Business directors and officers are sometimes sued in connection with their duties as directors and officers in a business or company. When this happens, the director or officer involved may be able to avoid being financially liable for the lawsuit if he or she has an indemnification agreement with the business or company for which he or she works.
Indemnification is a legal term referring to the process by which a company agrees to relieve a director or officer of the legal responsibility for their actions or from a lawsuit for the breach of a duty of care. Therefore, if the director or officer is sued for doing something wrong, the company agrees to pay any compensation required as part of the lawsuit. In addition, the company may agree to pay for the director’s or officer’s legal fees.
Indemnification agreements are not limited to directors and officers of for profit businesses. They may also be offered by nonprofit organizations. It is up to the business or organization to offer indemnification, and it is not a mandatory benefit that has to be offered to directors and officers.
This kind of indemnification is usually negotiated and spelled out in an indemnification agreement, which is sometimes included in an employment contract. In some situations, the indemnification of a director or officer is allowed in the company’s organizational documents. However, directors or officers may prefer to negotiate for an indemnification provision to be included in an indemnification agreement because it offers more protection for them.
There are some limitations to the kind of legal action that may lead to an officer’s or director’s indemnification, and therefore a director or officer may not necessarily be covered in all instances. Any limitations to the indemnification offered should be clearly indicated in the agreement.
A business may agree to indemnify a director or employee because it could be a way to protect the company. For example, if the director or employee is found liable in the lawsuit, the next step may be for the plaintiff to sue the business and seek compensation from the business for the actions of the director or officer.
For the businesses that agree to indemnify directors and officers, there are insurance policies that can help absorb some of the costs of indemnification. It is important for the business signing up for this kind of insurance to understand the limits of the policy, and whether it provides the level of indemnification reflected in the indemnification agreement with the director or officer.
Contact Us for Legal Assistance
If you want to learn more about whether or not indemnifying your management team may be in the best interest of your organization, contact the experienced DuPage County business attorneys at Momkus LLC for a consultation.