Senior executives are sometimes indemnified against costs and expenses incurred as a result of legal proceedings that might be brought against such employees. Indemnification of this kind provides the executives with a level of security in which they can make necessary, often difficult decisions required in their roles without fear of being exposed to liability, should they become a target of legal proceedings. Absent specific and careful language, however, these indemnity clauses can leave employers vulnerable to paying costs and expenses associated with dismissing senior employees who are alleged to have committed fraud or other misconduct while employed.

This happened to the Simcoe Muskoka Catholic School Board (the “Board”), where the Board, in its employment agreement with the Director of Communications and Public Affairs, Ms. Legg, indemnified her against costs and expenses associated with actions or suits. The Board retained an investigator to conduct a formal investigation into allegations of misconduct made against Ms. Legg, including the submission of allegedly fraudulent expense claims. Following the investigation, the Board terminated Ms. Legg’s employment. Ms. Legg sought to recover costs she incurred while defending herself during the investigation and the advancement of funds for the costs of appealing her termination from employment.

On October 27, 2014, the Ontario Court of Appeal upheld a decision of Mr. Justice Peter Howden of the  Ontario Superior Court, finding that the Board had an obligation to indemnify, reimburse, and save harmless Ms. Legg for costs and expenses associated with the investigation and subsequent proceedings regarding her dismissal. Madam Justice Jean MacFarland, writing for the Court of Appeal concluded that the indemnification clause provided general indemnification against “proceedings”, without any language limiting the clause to cover only legal actions or regulatory proceedings.

Although the indemnification clause in the employment agreement included an exception for situations where Ms. Legg failed to act honestly and in good faith, the Board chose, for the purposes of this hearing, not to rely on the investigation report for the truth of its contents. This led the court to determine that the Board had not proven a strong prima facie case that Ms. Legg acted dishonestly or in bad faith, such as to trigger the exception. It is unclear why the Board did not rely on the investigation report for this proceeding regarding the indemnification clause, when it appears to have made the decision to dismiss Ms. Legg as a result of the investigative findings.

In light of the decision, employers should bear the following in mind when carving out indemnification for costs and expenses incurred in proceedings associated with a senior employee’s alleged dishonest or fraudulent conduct:

  • limit indemnification to costs and expenses incurred specifically as a result of lawsuits and/or regulatory proceedings against the individual, not investigations;
  • limit indemnification to costs and expenses incurred in responding to proceedings related to the legitimate execution of the employee’s duties associated with the position, as set out in the employee’s employment agreement, which should, in turn, clearly set out the employee’s obligations;
  • expressly exclude costs and expenses associated with investigations into the senior employee’s conduct in the course of employment;
  • expressly exclude indemnification for costs incurred in disciplinary and criminal investigations or proceedings brought against the senior employee; and
  • expressly exclude indemnification for costs incurred in employment-related proceedings brought by or against the employee.