Academic journal article American University Business Law Review

To Indemnify or Not to Indemnify? When Cco Insurance Is the Answer

Academic journal article American University Business Law Review

To Indemnify or Not to Indemnify? When Cco Insurance Is the Answer

Article excerpt

INTRODUCTION

A recent survey by the American Association of Bank Directors found that over the prior five years, 24.5% of banks had directors or prospective directors resign, refuse to serve on committee, or refuse to become a director for fear of personal liability.1 This fear is something that Chief Compliance Officers ("CCOs") live with on a daily basis; particularly due to the government's recently increased interest in holding individuals accountable for corporate misconduct.2 Most corporations indemnify highlevel officers and directors, which provides these individuals with legal and financial security when investigations against the corporation arise.3 While it seems logical that a CCO would be a member of this high-level group, that is simply not always the case. Instead, CCOs are often leveraged by the corporation at the request of the government for a more lenient punishment for the corporation or its other high-ranking officials.4 Thus, the CCO becomes an easy scapegoat for the corporation to offer to the government when things go wrong.5 So where does this leave CCOs when they are left holding the bag for the corporation's actions? How can CCOs be expected to mount a successful defense when the corporation has decided to abandon their cause?

This Article examines those instances in which corporations refused to indemnify CCOs and explores the remaining options for CCOs facing individual liability. There are three options for CCOs to consider when negotiating with their employers to reduce their risk of individual liability. First, the CCO can be added to the C-Suite due to the inherent risks and responsibilities associated with the CCO's role. Inclusion in the C-Suite would then allow the CCO to make use of the corporation's indemnification policies to mount his or her defense. Second, if corporate indemnification is not an option, the CCO should be able to negotiate his or her employment agreement to include personal insurance that would cover the costs associated with defending the CCO if suit arises. Finally, insurance providers should create a package for CCOs to purchase that is specifically tailored to the needs of CCOs for when the corporation refuses or is unable to pay for the CCO's legal defense. Ultimately, the CCO's role is becoming an essential part of a corporation's operation; therefore, these individuals should be treated with the respect and legal insurance that they deserve.

II. WHAT IS INDEMNIFICATION?

Corporate indemnification is "the act of a corporation compensating one or more of its directors, officers, employees, or agents for liability they have personally incurred due to actions they took in their official capacities with the corporation."6 Typically, employees must meet three conditions before becoming indemnified.7 First, the employee must be named as a defendant in the lawsuit "by reason of" his or her employment title at the corporation.8 Second, the employee or officer must have been acting in good faith when the action alleged in the lawsuit was performed.9 Finally, the corporation must reasonably believe that the employee or officer was acting in the best interest of the corporation when the actions alleged in the suit took place.10 While most states permit corporations to indemnify their directors and officers, a small number of states explicitly require that certain officers be indemnified.11 Therefore, the decision to indemnify an officer or employee largely rests with the individual corporation and is generally prescribed in each corporation's governing documents.12

A. Delaware Indemnification Law

Over a million businesses are incorporated in Delaware and this includes more than fifty percent of all publicly traded companies in the United States and more than sixty percent of all fortune five hundred companies.13 Therefore, when assessing indemnification protocol, it is best to look at the Delaware Code for analysis because it is the leading home for American corporations and most states follow the corporate laws that Delaware sets forth. …

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