Legitimate concerns with individual liability, and the sufficiency and enforceability of bylaw-based indemnification agreements, are causing some officers and directors to seek separate, individual agreements from their health system. Interest in such agreements spiked after the issuance of the Yates Memorandum, and will likely be exacerbated by concerns arising from recent health industry FCA settlements that include penalties against board officers and executives.
The organic corporate documents of most health systems provide language committing to provide protection to officers and directors who are targeted for claims by governmental and private parties arising from their corporate conduct. In highly regulated industry sectors and in connection with complex and controversial transactions, particular concerns may arise as to whether the bylaw provisions address all of the relevant issues, and provide for sufficient protection should disputes arise over the scope of indemnification or advancement. This is particularly the case where the health system’s overall “D&O” coverage may be less than comprehensive.
A typical focus on separate indemnification agreements is to provide for mandatory indemnification, when the applicable bylaw provision provides for permissive indemnification as the board may determine. A separate written agreement can incorporate a level of detail on terms and conditions that may be out of place in a bylaw provision. Separate agreements are also attractive to the extent that they are contractually enforceable obligations of the health system and require the officer or director’s consent before being amended or terminated. An additional goal of separate agreements is to assure that indemnification extends to claims that may arise after the officer or director may have left the company/board service. Some agreements also include provisions intended to protect against (allegedly) wrongful attempts to withhold indemnity or advancement.
Separate indemnification agreements require careful drafting and must be structured in a manner consistent with applicable corporate and tax law—especially (but not solely) as such law may relate to excess compensation and benefits, and to the provision of coverage, even where the individual has been determined to have violated law or breached fiduciary duties. Nevertheless, the increasing regulatory focus on individual accountability suggests that the board may want to evaluate the feasibility of providing such individual agreements and, if so, on what terms.