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Serving on a corporate board of directors is a privilege that comes with personal exposure and risk or liabilities. Directors can be named individually in lawsuits alleging breach of duty, mismanagement, or securities violations.
For this reason, directors, board administrators, and officers need to take steps to protect themselves from personal financial loss if claims are made against actions they took in good faith while serving the company.
This guide explains what indemnity agreements are, why boards need them, and how they differ from board of directors insurance — so you can ensure your board’s protections are complete.
What is an Indemnity Agreement?
An indemnity agreement is a contract between two parties, in which one party agrees to reimburse the other for any losses or damages that may occur as a result of their action (or inaction). Examples of such contracts are contractor agreements, employment contracts, and business transactions.
The agreement may also include provisions for reimbursement of legal fees and costs incurred when defending against any claims or class action lawsuits. An indemnity agreement is typically used when two parties enter into a business relationship and need to protect each other from any potential losses or liabilities.
For example, a business may enter into an indemnity agreement with its supplier to protect itself from any losses that may be incurred if the supplier fails to deliver the promised goods or services.
In corporate governance, signing an indemnity agreement can protect the board of directors from facing liability for legal claims and damages related to their service. It is often a part of the operating agreement, which is signed when the company is established.
Keep that work inside your governance record, not a public chatbot.
Indemnity Agreement vs. D&O Insurance: Key Differences
While indemnity agreements and Directors & Officers (D&O) insurance serve to protect board members from personal financial loss, they operate differently.
An indemnity agreement is a direct promise from the company to reimburse directors or executive leadership for damages resulting from actions taken in good faith while performing their duties. D&O insurance protects the personal assets of directors and officers in case they face lawsuits for alleged wrongful acts in their professional capacity. D&O insurance is provided by an external insurer.
As part of the indemnity agreement, the company reimburses legal fees and settlements only if it has the funds to do so. With D&O insurance, the D&O provider reimburses the protected party according to the policy limits.
Here is a clear comparison breakdown:
Feature | Indemnity Agreement | D&O Insurance |
What is it? | A contract where the company promises to protect and reimburse a director or officer | An insurance policy that covers directors and officers against certain lawsuits |
Who provides it? | The company | A third-party insurance agency |
Who pays? | The company pays legal fees and settlements. | The insurer pays, up to policy limits. |
When does it apply? | When the company agrees the director acted in good faith while doing their job | When the company can’t or won’t identify – like during bankruptcy or certain conflicts |
Any limitations? | Only works if the company has money and chooses to honor it | Only pays for claims that fit within the policy and its exclusions |
What does it cover? | Legal costs, settlements, and judgments for actions done in good faith | Similar claims, but subject to policy limits and approval |
What does it exclude? | Fraud, intentional misconduct, or personal gain | Fraud, intentional acts, or claims not covered by the policy |
How long does it last? | As long as the agreement remains in place – often even after leaving the board | Policy renews annually and must stay active to keep coverage. |
What is it best for? | Personal protection backed directly by the company | Extra layer of protection if the company can’t pay |
What’s the bottom line? | The company promises to protect you. | The insurer pays when the company can’t. Both are needed for full coverage. |
Key Provisions of an Indemnity Agreement
When drafting an indemnity agreement, outline the key provisions. They include:
Advancement of Expenses
An effective indemnity agreement must specify how and when the company will advance legal expenses to directors or officers involved in a claim. The goal is not to burden the board members with defense costs during legal proceedings.
In most cases, the indemnitee agrees to repay those expenses if, at a later date, the court determines that indemnification wasn’t applicable.
Exclusions
The indemnity agreement must also define what situations are not covered. Common exclusions include cases involving:
- Fraud
- Intentional misconduct
- Breach of contract
This protects the indemnitor from covering actions taken in bad faith or outside the scope of official duties. The company must review exclusions to make sure they aren’t in conflict with corporate policies, such as confidentiality agreements or employment contracts.
Procedural Rights
This section outlines the process of handling indemnification claims. It usually describes:
- Notice requirements
- Defense arrangements
- The rights of both parties during legal proceedings
For example, the company may reserve the right to select counsel or participate in settlement decisions.
