In general, the term indemnification means the process in which one of the parties agrees to, or needs to cover up for the expenses incurred by another party. From a corporate perspective, business organizations (usually corporations or companies with limited liabilities) indemnify their Directors and officers. This indemnification is towards providing cover for legal expenses, defense and judgment amounts incurred by the directors and officers while providing services to the organization.
Corporate indemnification is an important element of protection for the Directors, Officers and other key employees in an organization. It is a well-known fact that Directors and Officers in an organization may be subjected to personal liabilities and in many cases, top-level directors will not take up the role if the organization does not agree to indemnify them against personal liabilities. Usually, this will happen in different ways:
- The organization will agree to indemnify the directors and officers against their liabilities through the assets of the organization or
- The organization will purchase a Directors and Officers liability insurance which will help in providing cover against the personal liabilities.
According to the Companies’ Act 1956, organizations were not permitted to indemnify their directors and officers. By this Act, an organization is allowed to indemnify its directors and officers only if the liabilities have been incurred during defence for civil or criminal proceedings in case of the director being acquitted. However, in cases of breach of duty or negligence, the directors will not be indemnified by the organization.
But, the provisions have been amended by the Companies Act, 2013 wherein an organization can indemnify its directors and officers against any liabilities which are incurred due to being accused with negligence, breach of duty or trust, etc.
A contractual agreement which is known as ‘Deed of Indemnity’ helps in highlighting the provisions of an organization concerning indemnifying its directors and officers. This deed states the protection which the organization will provide in case of its Directors being implicated in legal claims and procedures. This protection is in the form of financial support and any other costs which are involved in defence and claim settlement associated with the directors. The Deed of Indemnity also provides cover for issues associated with legal costs and also contains provisions for the organization to provide a loan to the directors for covering such costs.
In addition to the corporate indemnification, most organizations have options for second-line protection for their top-level employees with the help of a Directors and Officers liability insurance. This insurance offers comprehensive coverage in liability cases against directors of the company. This is quite helpful for Directors and Officers in the organization as it can act as a support system in those cases where the company does not indemnify their directors.
Additional Read: What are Side A, B and C covers in a D & O policy?