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D & O insurance and indemnification: both are critical to a comprehensive director and officer liability protection program.

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 advancement but also specify a time frame within which the company must respond after receiving a reimbursement request. Without a right to advancement and a time frame within which such advancement must be made, a company may delay or refuse to advance defense costs. This delay (possibly several years) could prove devastating.

Indemnification and D & O Insurance

Benefits of Indemnification: You may think obtaining broad indemnification rights is not critical to protecting your assets because your company already has D & O insurance. Even if you have heeded our advice over the years and vigorously negotiated your D & O insurance policy, this may not be the case. Unlike the coverage provided by a D & O policy, indemnification generally is not subject to numerous standard exclusions, including subject-matter claims related to environmental matters, ERISA, and breaches of contracts, as well as claims brought by other directors or officers. Moreover, indemnification agreements typically do not contain a timely notice hurdle, claims-made restriction, or requirement to use pre-selected defense attorneys, which are found in D & O policies. If you rely solely upon D & O insurance, you are not covering all bases.

Limitations of Indemnification: You should not rely solely on indemnification either. Indemnification has its own limitations. Your company may not be legally permitted to indemnify certain losses. For example, the Securities and Exchange Commission takes the position that indemnification for liabilities arising under the Securities Act of 1933 is against public policy and therefore unenforceable. Yet, the SEC raises no such objection to insurance coverage for such liabilities.

In addition, some state statutes do not authorize indemnification of judgments or settlements in a shareholder derivative suit. It is also possible that your company could suffer a financial meltdown and be unable to indemnify you. In any of those situations, you would turn to your D & O insurance policy, which provides an independent contractual source of indemnification.

When D & O insurance falls short, an indemnification agreement may meet your needs. When indemnification is not possible, D & O insurance may fill in. Both sources of protection are needed to provide the best protection for your personal assets.

The authors can be contacted at and

Stephen J. Weiss is a partner in the law firm of Holland & Knight LLP and is one of the nation's leading authorities on D & O and management liability insurance. Shannon A. Graving Knotts practices insurance law with Holland & Knight, with a focus on D & O coverage counseling and policy negotiation.


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Title Annotation:D & O INSURANCE UPDATE
Author:Weiss, Stephen J.; Knotts, Shannon A. Graving
Publication:Directors & Boards
Date:Mar 22, 2007
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