By-laws are not ordinarily considered to constitute a contract between the corporation and the director, although this can be altered by the corporation, such as in the event of a change of control. It is good to consider a binding contractual right to indemnity in a separate contractual agreement.
A contractual Indemnity should:
A. Be subject to statutory and by-law restrictions
B. Add detail and clarity to general statutory language and address procedural matters for benefit of both individual and corporation, including:
i. Potential proceedings - regulatory requests for information, applications for leave to commence proceeding
ii. Appointment of counsel; rights to separate counsel
iii. Rights to settle
iv. Arbitration of disputes
v. Co-operation and access to documents
vi. Timing of indemnification (advancement)
vii. Continuing purchase of insurance
Question: What is the relationship between the corporate by-laws and the past, present and future indemnity obligations of a Director & Officer policy. Should all directors be concerned about coverage being altered by the corporation in the event of a change of control? Would this be something an exclusive SIDE A DIC policy could help mitigate?
Answer: There’s not a huge impact on the D&O coverage – but most D&O policies have a “presumptive indemnification” clause. This says that if an insured entity should be indemnifying an individual and is not, then the insurer will consider it a side B claim and a deductible applies (no deductible would apply to side A claims). Typically, the language goes on to note that in these circumstances the insurer will advance defence costs without requiring the individual satisfy the deductible, but the insured entity will still have to pay it. The contractual indemnity does not resolve this potential issue, but does make it much clearer that an insured entity has an obligation to indemnify an individual.
If the insured did not have this advancement provision then a side A policy would help the individual (but really a better solution is to just buy a better corporate D&O policy that includes this language).
One last thing to note is that even if there’s no big impact on the D&O coverage, the contractual indemnity is still an important risk management step. The D&O policy is obviously a potential source to solve the problem if a person is not being indemnified, but all policies have exclusions and the claims frequently have grey areas where perhaps coverage does not apply. As a director, it’s way better to know that your employer will pay the bills and then rely on the insurer as a backup or a method of reimbursing the employer.
What do you think?
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