What if a current or formerCEO is sued by laid-off employees claiming economic harmcaused by executive incompetence? Should those in the C-Suiteface the same malpractice exposure as other professionals, and ifso, how might the directors and officers insurance marketrespond? Those were some of the questions raised by arecent episode of the ABC legal dramedy, “Eli Stone.”

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For those who haven't seen the show before, Eli Stone is atop-notch corporate lawyer whose life is changed by an aneurysmthat gives him visions of the past and future. Convinced he'sbeen made into a prophet by God, he begins representing the weakand vulnerable, rather than the rich and powerful.

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In the July 4 episode, Eli's firm seeks certificationof a class action on behalf of some 300 people who lost their jobsafter the company dismissed its CEO for bad management–but notbefore paying him over $200 million in annual compensation, andproviding an additional $43 million in a severance package.

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The suit is dismissed on the grounds that all of the workerswere at-will employees, and that the company has no liability forhaving to lay off people to pay its bills–even if one of thosecontractual debts is for a golden parachute for the CEO who ran thefirm into the ground.

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But then Eli has a vision, which inspires him to direct hisclients' wrath at another juicy target–the dismissed CEO, who issued under a novel legal concept, “executive malpractice.”

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“People sue their doctors when they botch a procedure. They suetheir lawyers when they botch a case. Why shouldn't they also beable to sue their bosses when they screw up?” argues Eli's partneron the case. “CEOs owe a fiduciary duty to their stockholders. Whyshouldn't they owe the same to their employees?”

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The judge certifies the class and allows the case toproceed. Then the fun begins.

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“What went wrong?” the defense attorney asks theCEO, squirming on the witness stand.

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“We made some bad bets,” he shrugged. “We expanded into marketsmaybe we should've stayed out of. We made investments in R&Dthat didn't pay off.”

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He goes on to argue that he should not have been dismissedin the first place. He stands by his decisions, and insists manywould pay off in the long run. But with the quarterly earningspressure public companies face, he claims he was dismissed as ascapegoat to stave off a shareholder revolt.

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Should CEOs be held to the same standards as doctors, he'sasked.

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“Doctors operate in a sterile, fairly predictable environment,”the CEO says. “But running a diversified, multinationalconglomerate is like waking up every morning drinking from a firehose.”

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The case took a bizarre twist when the company rehires the CEOright in the middle of the trial, pulling the rug out from underthe defense–which based its argument on the fact that the CEO wasincompetent, and therefore liable for poor decisions that cost the300-plus plaintiffs their jobs.

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But by bringing the CEO back on board, the company is seeminglyconceding THEY were wrong to blame the CEO, and trust him to takethe helm once more. (I can't imagine this ever happening, but thisis a TV show, after all.)

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Still, the judge permits the plaintiffs their day in court,agreeing with Eli that regardless of whether the CEO is still inplace or fired, the question of executive malpractice remains to besettled.

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The closing arguments were fascinating.

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The defense attorney concedes to the jury that her clientis in a tough spot because “Main Street is furious with WallStreet. Millions are losing their jobs while the CEO responsiblecollects millions in bonsues and golden parachutes. So whyshouldn't CEOs be held to the same professional liability standardas doctors?”

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Well, she says, “have you been to the doctor lately? Areyou aware of the needless tests to shield them frommalpractice lawsuits? Do you really want corporate executives to beheld to the same second-guessing in courtrooms? Do youknow what that would do to America's ability to compete in theglobal market?”

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She went on to argue that “if you take away the goldenparachute, how will you attract qualified executives to run thecompanies who give us our jobs?” Her conclusion was ominous: “Togive [Eli Stone] what he's asking for could cost you your job.”

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Not exactly a legal defense, is it? More like a warning, or athreat!

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Eli's team made a far more eloquent closing to counter thedefense attorney's “familiar argument, which is that CEOs haveto make billions because without them, there are no jobs for therest of us. Greed is good. A rising tide lifts all boats.Prosperity trickles down. Don't tie our hands with regulations.Well, we see how that worked out.”

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Eli's team argued that “plaintiffs didn't 'lose' their jobs. Anincompetent CEO lost their jobs for them. He ran their company intothe ground while falling softly to Earth in a goldenparachute.”

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Mr. Stone's associate told the jury that “the vast majorityof us depend on CEOs for our livelihoods, so why shouldn't the lawhold them to the same standard of care as doctors and lawyers andstockbrokers, accountants and attorneys? Why shouldn't CEOs be heldto the same basic standard of competence that you're held to inyour jobs?”

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This whole concept of executive malpractice is fascinating. Isthis fictional case preposterous, or might Eli be on to something?With millions being laid off–sometimes due to horrible decisions oncredit default swaps, subprime mortgages and other risky financialbets–and with job prospects grim for this year and perhaps even in2010, such legal questions might be more than academic beforelong.

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What might the exposure implications be for risk managers andtheir directors and officers insurers? Might there be anopportunity for carriers to create an entirely new class ofprofessional liability coverage? Or is this just a cockamamiedelusion from a hack Hollywood scriptwriter?

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Might you be wondering how the jury decided this case? Well,they came down in favor of the plaintiffs. While only granting aninconsequential economic judgment, they tacked on $220 million inpunitive damages–in essence ordering the disgraced CEO to turn overhis annual pay to those who lost their jobs because of his allegedincompetence.

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It certainly felt cathartic, but would it stand on appeal? Doesthe entire concept of executive malpractice have a leg to standon?

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What do you folks think?

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