Why Corporate Executives Should Have a Separate Written Indemnification Agreement

The following article authored by Kevin LaCroix, speaks to a very creative risk management technique that many Senior Executives should seriously consider. Few take the time to invoke this extra layer of security, and if not done, may discover that the window of opportunity has closed when they are in need of it. Britton Gallagher’s Executive Solutions Group strongly recommends you reach out to your individual or corporate counsel to discuss the matter in greater detail as this extra precaution will be quick and useful, if and when, you ever need it.

Most companies’ corporate bylaws or articles of incorporation contain indemnification and advancement provisions. While these provisions provide important protection for corporate executives if the individuals become the target of claims relating to their action undertaken in their corporate capacities, these provisions alone may not be provide sufficient protection.

For these and many other reasons, well-advised corporate executives will want to have their rights memorialized in a separate, written indemnification and advancement agreement with the company, as discussed further below.

  • Written agreements typically provide more comprehensive protection than corporate bylaws or statutory provisions. Most bylaws, for example, provide for permissive indemnification, whereas most written agreements are written on a mandatory basis. Moreover, the rights enumerated in the agreement are enforceable obligations that cannot be amended or terminated without the individual executive’s agreement.
  • The contractual indemnification provides individuals an extra measure of protection and some level of assurance that their rights will be protected if claims arise after they have left the company.
  • A separate written indemnification provision can also provide certain protections against wrongful withholding of indemnification or advancement, by providing presumptions in favor of indemnification and providing for “fees on fees” (that is, fees incurred in order to enforce rights to advancement or indemnification).

Disputes arise because the indemnification and advancement questions often arise in the midst of serious litigation, and frequently when the company is in the midst of a larger crisis. It is far better to try to sort as many of these issues as possible before the problems have arisen, when things are still calm.  The use of a separate written agreement is one way to take steps while times are calm and relationships are cooperative to ensure that the individual directors’ and officers’ rights will be protected even when things are no longer calm and relationships have turned combative.

In addition, there are a number of important issues that a written indemnification agreement can address that the corporate bylaws typically do not address.

  • Provide definitions of important terms and might clarify that the individual is entitled to indemnification or advancement even if the individual is just a witness in a proceeding, and not only if the individual is a named party.
  • Memorialize the individual’s right to select their own counsel. This could be particularly critical if the issues arise after the individual has left the company and new management is in place. There may be a host of potential conflicts between the individual and the new management, which could militate in favor of the individual having his or her own counsel.
  • Specify the procedures to be followed if disputes arise with regard to indemnification or advancement. The agreement can also provide for an expedited dispute resolution procedure. The agreement can provide for so-called “fees on fees” – that is, for reimbursement of expenses that an individual must incur to enforce indemnification or advancement rights.

Although individuals can try to protect themselves with a written indemnification agreement, the unfortunate fact is that when the time arises, the company may be financially unable to honor its indemnification or advancement commitments. For that reason, it is absolutely critical that the company maintain a robust and expansive D&O insurance program, so that if the company is financially unable to indemnify its directors and officers, the individuals can look to the insurance contract for protection. Even if the company is able to meet its indemnification obligations, the insurance can fund these obligations under its “reimbursement” coverage, on a “pay on behalf” basis, so that the company is not required to go out of pocket.

A well-designed D&O insurance program will include within its overall structure a layer of so-called Side A/DIC insurance. These kinds of policies have a number of important features that are available to protect individual directors and officers in certain kinds of catastrophic claims. This type of insurance not only provides excess insurance that protects only the individuals, but it also has a “drop down” feature under which the insurance can become first-dollar insurance providing protection under certain circumstances when the primary insurance is not available.