Indemnity and Insurance: How Directors and Officers Can Enhance Their Protections

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Jacquelyn Burke is special counsel and Rachel Katz is an associate at Cooley LLP. This post is based on their Cooley memorandum.

Whether they are new executive leaders or longtime members of a corporate board, directors and officers should be considering two prongs of protection—a robust insurance program and a tailored indemnification agreement.

Directors and officers can face significant personal exposure whenever their company is involved in a dispute or investigation. For example, for the past 10+ years, stockholder litigation has accompanied 80% to 90% of public M&A deals, in which stockholders assert breach of fiduciary duty claims or disclosure claims. Ongoing market volatility and increased regulatory efforts add to the potential for exposure. Prudent directors and officers—and any funds that place them on boards or in leadership positions—should avail themselves of all available legal protections in charter provisions, D&O insurance and indemnification agreements individualized to their needs.

In fact, looking to the company for indemnification vis-à-vis its charter provisions and indemnification agreements is generally the first line of defense. As an initial point, individualized indemnification agreements offer several advantages over any indemnification provisions in organizational documents, as outlined below.

Easier enforcement

Indemnification agreements may be more easily enforced by directors and officers because they are bilateral contracts reflecting bargained-for consideration in the form of an individual’s agreement to accept or continue service with the company—and cannot be amended without the directors’ and officers’ consent.

Broader, more thorough protection

Indemnification agreements also typically provide broader and more thorough protection of directors’ and officers’ indemnity rights than statutes and organizational documents. A well-written indemnification agreement should include, for example:

D&O insurance filling in the gaps

The next line of defense—D&O insurance—has terms that incorporate by reference the company’s indemnification obligations and then serves to fill gaps where indemnification is not otherwise available to directors and officers (i.e., bankruptcy or derivative suits). For those becoming a director or officer, the scope of the D&O policy’s protections should undergo an evaluation, in conjunction with an indemnification agreement. In the event of a claim against a director and officer, the availability of relief and reimbursement should be evaluated under both the policy and the indemnification agreement to pursue all possible sources of recovery.