dojAlthough it is not something that is often considered, D&O insurance is in many ways a financial tool allowing companies to manage their indemnification obligations to their directors and officers. The D&O policy’s reimbursement coverage recompenses the company when it honors its indemnification obligations to its corporate officials, and the policy’s individual coverage (usual referred to as Side A coverage) protects the individuals when the company is unable to honor its indemnification obligations, whether due to insolvency or legal prohibition.


D&O insurance is of course a critical part of corporate risk management, but the fact is that indemnification is an even more basic and comprehensive source of protection for corporate executives. Even for companies that purchase and maintain significant levels of D&O insurance, corporate indemnification provides important protection for company officials. D&O insurance is subject to limits of liability, whereas indemnification is theoretically unlimited (although, of course, practically limited by the indemnifying company’s financial resources). Indemnification is often very broad, often extending “to the maximum extent permitted by law,” whereas D&O insurance polices contain numerous exclusions and conditions. In addition, D&O insurance must be renewed each year, with possible changes in terms and conditions. Indemnification rights are much less likely to be changed, particularly, as noted below, for corporate officials who negotiate their own indemnification contracts.


Indemnification, then, is a very important consideration for all corporate directors and officers. While this has long been true, indemnification arguably has taken on an increased importance in light of the recent action by the U.S. Department of Justice. As I discussed in a post at the time (here), in September the U.S. Department of Justice released a directive —  referred to as “the Yates Memo” –restating and reinforcing the agency’s commitment to targeting corporate executives in cases of corporate wrongdoing. The cornerstone of the agency’s new policies is the specification that in order for a company to qualify for any cooperation credit in connection with a DoJ investigation, the company must provide the agency with all relevant facts about the individuals involved in the misconduct.


The DoJ’s Yates memo new policy directives increases the likelihood that individuals will be targeted and that individuals could remain as targets of criminal or civil actions even after companies have been able to negotiate the resolution of the actions against the companies themselves. The policy reflected in the memo has a number of implications, including with respect to D&O insurance, as I noted in my prior blog post. In addition, as noted in a December 3, 2015 memo from the Davis Polk law firm (here), the memo also has important implications for corporate indemnification.


In thinking about the Yates memo’s indemnification implications, it is important to keep in mind the sources of corporate executive’s indemnification obligations. That is, indemnification is a form of statutorily authorized protection that is usually embodied in corporate documents such as articles of incorporation or corporate by-laws. Indemnification generally encompasses the rights to both advancement of defense expenses and indemnification.


The company’s indemnification provisions specify the procedures individuals must follow in order to obtain indemnification. It is worth considering that indemnification questions often arise at a time of corporate turbulence, which may complicate an individual’s efforts to obtain indemnification or advancement. A separate written indemnification agreement can not only provide much greater procedural specificity but it can also provide certain protections against wrongful withholding of indemnification, by providing presumptions in favor of indemnification and providing for “fees on fees” (that is, fees incurred in order to enforce rights to advancement or indemnification).


The DoJ’s release of the Yates memo even further underscores the importance for corporate executives of their corporate indemnification rights. Individuals increasingly may find themselves drawn into criminal investigations and proceedings, and may find that they are unable to extract themselves from these proceedings even after the corporation itself may have negotiated its own resolution. The company’s indemnification obligation to its executives continues as the enforcement processes grind on. As the Davis Polk law firm memo notes, “expense advancement obligation typically continues after indictment and conviction until all appeals have been exhausted.”


The policies embodied in the Yates memo also highlight the value for executives of having a separate indemnification agreement, as detailed in a December 2, 2015 Corporate Counsel article by Heidi A. Lawson and David L. Barres of the Mintz Levin law firm entitled “Why Directors and Officers Need a Separate Indemnification Agreement” (here). As the authors note, an indemnification agreement can “mandate everything that that [the indemnification statute] permits” and can “provide broader protection of indemnification rights than statutes and organizational documents.”


The article helpfully identifies a number of key features that an indemnification agreement should contain. First and foremost, the agreement should mandate indemnification to “the fullest extent permitted by law.” Second, the agreement should contain broad definitions of key terms, such as “expenses” and “proceeding,” to ensure that all varieties of costs incurred for all varieties of procedures are encompassed within the agreement.  The agreement should specify the process and timing for the selection and for the payment of defense counsel.


According to the authors, the agreement should also specify what should happen if the company does not honor its indemnification obligations, and, as I noted above, provide for so-called “fees on fees.”  Many indemnification agreements will also specify that the company will provide D&O liability insurance that protects the indemnitee, to the extent the insurance is commercially available.


In addition to the points noted in the article, it is also important to note that while having a written indemnification agreement in place is important for senior corporate executives, it may be even more important for those individuals after they have left the company. If the individuals are the target of legal proceedings after they have left the company, they can claim their rights of indemnification notwithstanding the arrival of new management. The contractual indemnification provides them an extra measure of protection and some level of assurance that their rights will be protected if claims later arise. A separate written indemnification provision can not only provide much greater procedural specificity but it can also provide certain protections against wrongful withholding of indemnification.


Although corporate indemnification is broad, it is not unlimited. There are times when a corporation may not indemnify an individual – for example, there generally are limitations on a corporation’s ability to indemnify individuals found liable in shareholders’ derivative suits. In addition, insolvency may prevent a company from honoring its indemnification obligations. As I noted at the outset, D&O insurance provides protection for company officials when corporate indemnification is not available, whether due to insolvency or legal prohibition. D&O insurance also provides a mechanism for corporations to be reimbursed when they do indemnify their executives.


A French Classic: In a December 5, 2015 Wall Street Journal article (here), novelist Lauren Groff explains how her lifetime love of Édith Piaf’s classic song Je Ne Regrette Rien (I Regret Nothing) began when Groff found a recording of the song in her host family’s record collection during a high school exchange trip in France. Groff reports that she played the song over and over so many times that her host family finally resorted to hiding the recording from her. I also have a great love for Piaf’s music, based on a CD I acquired on a trip to Paris many years ago. And yes, I have played the CD over and over again many times as well. I like many of Piaf’s songs, but I agree with Groff that of all of them, I like Je Ne Regrette Rien the best, a song that is at the same time both a hymn of sadness and an anthem of strength.  Here’s a live recording of the classic song.