Posted on 21 Jul 2011
In the wake of the phone-hacking scandal at News Corp, executives and some of its subsidiaries, the legal bills are sure to mounting up, but depending on the companies' directors and officers insurance coverage, they aren't likely to be responsible for paying the attorney fees. At least for now.
The D&O insurance policies at companies like News Corp cover the legal fees for executives and board members. But if schisms between company leaders arise, and insurers clash, things could fall apart.
Independent board members could turn on internal members and former executives could blame each other for wrongdoing -- all of which could throw the policies into disarray.
Big corporations such as News Corp, which has 51,000 employees and had $32.8 billion in revenue last year, usually buy at least $100 million in directors and officers insurance, legal experts said. In most cases, the coverage includes defending criminal charges for current and former executives.
Former News International division Chief Executive Officer Rebekah Brooks, former Dow Jones CEO Les Hinton and other officers and directors who may end up defending allegations, in theory, will have their legal bills covered by insurance.
"There's a reason white-collar attorneys make so much," said University of Pennsylvania Law School Professor Tom Baker. "It's because insurance pays them."
Brooks, who was a close confidant of News Corp CEO Rupert Murdoch and the company's most senior news executive, and Hinton, who was publisher of the Wall Street Journal, both resigned July 15 amid the controversy.
Both also claimed to be ignorant of the phone hacking and alleged police bribery committed by the company. Brooks was not available for comment. Hinton could not be reached for comment. A News Corp spokesman declined to provide information about any D&O insurance policy it might have.
Brooks has hired Stephen Parkinson, head of criminal litigation at UK-based Kingsley Napley. News Corp's independent directors have brought in Debevoise & Plimpton partners Mary Jo White and Michael Mukasey, who will advise Viet Dinh, an independent director.
White, a former U.S. Attorney in New York, is considered one of the top internal investigators in the country.
Mukasey is former a U.S. Attorney General who also focuses on internal investigations. Such marquee-name attorneys can charge as much as $1,000 per hour, fees which would be covered by D&O insurance.
$50 MILLION IN LEGAL FEES
In addition, the company itself has hired Williams & Connolly senior partner Brendan Sullivan and Lord Grabiner, head of barristers chambers One Essex Court.
Grabiner will serve as the chairman of a company committee charged this week with cleaning out any wrongdoing within the company. Mark Mendelsohn, a white-collar defense attorney at Paul, Weiss, Rifkind, Wharton & Garrison, has also been retained, but it is unclear what his role will be.
Despite the name, D&O policies generally also include coverage for the corporation itself, or what's known as Side B coverage. Philip Touitou, a partner at Hinshaw & Culbertson whose practice focuses on complex commercial litigation, said that News Corp likely has such coverage.
In the end, the price tag of all the fees could amount to as much as $50 million, Touitou said.
In general, D&O policies pay for the civil legal costs incurred by directors and executive for alleged wrongdoing. In addition, they include the cost of defending criminal charges, which can be a big part of the fees.
In the Enron scandal, for example, when executives of the company were accused of doctoring company books, half of the $300 million in legal fees went to pay criminal defense attorneys, Baker said.
D&O policies typically also cover the legal fees for directors and officers who have left the company, as long as the alleged misconduct occurred within the policy term, he said. If they are convicted or plead to a serious crime like fraud, they have to pay the money back.
That means that if Brooks admits to or is found guilty of conspiring to intercept communications, she may have to reach into her own pockets.
Coverage is typically composed of different tiers often provided by different insurers, which together make up the total amount of coverage.
Policies generally apply to the directors and officers as a whole, meaning that different individuals are not covered for different amounts.
The better policies, which News Corp executives likely negotiated for, Baker said, provide an advance of money for fees instead of reimbursement for the employee.
But that's all in theory. What often ensues, and is a real possibility in the News Corp action, said Touitou, are battles between the variety of insurance companies providing coverage for a company about who is going to pay what.
INTERESTS COULD DIVERGE
Fights could arise about the point at which coverage kicks in, and whether a policy should cover the fees at all, said a UK-based executive with experience in directors and officers insurance. He requested anonymity because he was not authorized to discuss sensitive market matters publicly.
"Until there is a civil proceeding or an actual intention to prosecute, the extent of coverage is going to be far from clearly obvious," the source said.
Investigations generally aren't covered, and a "claiming event" usually is required to trigger coverage, such as an arrest or an indictment, the source said.
More seriously, a question of whether any D&O policy is even valid also could arise.
Recent fights involving coverage between an insurer and Sprint Nextel Corp executives in a securities litigation settlement and between an insurer and Stanford Financial Group executives are two examples of many cases in which insurers and executives end up on opposite sides.
If an underwriter can prove that misrepresentation by one of the executives occurred at the policy's inception -- for example, if an executive knew of illegal behavior and denied it when the policy was executed -- the underwriter could seek to void it, said an insurance litigator.
Some courts are taking a more nuanced view and have voided the policy as it pertains to a particular executive but have allowed the rest of it to remain intact, said the litigator, who requested anonymity because he was not authorized to speak on the subject.
Other outcomes could further complicate D&O coverage. At some point, the expert said, the interests of the company, embroiled executives and the directors could diverge.
The company may well claim that any wrongdoing on the part of executives was rogue behavior not covered by insurance, while independent directors could claim that inside directors knew of the activity and failed to tell the rest of the board.
In those scenarios, battles over coverage could result from the blame games.
And should that happen with News Corp, litigation well beyond issues involving hacking and bribing will ensue, Touitou said. "We don't know where this is ending," he said.