Indemnification of Directors Indemnification is a method by which the corporation may provide for the expenses of a director accused of misconduct. Under an; indemnification provision, a director may obtain indemnification for reasonable expenses, including • litigation costs and attorney's fees, unless found guilty of actual misconduct or bad faith. The expenses may be borne either from corporate funds or through an insurance policy. Provision for indemnification is usually provided in a state's corporation law. Greenberg reports in 1975 that 48 states had allowance for indemnification statutes, the exceptions being Idaho and Illinois. State provisions may be either elective or mandatory, allowing or dictating coverage. Provision for indemnification must be expressly stated in the corporation charter or by-laws. In drafting an indemnification provision, the following items should be considered: 1. Whether coverage is mandatory or discretionary. 2. What types of suits are covered. 3. What costs and expenses are covered, and to what amounts. · 4. What "persons" are covered: Officers and directors, past directors, heirs and estates, etc. 5. What standard of care is required: "good faith within the scope of authority," "not derelict in performance of duties," "not judged liable for misconduct." 6. Who determines when standard was met: court, board, legal counsel, membership. Liability Insurance Because of the financial limitations of most nonprofit organizations, insurance has become a natural method for providing protective coverage. Recent years have witnessed a burgeoning growth of directors and officers; liability insurance, both for profit and non-profit corporations. Forbes reported that in the period 1963-68 the amount of directors' and officers' insurance written in this country rose from practically nothing to over one billion dollars. Today the amount is substantially higher. Each board liability policy is usually individually negotiated and written to match the Page 20 RAIN Fall 1986 situation and requirements of the organization. Illustrative of the type of coverage and cost is that of a policy for non-profits underwritten by the American Home Assurance Corporation. General provisions of the policy included a requirement that the organizations have been in existence for a minimum for three years: $1,000,000 maximum coverage with five percent shared participation by the organization; and a prepaid premium for the three-year term of the policy. Coverage can generally be considered "expensive" for most non-profits, and rates can only be expected to rise. Summary Liability of the members of boards of directors is an area just coming to the attention of most nonprofit organizations. It will assume increasing importance with the increase in lawsuits against non-profit groups, the increasing scrutiny and regulation of non-profit activities by governments and the courts, and the increased "professionalization" of non-profit organizations. In general, protection from personal liability of a board member is best undertaken through a good faith effort on the part of that director to do a conscientious and careful job for the organization undertaking all management and supervisory activities. The records of the organizations should reflect this conduct. Other protective measures available include indemnification provisions and liability insurance. ti
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