Legitimate concerns with individual liability, and the
sufficiency and enforceability of bylaw-based indemnification
agreements, are causing some officers and directors to seek separate, individual
agreements from their health system. Interest in such
agreements spiked after the issuance of the Yates Memorandum, and
will likely be exacerbated by concerns arising from recent health
industry FCA settlements that include penalties against board
officers and executives.
The organic corporate documents of most health systems provide
language committing to provide protection to officers and directors
who are targeted for claims by governmental and private parties
arising from their corporate conduct. In highly regulated industry
sectors and in connection with complex and controversial
transactions, particular concerns may arise as to whether the bylaw
provisions address all of the relevant issues, and provide for
sufficient protection should disputes arise over the scope of
indemnification or advancement. This is particularly the case where
the health system's overall "D&O" coverage may be
less than comprehensive.
A typical focus on separate indemnification agreements is to
provide for mandatory indemnification, when the applicable bylaw
provision provides for permissive indemnification as the board may
determine. A separate written agreement can incorporate a level of
detail on terms and conditions that may be out of place in a bylaw
provision. Separate agreements are also attractive to the extent
that they are contractually enforceable obligations of the health
system and require the officer or director's consent before
being amended or terminated. An additional goal of separate
agreements is to assure that indemnification extends to claims that
may arise after the officer or director may have left the
company/board service. Some agreements also include provisions
intended to protect against (allegedly) wrongful attempts to
withhold indemnity or advancement.
Separate indemnification agreements require careful drafting and
must be structured in a manner consistent with applicable corporate
and tax law—especially (but not solely) as such law may
relate to excess compensation and benefits, and to the provision of
coverage, even where the individual has been determined to have
violated law or breached fiduciary duties. Nevertheless, the
increasing regulatory focus on individual accountability suggests
that the board may want to evaluate the feasibility of providing
such individual agreements and, if so, on what terms.
An increasingly important responsibility of the general counsel is to advise the corporation, and its officers and directors, on the application and extent of insurance/advancement and indemnification protections.
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