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The Value of an Indemnity

Achieving a senior executive position in any organization is a substantial accomplishment. With such a position ordinarily comes expanded responsibilities as well as meaningfully increased compensation. However, such jobs also bring the real possibility of greater personal liability. In what is frequently described as our litigious society, it is not uncommon for CEOs to be individually named as parties to lawsuits brought against their corporate employers by disgruntled employees, disappointed shareholders and outraged competitors. And CFO liability can have a number of statutory bases.

Accordingly, it is important for senior executives to protect themselves against liability for actions which they took in good faith in the performance of their employment obligations and with explicit or implicit authority from their employers. As executive employment attorneys, we help put such protection in place at both ends of the process: when the executive is negotiating his or her employment contract on the way in, as well as when the executive is negotiating a separation agreement on the way out.

How do we, as executive compensation attorneys, obtain this protection?

Largely by way of a legal mechanism termed an “indemnity,” in which the employer comes to agree, within certain parameters, to “stand behind” executives who, through no independent fault of their own, end up having to defend themselves against a claim that exposes them to personal liability for something they did (or did not do) on behalf of their employer.

This is perhaps the place to point out that, even when senior executives are not ultimately found personally liable, by the time that finding is made, they may have spent thousands, tens of thousands, or even hundreds of thousands of dollars in legal fees and expenses (let alone what they have spent in time and aggravation) just to defend themselves, all to be found not legally responsible after all. An indemnity, if carefully crafted, can protect, at least in part, against these monetary losses incurred in the payment of legal fees and expenses.

On the Way In

Depending on the nature of the executive’s position and the particular industry involved (for example, financial services, media, or academia, to name a few), when we represent a senior executive who is either still negotiating or inclined to accept an offer of employment, we can explore a number of potential protections. Among them are:

1. Does the employer carry Directors and Officers (“D+O”) liability insurance and, if so, what are the terms of the policy? Will that policy cover our client and, if so, in what amount? Other questions to consider include, are there any exclusions to the policy? What is the nature of those exclusions?

2. What indemnity protection, if any, does our client have by reason of state law?

3. Do the organizational documents and/or policies of the employer include any indemnity protection? If so, which employees are protected? To what extent, and under what circumstances?

4. What separate, special or additional indemnity protection should be requested, if any, as part of the executive’s contract negotiation?

On the Way Out

When a senior executive is terminated or otherwise separates from employment, the question of indemnity again arises in a different, but possibly even more important, context:

1. The executive employment attorney representing a departing executive may need to be certain that nothing in the separation documents – particularly, but not only, in the customary releases — inadvertently releases, limits or obliterates the executive’s existing protection, including D+O insurance and any statutory, corporate or contractual indemnities.

2. Here, too, the specific circumstances of the executive’s employment at issue dictates how vigorously the question of post-employment indemnity protection should be pursued. Is the departing executive currently named as a party to any lawsuit? Is it likely or possible that he or she will be named as a party to any lawsuit in connection with the services and performance at the employer company? And, as a related question, even if the executive is highly unlikely to be actually named as a party (and, therefore, to have to worry about personal liability), are they going to be dragged into time-consuming legal proceedings on behalf of their former employer as a witness or a consultant? If so, will they need their own separate counsel, and will the employer agree to pay or reimburse the executive for legal fees? And what about out-of-pocket expenses? Is the employer willing to appropriately reimburse the executive for his or her time?

Even this brief overview demonstrates why the words “indemnify and hold harmless” in executive employment contracts and employment separation agreements can be a valuable tool in the hands of an experienced executive employment attorney.

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.