By G. A. Finch
Indemnification By Employer
In my law practice covering executive employment contracts, I see too infrequently a provision requiring an employer to indemnify an executive for any costs, expenses, liabilities, and losses incurred by the executive in the performance of his duties with the company. Usually, the indemnification arises in the context of litigation costs. It should apply to any kind of claim or proceeding including an action, law suit, arbitration, investigation, or administrative proceeding. It should also apply to both civil and criminal actions, investigation, and proceedings.
The costs, expenses, liabilities and losses should include, but not be limited to, reasonable attorneys’ fees, judgments, interest, expenses of investigation, fines, excise taxes or penalties and amounts paid or to be paid by executive in any settlement.
A well drafted indemnification provision will require the employer to advance to the Executive all his costs and expenses concerning a claim or proceeding.
An indemnification provision may have qualifying language that, as a precondition for indemnification, the Executive must be properly performing his obligations in good faith.
Claw Black of Indemnification Payments
Some indemnification provisions will have a mechanism allowing the employer to claw back the amounts advanced to an Executive if a determination has been made that the Executive was not entitled to indemnification for the subject costs and expenses.
The most comprehensive indemnification provision I have seen used reads as follows: “Employee shall be held harmless and fully indemnified by Employer to the fullest extent permitted by [State X] law without qualification or limitation.”
A companion provision that would be prudent for the Executive to include in his employment agreement is that the employer be required to keep in place directors and officers’ liability insurance coverage for the Executive during his employment with the employer and for four years afterward.
Executives get investigated, prosecuted, and sued all the time. An Executive’s having indemnification and insurance provisions will offer the Executive some peace of mind.
Indemnification By Employee
Employers sometimes require an Executive to indemnify the Company.
One kind of Executive’s obligation to indemnify involves the Executive’s indemnifying, defending, and holding his company harmless from any uninsured portion of any claim, loss or expense arising from any action by the Executive that contravenes the rules and policies of the company, any applicable laws or that arise from intentional misconduct by the Executive.
New Employer’s Protection from Old Employer’s Restrictive Covenants
Another kind of Executive’s obligation to indemnify involves the Executive warranting that Executive is not under any legal or contractual obligations that contravenes the new employer’s employment agreement and execution of the employment agreement will not breach any other agreement by the Executive. If there is such a breach, then the Executive must indemnify the new employer and must hold the new employer harmless from and against any and all loss, damage, and expense emanating from the claim against the Executive or the new employer arising from Executive’s relationship with his previous employer. The breaches would typically involve non-compete provisions, non-solicitation provisions, and confidentiality provisions.
Employers must protect themselves from new employees who know they have valid legal obligations to previous employers like confidentiality agreements. One additional way to protect themselves is for the employers to require the prospective employee to provide copies of all employment and separation agreements containing restrictive covenants like non-compete, non-solicitation, and confidential information.
Employers should also be able to be made whole from the bad conduct of their employees giving rise to uninsured liability.
The scope and kind of indemnification by an employee must be appropriately negotiated by each side. Obviously indemnification amounts can be quite burdensome and even financially catastrophic for an employee.