Indemnification: What Every CU Director Should Know

By John Wallace

Volunteer boards of directors have been a pillar of the U.S. credit union movement for 100 years. But in today’s increasingly litigious society, more directors find themselves the targets of lawsuits—possibly putting their personal assets at risk.

To offset this trend, numerous laws allow for indemnification of directors, which reimburses or compensates them if they suffer hurt, loss, or damage.

The conventional thought on indemnification is that it’s necessary to attract qualified board members. Without indemnification, most qualified individuals are unwilling to sit on a board and expose their personal assets.

Traditionally, there have been two types of indemnification: Permissive and mandatory.

Permissive indemnification provides the organization the power, but does not impose a duty, to indemnify its directors and officers. Therefore, the directors have the discretion to determine indemnification on a case-by-case basis.

In short, this means once a director is named in a suit, the rest of the board will determine if he gets indemnified. An advantage to this approach is that a board is unlikely to indemnify someone who is clearly guilty.

However, applying permissive indemnification in a suit against a board member often divides a board, and the decision to indemnify becomes emotional and with little basis of logic. In addition, with almost absolute certainty, if a director is not indemnified, he or she will file a suit against the rest of the board seeking indemnification and alleging unfair dealings, breach of fiduciary duty, etc.

According to the book, “Directors and Officers Liability,” by John Mathias, mandatory indemnification provisions, on the other hand, require the corporation to automatically indemnify the director or officer.

Mandatory indemnification is more likely to protect a director’s personal assets. Ultimately, indemnification is allowed by various federal, state or case law.

To receive indemnification, it must be expressed in any of the following, depending on the applicable federal, state, or case law:
* The bylaws of the organization;
* The articles of incorporation;
* A board resolution; or
* A contract between the director and the organization (commonly referred to as contractual indemnification).

There is some question as to how law would react to an indemnification contract that contradicts the credit union’s bylaws. Therefore, it is important to consider how these interact if you have contractual indemnification agreements and to address indemnification in other sources, such as your bylaws.

Here is a personal indemnification checklist every director should review:
* I have mandatory indemnification (or I understand the reasons why I have permissive indemnification).
* My bylaws, board resolution, contract, or articles of incorporation clearly define the law under which indemnification is derived, and I understand any limitations to indemnification provided by that law.
* I have indemnification to the maximum extent allowed.

As a credit union director or officer, fully understanding your credit union’s indemnification policy and insuring you’re covered will help protect your personal assets—and possibly help you sleep a little better at night.

These recommendations are not intended as legal advice, and you are encouraged to contact your attorney to address your specific situation.

John Wallace is the product executive for CUNA Mutual Group’s Bond and Management & Professional Liability insurance products. Contact him at 800-356-2644, ext. 7151.