As Ken Lewis prepares to defend himself from fraud charges in New York, the retired chief executive of Bank of America Corp. may be sheltered from personal financial loss by several layers of special insurance.

Legal and insurance experts say high-profile executives, such as Lewis, at large corporations are protected from serious financial harm in the case of a lawsuit because of cash set aside for their defense by the company and additional insurance, known as director’s and officer’s insurance. It has also been reported that recently Lewis individually secured additional insurance coverage for any damages not covered by the bank.

Joe Price, BofA’s president of consumer banking and former chief financial officer, faces the same charges and is believed to also be covered by the bank’s D&O policy.

However, experts tell the Charlotte Business Journal, if the fraud charges have merit, then prosecutors may seek a final judgment or settlement that requires the embattled bankers to pay a penalty out of their own pockets.

“This is a one-of-a-kind situation,” Michael Klausner, a Stanford School of Law professor, says about the charges. “It could become very complicated.”

Lewis and Price face civil-securities fraud charges from New York Attorney General Andrew Cuomo from the bank’s purchase of Merrill Lynch & Co. in late 2008. The suit contends the BofA executives intentionally hid information that Merrill was suffering huge losses so shareholders would approve the deal. Then they allegedly manipulated the federal government into saving the deal with a $20 billion bailout by threatening—falsely, Cuomo contends—to back out of the deal unless the bank received billions in taxpayer funds.

Bank of America, Lewis, and Price all contend the charges are without merit.

The charges raise the question of how much the individual bankers could pay in penalties or in a settlement. But there are multiple layers of insurance to shield personal fortunes.

First, experts say Bank of America likely has cash set aside to pay for the legal expenses of its officers and directors. This money is used to pay for attorneys and other costs associated with a legal defense, assuming that the officers acted in good faith. It could also pay a portion of a legal settlement.

Kevin LeCroix, an attorney for OakBridge Insurance Services, says a company with the size and exposure of BofA will likely have “tens of millions of dollars” set aside to indemnify its leaders.

Second, BofA likely provides D&O insurance for its executives and board members. This would cover the bank’s officers from personal loss in a lawsuit related to bank business if the bank could not cover the expenses. Historically, this insurance is claimed when a company is bankrupt or in other financial straits, preventing it from indemnifying its officers.

BofA spent more than $380.2 million on legal expenses in the fourth quarter, according to regulatory filings. Bank officials didn’t respond to questions for this story.

Finally, Lewis, who retired on December 31, is believed to own a third layer of protection that he purchased himself before he retired. A report on the financial blog The Big Money, part of the online journalism organization Slate, says Lewis secured a special insurance policy for himself that would kick in if the bank’s insurance ran out or could no longer cover his expenses. The report cited an unnamed source familiar with the situation.

LeCroix, an expert on D&O insurance issues, says additional insurance for Lewis individually “just makes sense” considering his role in several controversial business deals.

Lewis and his attorney could not be reached for comment.

Despite layers of insurance, there’s still a chance Lewis could pay out of pocket if the case moves forward. Stanford’s Klausner says most insurers don’t pay if the defendant deliberately committed fraud.

But proving that will be a tough sell. The Securities and Exchange Commission is negotiating a settlement with BofA on similar charges, but without charging the officers individually. Observers say that suggests there’s insufficient evidence to prove Lewis and Price intended to commit fraud.

Because of the public nature of the case—and assuming it has merit—it’s possible Cuomo could insist a settlement “include a provision that requires Mr. Lewis to pay out of his own pocket and not seek insurance coverage,” Klausner says.

Cuomo’s office did not respond to a request for comment.

LeCroix says Cuomo’s charges hang on New York’s Martin Act, a law that eases a prosecutor’s burden in proving securities fraud. That could lower the bar and help Cuomo prove his case, experts say, but it would also open the door for more insurance coverage for the executives if deliberate fraud can’t be proven in court.

“It’s entirely possible that a settlement would be covered” by Lewis’ insurance, LeCroix says. “He can feel good that there’s a big pot of money there for him.”

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Adam O'Daniel is a staff writer for the Charlotte Business Journal.