Indemnification – Huh?

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Has that ever been your response, when reading about indemnification for nonprofits? Simply explained, indemnification is the legal procedure by which a corporation reimburses directors, officers, and other agents for liabilities, expenses, and other losses incurred in the event of a lawsuit or other proceeding.   This important protection should provide great comfort to the organization’s leaders.

Indemnification protection should be detailed in an organization’s bylaws.  Who, what, how, and when a corporation indemnifies are critical questions that need to be addressed.  Unfortunately, many nonprofit boards gloss over these sections and never engage in a healthy dialogue on this critical issue, that is, until a situation arises and the board needs to decide whether or not to indemnify.    

Directors and officers are wise to take time to not only understand the indemnification language in their organization’s bylaws, but also to evaluate together whether it adequately reflects the organization’s position and goals. This evaluation is particularly important for religious institutions, which may have theological aversions to lawsuits between their members.  In addition, the leaders may wish to decide when and how a corporation should indemnify individuals involved in an inter-organizational conflict or other derivative lawsuit.  If a director decides he wants to file a lawsuit against the other directors for mishandling certain matters, should the corporation be required to indemnify that individual director for the expenses incurred in doing so?

Unfortunately, many nonprofits’ bylaws insufficiently address indemnification by either omitting the topic all together, simply reciting the statutory language verbatim, or including only a short provision that states, “the corporation shall indemnify to the greatest extent that the law permits.”  None of these approaches, themselves, reflect a board’s understanding and determination of appropriate indemnification. Take time to discuss indemnification before a claim, lawsuit, or other adverse action arises.  Engage in healthy dialogue on this issue, so that the bylaw language is sufficient and future indemnification decisions may be made more easily and with greater clarity.