South-Western Legal Studies in Business

D&O Insurance Does Not Cover Cost of Independent Counsel Retained by Directors
Description Appeals court held that the Directors and Officers insurance policy maintained by a company to cover defense costs for directors sued in their capacity as directors covered the cost of legal representation provided by the company and its law firm. It did not extend to the cost of independent counsel hired by directors.
Topic Business Organization
Key Words Directors; Liability; Indemnity; Insurance
C A S E   S U M M A R Y
Facts Telxon and various directors of the corporation were sued in class action securities lawsuits, contending the company had misrepresented its financial performance in order to raise the price of its stock. The company hired a law firm to represent the company and the directors. The company had a directors and officers (D&O) insurance policy to provide liability indemnification in such instances. The policy covered the cost of the legal defense. Some directors hired other lawyers to represent them. After successfully defending themselves against the suits, the directors demanded the insurance company cover all costs of legal representation. The insurer contended that it was not responsible for the costs of the outside counsel hired. The district court held for the insurance company; the directors appealed.

Affirmed. The D&O policy stated that the insurance company was "legally obligated to pay" for defense costs was not open ended to cover any counsel hired by any director or officer. The company's general counsel provided defense work along with the law firm retained to defend the company and its directors. If individual board members hired legal representation beyond what was provided by the company and its law firm, the insurance policy did not cover such fees.

Citation Telxon Corp. v. Federal Insurance Co., 309 F.3d 386 (6th Cir., 2002)

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