Who Is Paying Those Legal Fees?

The Wall Street Journal has an article (subscrip. req.) about the costs to companies (and their shareholders and insurers) of defending executives from fraud charges. The article discusses a Delaware court ruling last October holding that Rite-Aid must continue to advance the defense fees of its former CFO, despite the fact that he has plead guilty to criminal fraud charges, because there has not yet been a “final disposition” (i.e., sentencing) in the case.

Quote of note: “A company’s average cost of defending against shareholder suits last year was $2.2 million, according to Tillinghast-Towers Perrin. ‘These costs are likely to climb much higher, due to a lot of claims for more than a billion dollars each that haven’t been settled,’ says James Swanke, an executive at the actuarial consulting firm. Though companies can recoup some defense costs through directors-and-liability insurance, it is rare to collect legal fees already advanced to former officers who have been convicted or pleaded guilty.”

Quote of note II: “Seeking to stop payouts to wrongdoers, insurers now want new insurance policies to be written differently than in the past. Instead of making fee payments pending a ‘final disposition’ in a court case, insurers are suggesting that corporate policies call for payments pending a ‘final determination’ of a fraud allegation. The upshot: A third-party arbitrator would decide whether an accused individual has committed fraud, rather than waiting for courts to rule.”

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