“This is important because there is no Sixth Amendment right to counsel prior to indictment,” he said.

Had the invocation taken effect prior to the indictment, Judge Kaplan may have deplored it, but he would not have been able to offer the defendants the remedy of suing KPMG for legal expenses, Mr. LaCroix noted.

“This is significant because the trigger for coverage under D&O policies–even the broader Side-A and difference-in-conditions policies–is an indictment,” he said. (Side-A policies aim to provide coverage for directors and officers in situations when companies are unable or unwilling to indemnify them, or indemnification is prohibited by law.)

If the Thompson Memo is invoked with respect to an employee pre-indictment, D&O coverage would not respond to pay for that employee's legal expenses, he added.

U.S. Senator Arlen Spector, R-Pa., has said he is considering congressional action curing the purported ill effects of the memo. But no action is likely until the next Congress convenes in 2007.

Steve Shappell, managing director of the legal and claim practice for Aon Financial Services Group, said the Thompson Memo threatens directors and officers in a very real way. “I think the big issue for directors and officers is what happens to this fundamental promise from the company to defend them if they ever run into litigation or [are faced with an] investigation,” he said.

The question becomes how can the company address this risk, Mr. Shappell added, referring to the risk that in spite of making “the best promise in the world,” there may be “pressure and situations where the company simply won't be able to, or will not be willing to, take the risk of indemnifying its directors and officers.”

“So it becomes a poster child for insurance,” he said.

Mr. Shappell said that companies can provide better protection for their directors and officers if they beef up their indemnifications obligations to put them outside the scope of Thompson Memo pressure to cooperate. “If you look at the Thompson Memo and listen to some of the rationale, if there is a 'legal' obligation to indemnify, then supposedly there will not be pressure to stop indemnifying, and it will not be a negative factor if you are 'legally obligated,'” he said.

John McCarrick, a partner with the law firm Edwards & Angell in New York, said the concerns of the Thompson Memo extend beyond Justice Department investigations, since the Securities and Exchange Commission and the New York Attorney General's Office have employed similar tactics. “Given the broader use of this strategy, I find it interesting that no one is challenging the SEC or the NYAG with the same intensity as in connection with Thompson Memo criticisms,” Mr. McCarrick said.

He noted the Thompson Memo addresses the legitimate public policy concern that when a company under investigation employs a single counsel to represent its interests and those of all its employees, such legal representation creates an opportunity for the company to improperly influence the cooperation of those of its employees being questioned in the investigation.

But on the other hand, targeted employees still have a right to competent counsel, even in the pre-indictment stage of any investigation.

The Hartford has developed a new professional liability policy that for the first time addresses Thompson Memo concerns for both employees and employers.

Hartford Vice President Michael Price said the continual expansion of scope of coverage of directors and officers policies through the years has created an expectation that D&O insurance addresses all management liability exposures.

“But that is just not reality,” he said.

While D&O coverage may cover individuals who have already been indicted, the Thompson Memo and the Seaboard Report (the analogous SEC document) usually affect employees at the pre-indictment stage.

“It has been suggested that D&O insurers address this issue by expanding the definition of 'claim' to include even informal investigations, and to agree to provide legal expenses for employees against whom no wrongful acts have been alleged,” Mr. Price said. “But that would be a huge leap, and I'm not sure the D&O market is ready to broaden coverage to that degree.”

He said that EmployeeSecure provides legal expenses coverage in the form of dedicated sublimits available for to up to 10 employees. “These covered employees can be identified either before the coverage-triggering event or after, thereby providing maximum flexibility to buyers to have this coverage when it is needed,” Mr. Price added.

Coverage can be triggered by a criminal or regulatory investigation against the business entity, and an oral or written indication that employee expense advancement is discouraged by the prosecutors or the SEC in that investigation.

Once that takes place, the employee selects legal representation from a panel counsel list of top-tier national law firms and practitioners with highly regarded white-collar crime and SEC regulatory practices.

Mr. Price sees the policy as an opportunity for businesses to mitigate the risks created by a prosecutorial investigation strategy that can have significant and far-reaching consequences for the businesses and their employees.

“The coverage levels the playing field, so that general counsels no longer need to worry that their employees will cooperate with the government or regulators solely based on the company's agreement to cut off legal expenses under pressure from the government or the SEC,” he said.