Footing the bill: paying the legal costs of criminal proceedings: because of the possibility that insurance will not cover defense costs, corporate counsel must take steps to protect corporate interests.

• Author: Holland, Michael J.

FOR A corporation accustomed to having its in-house counsel handle legal affairs and its insurance carrier to provide outside counsel for matters routinely covered under its comprehensive general liability policy, the receipt of a subpoena or letter from criminal authorities indicating an interest in discussing certain matters with employees or officers of the corporation may come as quite a shock.

FIRST THINGS FIRST

The first step is to determine how to protect the rights of the corporation, its officers, directors and employees during the criminal investigation process. Corporate counsel must first ascertain whether the corporation is merely a source for information or a potential target of the criminal investigation. The answer to this question will determine the response of the corporation.

Many corporate officers have difficulty in accepting the fact that the company may be the target of a criminal investigation based on either a turncoat employee bringing a "whistle-blower" action or by running afoul of some federal or state regulation that provides for criminal penalties in the event of non-compliance. The first reaction of a harried corporate executive may be to "tell all" and "get it off our chest." But this may not be the right response.

CONFLICTS OF INTEREST

After determining whether the corporation is either the target or merely a source for information, corporate counsel must consider whether there is any potential conflict between the legal interests of corporate executives and corporate employees. If so, separate counsel for each probably would be required so as to avoid any potential conflict of interest. The corporate in-house attorney probably would be disqualified from acting on behalf of either the corporate officers or the corporate employees.

If the in-house counsel conducts an internal investigation in response to the inquiry from the criminal authorities, the corporate employees who are interviewed must be told that the company attorney is not their attorney and that the role of the corporate counsel is simply to find facts on behalf of the corporation. Corporate employees should understand that they may find it necessary to retain their own counsel if they have legal questions concerning their own situations.

The corporation's in-house attorney should avoid giving legal advice to employees, officers or directors as to whether they should agree to speak with legal authorities, to testify with or without a subpoena or to produce any documents within their possession.

INDIVIDUAL EMPLOYEES AS DEFENDANTS

If individual employees of the corporation are named as defendants, a delicate problem is presented, because it is in the interests of the corporation not to have its individual employees pointing fingers at either their fellow employees or the corporation. There is certainly the potential of a conflict of interest if the same attorney representing the corporation seeks to undertake the representation of the individual employees. An investigation by the corporate attorney should determine, at least preliminarily, any potential conflict or diversion of interest among the employees and between the employees and the corporation.

In civil litigation, the corporate attorney generally is appointed to represent the interests of the employees, as well as the corporation, as long as the facts underlying the suit and the basis of the defense are undisputed. If, however, the employees are named in a criminal suit, there are more substantial questions of conflict in joint representation, and in those cases it is likely that employees would have to retain their own criminal counsel.

In civil actions, the ultimate interests of the corporate employer and the employees are the same--this is, to avoid or limit their potential liability. In a criminal case, a conflict of interest would exist where a lawyer represents both an employer and an employee. In those cases, an employee's interests may well be advanced if the employee discloses to the prosecutor evidence of the corporate employer's criminal conduct. That's why employees should retain their own criminal counsel, since a conflict could arise where several employees, all of whom may bear various degrees of criminal culpability, are all represented by the same counsel and where some of the employees allege that their fellow employees were engaged in criminal conduct. (1)

Should an actual conflict develop between an employer and an employee or among various employees, an attorney would be required to advise both parties, terminate his representation of one party, or obtain waivers or consents from both parties. (2)

WHO PAYS?

The prospect of retaining multiple attorneys to defend a corporation and its employees in a criminal investigation is unappealing to the chief corporate executive. Inquiries will be made to the chief financial officer or insurance director to determine what insurance funds are available to pay the costs of a criminal defense. Sadly for the corporation, the answer is "not much."

In analyzing whether insurance is available, the activities of two types of corporate employees must be examined--employees, on the one hand, and officers and directors, on the other. There is little insurance coverage available to pay for the cost of criminal defense counsel for a corporate employee. A directors and officers' liability policy is more likely to provide coverage for corporate executives if the directors and officers are alleged to be acting in their official capacity for the corporation rather than as individuals. The extent of coverage and the duty of the insurers to pay on-going criminal defense costs are often-litigated issues on which there is no clear consensus among the courts.

1. Liability and Professional Malpractice Policies

   The courts unanimously have held that no coverage exists for criminal defense costs under a third-party legal liability policy providing coverage for damages.

   The U.S. District Court for the District of Columbia stated in Potomac Electric Power Co. v. California Union Insurance Co.:

   Fees incurred solely for the purpose of representing the company and/or its employees before state and federal grand juries are not reimbursable under the policy. This is because fees expended in defending against possible criminal charges are not recoverable under a liability policy. There are two reasons for this. First, criminal punishments--fines and incarceration--are not "damages" caused to the property of another .... Further, it has been suggested that allowing fees spent on a criminal defense to be recovered under a liability policy would violate public policy. (3) Since most liability insurance policies provide coverage of claims for only allegations of bodily injuries or property damage, courts generally have held that no duty exists to defend or indemnify the insured in criminal actions where monetary damages are not sought. In Spiegel v. State Farm Fire and Casualty Co...