Right to indemnification: Overview, definition, and example
What is the right to indemnification?
The right to indemnification refers to the legal right of a person or entity to be reimbursed for certain expenses or damages they incur while acting on behalf of another party, typically in the course of their official duties. In business contexts, this often applies to directors, officers, and employees who may face legal claims or liabilities as a result of their actions within the scope of their work. If they are sued or incur costs, the business may cover these costs, provided the actions were not illegal or outside the scope of their responsibilities.
For example, if a director of your business is sued for actions taken during their role, the business might have an indemnification clause that covers the costs of legal defense and any settlements, as long as the director acted in good faith.
Why is the right to indemnification important?
The right to indemnification is important because it helps protect individuals who act in the best interests of the business from personal financial loss. Without this protection, people may be reluctant to take on roles that involve significant responsibilities or risks, such as directors or officers. Indemnification ensures that they are shielded from personal liability when performing their duties in good faith, thereby encouraging leadership and decision-making that benefits the business as a whole.
For SMBs, having a clear indemnification policy in place can help attract and retain key personnel by providing them with assurance that they will be protected from certain risks associated with their roles.
Understanding the right to indemnification through an example
Imagine the CEO of your small business is sued by a competitor for alleged unfair business practices. The CEO is acting in the interest of the company, and the claim is related to their professional role. Under the company’s indemnification policy, the business would cover the CEO’s legal expenses, court costs, and any potential settlements or damages, as long as the CEO acted within the scope of their duties and in good faith.
In another example, if an employee is sued for accidentally causing damage to a client’s property while performing their job, the employee may be entitled to indemnification by the business to cover legal defense costs or settlements.
An example of right to indemnification in action
Here’s how the right to indemnification might be referenced in a company’s bylaws or employment contract:
“The company agrees to indemnify and hold harmless its directors, officers, and employees from any liabilities, damages, or expenses, including legal fees, incurred while acting in good faith on behalf of the company, except in cases of willful misconduct or illegal actions.”
Conclusion
The right to indemnification is a key provision that protects individuals from financial loss when acting on behalf of the business, particularly in cases where legal claims or liabilities arise from their official duties. For SMBs, offering indemnification helps ensure that key personnel are not dissuaded from taking on leadership roles, thereby encouraging responsible decision-making and safeguarding 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.