May 1, 2008
As MSHA ratchets up enforcement, re-examine personal liability coverage for your management team.
by Avi Meyerstein
With all that Congress and the Mine Safety and Health Administration (MSHA) have done to ratchet up safety enforcement and penalties, you’ve probably thought about one of the worst-case legal scenarios: that MSHA will decide to go after you or other individuals in management, personally, for safety violations. After all, under the Mine Act, MSHA can refer individual corporate agents for criminal prosecution resulting in penalties of up to $250,000 and/or one year in prison for the first offense. In addition, MSHA has the authority to issue personal, civil fines against individual corporate agents for alleged knowing or willful violations.
These penalties can apply to a broad range of management personnel defined as corporate agents, beginning with frontline foremen and rising all the way to the CEO. With so much on the line, it makes sense to consider strategies to reduce the impact of MSHA cases on management employees who act in good faith, but get caught up in an MSHA action. Every company should consider a policy permitting lawful defense and indemnification of its agents. Companies with such policies in place should review the policies from the perspective of potential MSHA cases and related investigations and litigation.
Indemnification is a clumsy word that simply means protection from loss or damage, such as when a mine operator agrees to reimburse its management employees for legal liabilities and expenses the employee incurs on the job (within certain limitations). Covering an employee’s costs of defending an MSHA investigation by “advancing” legal fees and paying resulting civil penalties is a perfect example of how indemnification can work.
Even without MSHA fines and prosecution referrals, management personnel at all levels are faced with incurring legal fees simply if they must defend themselves from MSHA allegations or they need independent advice during an MSHA investigation when management counsel has a potential conflict of interest. While management counsel can often provide advice to corporate agents when no conflicts exist, aggressive MSHA enforcement can lead to potential conflict considerations that require separate counsel for management agents. Similarly, even though workers’ compensation laws generally prevent management agents from being held liable for workplace injuries or fatalities, some states permit such lawsuits, and management agents often fear these risks even beyond their realistic potential for liability.
Someone in management, acting in the best interests of employee safety and the company, could wind up with crippling expenses for investigation or defense counsel. From a company perspective, telling a management agent who was acting in good faith to “fend for yourself,” during the middle of an MSHA investigation, could eliminate company loyalty and invite retribution by an angry agent. A far better approach is to adopt a policy that demonstrates loyalty and permits the company to pay reasonable, independent counsel costs for management agents who were acting in good faith, but who can not be represented by company counsel (e.g., because of a potential conflict of interest). In such a setting, company counsel and independent management agent counsel can enter into “joint defense agreements” to further their common interests, protect privileges, and avoid duplication of work, thereby achieving common goals while protecting against conflicts of interest.
Creating — and training — employees about these indemnification and defense policies is often in an employer’s best interest. The best time to tell employees about these policies is ahead of time, even when no MSHA action is pending against them. In fact, whenever possible, incorporate your company’s indemnification and defense policy while training management agents about MSHA liability prevention. Moreover, in a tight employment market, where skilled mining personnel are scarce, current and prospective employees will view an indemnification and defense policy as a benefit provided by a loyal employer. An indemnification policy not only protects valued employees and ensures them representation and a fair hearing if needed, but it can also help an employer’s attorneys defend the employer. If the employee has an experienced attorney, it is all the better for establishing a successful joint defense.
Yet, there has been concern among policymakers that there should be limits to indemnification and defense by companies of its management employees. They fear that if “bad” conduct is defended and indemnified, some people will lose their incentive to follow the law since they will no longer face the costs of their actions. As a result, each state has an indemnification statute that may even require indemnification and/or advancement in some situations, allow them in other circumstances, and prohibit such agreements under other conditions.
In Delaware, for instance, where many corporations are registered, corporations are free to indemnify their officers, directors, and employees involved in civil, criminal, or administrative actions based on these individuals’ roles in the corporation “against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred” by the individual.
However, there are limits in Delaware. Indemnification in civil cases generally must be limited to situations where the employee acted in good faith and in a way he reasonably believed was in the corporation’s best interests. In criminal cases, the employee can only be indemnified where he had no reasonable basis for believing his conduct was illegal. Significantly, there is no presumption that an employee acted in bad faith or knowing the conduct was wrong. So, just because you may lose or (more likely) settle an MSHA case does not mean that you will automatically lose any indemnification rights you may have under state law, your company’s charter or policy, and/or your terms of employment.
Delaware also requires indemnification in certain situations. In the case of officers and directors specifically, the corporation must provide indemnification to the extent the individual is successful in defending all or part of the action against him. In addition, Delaware law permits a corporation to advance to an officer or director the expenses and attorneys’ fees required to defend the lawsuit provided that the individual agrees to reimburse these funds if it later turns out that he was not entitled to indemnification (such as if he is found to have acted in bad faith).
Not only should companies consider or review policies to indemnify and defend employees under appropriate circumstances, but they also should review insurance policies that may cover some indemnification and/or defense. Certain “D&O” (directors and officers) insurance policies, and sometimes even general liability policies, may cover defense and/or indemnification costs in certain MSHA investigation settings related to anticipated lawsuits. On the other hand, many insurance policies may not cover regulatory liabilities, may have limited or no coverage for “willful conduct” claims, and may initially deny coverage for MSHA defense costs. Yet, policy coverage is worth exploring when MSHA situations occur; particularly when companies anticipate civil lawsuits. Preferably, companies will review these insurance policy terms when policies renew. Companies should consider making indemnification and defense policies and agreements apply, even when no insurance is available, and seek coverage that includes company agent defense needs.
Reviewing company defense and indemnification policies and commitments to management agents at risk of ever-increasing MSHA enforcement seems to be a particularly worthy goal for 2008.
Avi Meyerstein is an associate at Patton Boggs LLP’s Washington, D.C., office where he advises clients on public policy issues and matters involving complex civil and commercial litigation. Meyerstein may be reached via phone at 202-457-6623 or via e-mail at firstname.lastname@example.org.