduced or no coverage. 2) Read the definitions of “loss” and “wrongful act” in the policies very carefully. There is limited case law interpreting these terms, but the more modern trend in policies is to provide coverage even at the investigation stage. Much litigation is underway on these issues. 3) Evaluate whether the policy requires advancement of fees and costs, or reimbursement only. Absent clear language on this, many states require advancement of fees and costs.
Effective defense efforts take time and, therefore, money. With some tenacity and diligent searching through the sources of potential indemnification, you just might find enough money to do the job right.
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