Doubling Down: Protecting the Director or Officer Against the Unknown and Unforeseen

Here’s a little story that rung an old bell for me, and provides an object lesson on a point I have made in the past in various forums concerning the protections against liability that need to be sought by officers and directors. The story concerns a decision out of the Tenth Circuit finding that a company did not have to indemnify one of its former corporate officers in total for legal fees related to the officer’s defense of a securities fraud case, despite a written agreement that appeared to impose such an obligation. I have not studied this case enough to hazard a guess as to whether the former officer, or the company indemnifying the officer, might have had access to coverage of those defense costs under a directors and officers policy. However, the case illustrates a principle I have often mentioned with regard to issues concerning service as a director or officer of a company - there is no way to know for certain long in advance of any particular claims being made whether the company will stand by an apparent obligation in its by-laws or other documents to indemnify an officer, nor can one be absolutely certain in the abstract whether the officer will have coverage against any such future claims under a directors and officers policy. There are too many variables to be certain, as the story reflects and evidences. As a result, as I discussed in detail here some time ago, it is important for directors and officers to protect themselves by doubling down on their protections, and requiring both broad indemnification protections in the company’s documentation and that the company acquire directors and officers coverage that is as broad as possible. That way, if and when a claim is made, if one of the two (the company or the directors and officers insurer) balks at paying for the defense of the officer or director, a second avenue of potential payment still exists. Certainly, as appears to have been the case in the little exemplar story discussed in this post, there may be claims in which neither will have to pay for all of the costs of defending the officer or director against a claim, but at least this two pronged approach gives the officer a reasonable shot at having someone pay those fees for him or her.