Currently, hospital directors rely solely on the indemnity provisions contained in the hospital’s by-laws to protect them, should they become the subject of a legal action or proceeding. Directors rely on these by-law protections while they serve and even after they have left the board. The hospital corporation is entitled (but not obligated) to indemnify its directors by virtue of the Corporations Act.

We have been advising our hospital clients that they should have written indemnity agreements with their directors. Our advice aims to ensure that each director, who is serving voluntarily and with exposure to significant potential liability, has appropriate protection from those liabilities. The indemnity protections in the by-laws are not written in stone and can be changed by a new board of directors. A new board of directors may come into power due to community activism overthrowing the board or as a result of the government appointment of a supervisor. Between June 2007 and July 2008, an unprecedented five supervisors were appointed by the Ontario government over public hospitals. New boards typically follow. Coupled with an era of funding uncertainties, these are powerful reasons not to rely on indemnity provisions housed solely in by-laws.

This advice is validated by a recent Delaware case that upheld a corporation’s refusal to advance funds to a former director to pay for the director’s defence of an alleged breach of fiduciary duty. The Delaware Court of Chancery concluded that the corporation had the right to deny the former director’s claim for such payments because the corporation had changed the by-law provision that would have entitled the director to such payment before he commenced the action for the advancement.

The significance of the Delaware decision is reinforced by an Ontario Court (General Division) decision against an Ontario hospital that awarded a plaintiff $10 million in damages for an adverse event suffered in the hospital. Awards of this nature encourage lawsuits against hospitals and any other parties (such as the directors) who may contribute to an event and who may have insurance to fund the damages.

Directors should demand a written indemnity agreement that incorporates the hospital’s indemnity obligations both during the director’s term and after the term has expired. The indemnity agreement should also address issues such as a right to an advancement of monies to cover the defence of claims, the right to separate counsel, appropriate run off coverage, and a priority of payments and severability endorsement.