D & O insurance and indemnification: both are critical to a comprehensive director and officer liability protection program.
Author | Weiss, Stephen J. |
Position | D & O INSURANCE UPDATE |
SINCE THIS COLUMN'S debut nine years ago, we have regularly written about protecting your personal assets from the costs of litigation by means of well-negotiated directors' and officers' (D & O) liability insurance. A comprehensive protection program should also include indemnification rights in the form of corporate bylaws or an individual indemnification agreement between you and your company. Corporate indemnification and D & O insurance complement each other--in some situations your indemnification rights will protect you; in other situations, your D & O insurance will.
Corporate Indemnification
In general, state corporation statutes authorize corporations to indemnify a director or officer for losses incurred as a result of a legal proceeding against the director or officer in his or her capacity as such, but this indemnification is merely permissive in most circumstances. Without further contractual obligations, your company may refuse to indemnify you for losses incurred in connection with your service to the company. Accordingly, to ensure that you will be indemnified, your company's bylaws or your indemnification agreement must provide for mandatory indemnification if you meet the statutorily prescribed standards (e.g., you acted in good faith) and should contain a number of other provisions, as discussed below.
Indemnification Agreements
Both your company's bylaws and indemnification agreements may be drafted to provide similar protection but, in the interest of simplicity, we focus only on indemnification agreements. Like D & O insurance policies, indemnification agreements come in many shapes and sizes. They can be as simple as a one-page document stating that the company shall indemnify you to the fullest extent permitted by law, or 15 or more pages detailing your substantive and procedural rights to indemnification.
For example, a comprehensive indemnification agreement should specify the situations in which the company must indemnify you, mandate advancement of defense costs, provide for penalties against the company if it fails to honor its indemnification commitment, and require the company to obtain or maintain D & O insurance.
To illustrate the benefits of such detailed provisions, consider the advancement of defense costs during a lawsuit. Advancement provides the funds a director or officer needs to retain legal counsel and vigorously defend against a lawsuit. An indemnification agreement should not only require such...
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