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The Need for Indemnities and Directors’ and Officers’ Insurance for Presidents and Other Senior Executives

In approaching any executive employment agreement, attorneys who represent executives focus on two primary tasks:

First, securing and, if possible, increasing the benefits of the agreement for their executive client, including but not limited to base salary, bonuses, deferred compensation, equity or profit participation awards, enhanced disability insurance coverage and other benefits.

The second but no less important task of the executive employment attorney is to add or strengthen a variety of protections in the contract designed to make certain that the executive is not actively harmed or disadvantaged by the employment relationship.

Among these essential protections are, as only one example, the need for adequate notice and severance compensation if the executive is terminated without Cause (and, as a corollary, the need for a fair and not overbroad definition of what constitutes Cause for termination).

One such important protection which is frequently overlooked by attorneys without experience in the executive employment arena is the need for both a proper “indemnity” clause and a provision that the executive be included in the list of persons covered by the full protection of the employer’s directors’ and officers’ (“D&O”) liability insurance policy if there is such a policy.

The need for such “double protection” (assuming it is available) comes from the reality of the litigious world we live in. Any executive — and this includes college and university presidents as well as finance, industry and media executives — may well be named personally as a defendant in a lawsuit against their employer, even if that college president or financial executive has done nothing wrong, and has acted only within the scope of his or her corporate authority (even, sometimes, acting at the direct instruction of a superior or the employer’s Board of Directors). Another unfortunate reality is that even if a lawsuit naming the president or other executive as a defendant is wholly without merit and may even get dismissed fairly early in the proceedings, today’s costs of litigation are sufficiently high that the executive who is not protected by having his or her legal fees paid by their employer (or former employer, if the lawsuit occurs after the executive’s employment has ended) can still “lose by winning.”

For this reason, experienced executive employment lawyers attempt to have their executive clients covered by BOTH proper indemnity language in the executive employment agreement as well as specific language in that agreement which requires the university, financial firm or other employer to provide coverage for the executive under that employer’s D&O liability policy.

Why is that double protection advisable?

For one reason, some — although not many — significant employers do not carry D&O insurance. Even if they do have such insurance, however, there are monetary limits, including deductible amounts specified by those D&O policies.

Here is a hypothetical example which highlights why an executive employment lawyer would be concerned with such issues:

Small college “x” has never had much litigation, so the Board of Trustees decides, in order to save costs, to buy and pay premiums on a D&O policy which has meaningful limitations on coverage: it may only cover claims against the directors and officers of the college to the extent of $10 million in damages, and also have a deductible of $50,000 before the policy actually “kicks in.”

Without separate language in the president’s contract, obliging the college to indemnify the president for all expenses and damages, including attorneys’ fees, incurred by the president in defending herself against any and all claims made against her for actions taken within the scope of her employment authority, the president may be exposed for both the first $50,000 of legal fees as well as the possibility (however unlikely) of a judgment against all defendants in excess of $10 million.

The fact that the college may decide to pick up the fees and expenses of the president even if it does not have a contractual obligation to do so, does not mean that the president’s executive employment attorney should forgo an opportunity to include these protections in the obligatory language of the president’s agreement. Without such language, there is always the possibility that the school will decide not to shoulder its moral burden, or maybe it will simply run out of money before doing so (not every college has an unlimited endowment and even corporate, commercial and financial employers do run out of money).

Finally, when an executive is terminated and enters into an exit package with the employer, a knowledgeable executive employment attorney must be careful to exclude from the general release customarily required by the employer from the executive as a condition of the executive’s receipt of severance, all rights of indemnification and existing insurance coverage so as to preserve these important rights even after the employment relationship has dissolved.

About the Author

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George Birnbaum

Since 1980, sophisticated business people have relied on George to apply the meticulous preparation, attention to detail, and devotion to his clients he learned from fabled trial lawyer Louis Nizer. A graduate of Harvard College and Harvard Law School, George has over 35 years of distinguished deal-making, litigation, mediation and arbitration experience which he has used to negotiate high-stakes agreements for senior executives and select business clients throughout the United States.