Indemnification by the company: Overview, definition and example
What is indemnification by the company?
Indemnification by the company refers to a provision in a contract where the company agrees to compensate or reimburse an individual (such as an employee, director, or officer) for certain losses, damages, or liabilities they incur as a result of their actions or decisions made while performing their duties on behalf of the company. Typically, this provision is intended to protect individuals from personal financial loss due to legal claims or actions related to their professional roles, provided that the actions were taken in good faith and within the scope of their responsibilities.
Indemnification clauses are commonly found in corporate bylaws, employment contracts, and agreements with directors and officers (D&O insurance policies).
Why is indemnification by the company important?
Indemnification is important because it encourages individuals to perform their duties without fear of personal financial consequences for actions taken in the course of their work. By offering indemnification, the company helps ensure that directors, officers, and employees are willing to take necessary risks or make decisions that benefit the company without the concern of being personally liable for potential legal claims or financial damages.
This provision also helps the company attract qualified individuals to positions of responsibility by providing additional legal protection and financial security, particularly in the case of litigation or claims arising from the individual’s actions in their role.
Understanding indemnification by the company through an example
A director of a company is sued by a third party for actions taken during their tenure on the board. If the director was acting in good faith and within the scope of their duties, the company may indemnify the director by covering their legal defense costs and any damages awarded, as long as the director did not engage in fraudulent or malicious behavior.
An example of an indemnification by the company clause
Here’s how an indemnification by the company clause might appear in a contract:
“The Company agrees to indemnify and hold harmless [Employee/Director/Officer] from any and all claims, liabilities, damages, and expenses (including attorney's fees) arising out of any act or omission in the course of their employment or service, provided that such act or omission was made in good faith and within the scope of their duties. This indemnification shall not apply in cases of gross negligence, willful misconduct, or illegal activities.”
Conclusion
Indemnification by the company is an important clause that protects individuals from financial loss arising from legal claims related to their professional actions within the scope of their roles. This provision not only offers financial security but also promotes responsible decision-making and leadership within the company. A well-drafted indemnification clause ensures that individuals are shielded from certain liabilities, as long as they acted in good faith and in alignment with the company’s interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.