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Managing risk<br />
Indemnification is not self-executing.<br />
The company bylaws, charter and any<br />
corporate indemnification agreement<br />
between a director or officer and the<br />
company will determine:<br />
• who evaluates and approves requests<br />
for indemnification; and<br />
• whether a director or officer may be<br />
indemnified in a particular case and,<br />
if so, whether the director or officer<br />
may receive an advancement from the<br />
company to pay for expenses incurred<br />
in connection with the matter.<br />
In the absence of specific provisions<br />
related to who evaluates and approves<br />
requests for indemnification, the decision<br />
is generally made by a majority vote of<br />
disinterested (nondefendant) directors, a<br />
committee of disinterested (nondefendant)<br />
directors or upon the recommendation<br />
of independent legal counsel in a written<br />
opinion.<br />
If the company is either unwilling or<br />
unable to indemnify a director or officer<br />
for expenses, damages or settlement<br />
amounts, the director or officer may<br />
be able to seek payment directly from<br />
insurers, depending on the nature and<br />
breadth of insurance coverage under<br />
insuring agreement A of the company’s<br />
directors and officers liability insurance<br />
policy (commonly called “Side A”).<br />
Notably, the ability of a director or<br />
officer to seek timely reimbursement<br />
directly from insurers may differ<br />
significantly, depending on the exact<br />
terms, conditions, exclusions and limits<br />
that are purchased by the company.<br />
Today, most Side A polices are poised<br />
to begin responding to a loss on behalf<br />
of a director or officer within 60 days if<br />
the director or officer has not received<br />
a response from his or her company<br />
regarding whether it will indemnify<br />
the director or officer for the matter in<br />
question.<br />
Does the company have to advance the<br />
costs and expenses incurred in defending<br />
against a claim made against a director<br />
or officer? The ability of the company to<br />
advance defense costs in a timely manner<br />
to its directors and officers can be critical<br />
in attracting independent directors<br />
because the cost of defending a lawsuit<br />
can be immediate and substantial and<br />
may directly influence both the nature<br />
and quality of the defense presented by<br />
directors and officers.<br />
Rights to advancement are<br />
governed under a combination of state<br />
law, corporate bylaws and corporate<br />
indemnification agreements of the<br />
company and are separate and distinct<br />
from the obligation of indemnification.<br />
For example, a right to advancement<br />
of defense costs may be broader and<br />
less restrictive than an individual’s<br />
right to indemnification. Because the<br />
determination as to whether an officer’s<br />
or director’s conduct is indemnifiable<br />
generally cannot be made until the end<br />
of a claim or proceeding, Section 145(e)<br />
of the Delaware General Corporation<br />
Code permits (but does not require) a<br />
corporation to advance defense costs,<br />
including attorneys’ fees, to defend<br />
against a claim for something that, if<br />
true, would be an indemnifiable claim;<br />
but only if the claimant submits to the<br />
company a written undertaking to repay<br />
the amounts advanced if it is ultimately<br />
determined that he or she is not entitled<br />
to indemnification. Specific attention also<br />
should be paid to other conditions that<br />
may have to be met in order to receive<br />
timely advancement.<br />
A note of caution: in light of a 2008<br />
Delaware court decision in Schoon<br />
v Troy Corp (948 A 2d 1157 (Del Ch<br />
2008)), directors and officers relying on<br />
indemnification provisions in company<br />
bylaws should understand whether:<br />
• the bylaws include language stating<br />
that the rights of directors and officers<br />
to advancement of legal expenses vest<br />
upon commencement of services;<br />
• these rights are contract rights; and<br />
• the bylaws state that they cannot be<br />
amended retroactively to impair those<br />
rights.<br />
Although Delaware has since amended<br />
its corporations code to reverse the<br />
effect of Schoon v Troy Corp, it serves<br />
to highlight the potential importance<br />
for directors and officers to consider<br />
separate indemnification agreements<br />
with the company that specifically<br />
address advancement of expenses,<br />
including provisions that prohibit<br />
modifications to such an agreement<br />
without the written consent of the<br />
director or officer.<br />
8.4 D&O liability insurance<br />
Marsh<br />
It is clear that companies and their<br />
boards of directors may well face lawsuits<br />
at some point. While most boards take<br />
their responsibilities seriously and try to<br />
execute them properly, that intent does<br />
not confer immunity. Shareholders and<br />
other stakeholders—often prompted by an<br />
aggressive plaintiffs’ bar—can be expected<br />
to sue when they see themselves as having<br />
been wronged. Thus, in addition to doing<br />
everything possible to execute their<br />
responsibilities properly and effectively,<br />
those charged with corporate governance<br />
should also protect themselves with D&O<br />
insurance.<br />
Most D&O insurance policies for<br />
public companies provide financial<br />
protection to more than just individual<br />
directors and officers. They also afford a<br />
significant degree of protection for certain<br />
financial obligations of the company. As<br />
a result of this dual protection, directors<br />
and officers must be aware that, at certain<br />
times, their interests and those of the<br />
company may diverge, particularly if<br />
claims are made that may approach or<br />
exceed the shared limits of liability for all<br />
the insureds taken as a whole. Directors<br />
and officers should understand the basic<br />
coverage and limits of their particular<br />
policies.<br />
D&O policies are generally written on a<br />
“claims-made” basis. Under such policies,<br />
the making of a claim against the insured<br />
during the term of the policy—not the<br />
occurrence of injury or damage—is the<br />
operative threshold event to which the<br />
policy responds. Some policies also require<br />
that the insured report the claim to the<br />
insurer within the policy period (or within<br />
a brief window of time thereafter).<br />
Most D&O insurance policies have<br />
one or more of the following three basic<br />
insuring agreements (see chart below):<br />
• Side A: Personal asset protection<br />
for officers and directors—Insuring<br />
Agreement A, commonly referred<br />
to as “Side A,” covers a loss incurred<br />
by individual directors and officers<br />
resulting from claims for which the<br />
company has not indemnified them.<br />
A director or officer need not pay a<br />
retention or deductible in the event<br />
Side A insurance proceeds are sought<br />
NYSE IPO Guide<br />
89