Have you reviewed your corporate indemnification and D&O Insurance policy recently? If not, it might be a good time to do so. You probably have heard or read about the infamous “Yates Memo” announcing that the U.S. Department of Justice will be targeting individual executives – and their compensation – in future investigations. The Yates Memo did not exactly come out of nowhere; the government has been stepping up its pursuit of individual officers for several years now.
Chances are that your current indemnification provisions are fully adequate to address the risk – or have been amended to do so recently. However, it never hurts to double-check. And it is always best to make any changes like this when there are no issues pending. If the DOJ is on your doorstep, amending these provisions may be impracticable.
Among the most important points to verify are the following:
- Indemnification is mandatory
- Advancement of legal fees is mandatory through the final, non-appealable conclusion of the case
- Provides for the maximum indemnification possible
- Specifies indemnity for judgments, fines, amounts paid in settlement, and expenses, including attorneys’ fees
- No provision taking away your right to select counsel or control the defense
- No cap on fees or hourly rates (which could affect your choice of counsel)
If the company is concerned about providing such broad protection to so many people (especially companies with many individuals in the “officer” ranks), the company could consider refining the definition of “officer” in the bylaws or indemnification provisions.
Of course, individual indemnification agreements are preferable to indemnification in the bylaws. The company could amend its bylaws, but it cannot amend your individual agreement with your consent.
Regarding D&O Insurance, even the best indemnification agreements are no substitute for D&O insurance. Insurance can provide benefits for which indemnification is not permitted – e.g., judgments or amounts paid in settlement in derivative suits. Insurance can kick in when the company becomes troubled or distressed or is – as might be the case in a Yates Memo situation – unwilling to provide indemnification. With respect to company’s D&O insurance, you should verify the following:
- The “crime/fraud” and “personal profit” exclusions in the policy are only triggered upon a “final adjudication” of the facts underlying the exclusion, which must occur in the underlying litigation
- The policies contain severability provisions that protect innocent insureds from losing coverage because of the bad acts of others, and
- The policies contain priority of payment provisions ensuring limits get paid out for loss sustained by individual insureds first, over any loss sustained by the entity, or even better purchase “Side A-only” policies, which cover directors and officers exclusively.
Companies are well-advised to seek expert counsel in these important matters.