June 01, 2008
Ask the legal expert
Attorney John Durso, Ungaretti & Harris LLP
How can we mitigate liabilities for our corporate directors or officers?
As mentioned last issue, when a corporate director or officer acts appropriately, he or she is entitled to the business judgment rule. This rule provides that directors and officers are immune from liability to the corporation for losses incurred in corporate transactions within their authority.
Most states allow or require companies to indemnify directors and officers for defense costs arising out of actions taken on behalf of the corporation. States have long recognized without such indemnification requirements it could prove difficult to fill director and officer positions.
Corporations can include an indemnification clause in its bylaws or articles of incorporation to provide additional protection to the director or officer.
However, indemnification clauses are not fail-proof. State laws may prevent indemnification of certain acts or the corporation might not be able to pay for the indemnification. Most states' corporation statutes allow for corporations to purchase insurance where the director or officer is not entitled to indemnification.
D&O (directors and officers) liability insurance is useful where the corporation cannot reasonably protect against a risk of a claim or does not have the financial resources to pay the liability. D&O insurance is separate from, and in addition to, general liability insurance for a corporation.
Corporations, directors and officers should carefully read over policy exclusions. Exclusions for fraud, willful violation of the law and improper personal profit typically apply only if the conduct is established by final adjudication.
When looking into establishing an indemnification clause or purchasing D&O insurance, it is best to check the state law and speak to an insurance broker about a corporation's individual needs.