Best Practices for Boards and General Counsel
Clear indemnity protections help streamline risk management. To safeguard directors and officers, general counsel should:
- Review indemnity agreements annually or when making major legal or governance changes (whichever comes first)
- Align corporate bylaws, operating agreements, and the indemnification clause
- Coordinate indemnity terms with D&O insurance policies (to close any coverage gaps)
- Maintain accurate and accessible records (keeping signed copies of indemnity agreements for all current and former directors and officers).
- Offer awareness consultations (to help indemnitees understand their rights and obligations according to the indemnity agreement)
- Consult external counsel (to confirm that indemnity and insurance arrangements reflect best practices in corporate governance )
The board cannot just sign an indemnity agreement and forget about it. Such contracts require regular updates and maintenance.
How to Write an Indemnity Agreement
When writing an indemnity agreement, you can take advantage of a template (provided below) and adjust it according to these instructions:
1. Consider the Indemnity Laws in Your State
Indemnity laws vary by state. Some states impose limits on how far a company can go in protecting its directors or officers, especially in cases of negligence.
You must review these laws to make sure the agreement you create is enforceable. This may require legal advice.
2. Draft the Indemnification Clause
The indemnification clause defines when and how one party will compensate the other for losses and legal fees. This section should outline what actions are covered and confirm that indemnification applies only when the indemnitee acted in good faith and in the best interests of the company.
3. Outline Indemnification Period and Scope of Coverage
Specify both the duration and the scope of the protection offered. The indemnity should apply to all acts performed during the director’s or officer’s service. It can continue for a certain period after they leave the board.
The scope should include legal expenses, settlements, and other reasonable costs.
4. State Indemnification Exceptions
Every indemnity agreement must include a list of exceptions. Traditionally, the indemnification will not apply if the individual:
- Acted in bad faith
- Committed fraud
- Obtained personal benefit from wrongful acts
The list may depend on special circumstances outside the company. It should also align with broader company policies.
5. Draft the Settlement and Consent Clause
This clause describes how settlements and legal decisions will be handled. It should clarify whether the company must approve any settlement before it is finalized and outline how consent will be obtained.
This prevents one party from making binding decisions without proper communication.
6. Draft Enforcement Procedures
This section describes how disputes about indemnification will be resolved. This may cover arbitration, mediation, or court jurisdiction. It can also describe who will bear the legal costs of enforcement.
Indemnity Agreement Template
Disclaimer: This sample is provided for general information only and does not constitute legal advice. Corporations and directors should consult qualified counsel before using or modifying any agreement.
This Indemnity Agreement (“Agreement”) is made on [Date], by and between:
[Company Name], a [State] corporation (the “Company”),
and
[Director/Officer Name] (the “Indemnitee”).
- Purpose
The Company wishes to indemnify and hold harmless the Indemnitee against certain claims and expenses that may arise from serving as a director or officer of the Company.
- Indemnification
The Company agrees to indemnify the Indemnitee to the fullest extent permitted by law against all expenses, judgments, fines, and settlement amounts reasonably incurred as a result of any action, suit, or proceeding related to the Indemnitee’s role with the Company – provided the Indemnitee acted in good faith and in the best interests of the Company.
- Advancement of Expenses
The Company shall advance legal expenses as they are incurred, upon receipt of:
- A written request, and
- An undertaking by the Indemnitee to repay such amounts if it is later determined they are not entitled to indemnification.
- Exclusions
Indemnification shall not apply to matters where a final court judgment establishes that the Indemnitee:
- Acted in bad faith or engaged in intentional misconduct, or
- Derived improper personal benefit.
- Notification and Defense
The Indemnitee shall notify the Company promptly of any claim. The Company may assume the defense, provided it uses counsel reasonably acceptable to the Indemnitee.
- Duration
This Agreement applies to any claim arising from acts performed during the Indemnitee’s service and continues after the Indemnitee ceases to hold office.
- Governing Law
This Agreement shall be governed by and construed in accordance with the laws of the state of [State].
- Entire Agreement
This document constitutes the entire agreement between the parties on this subject and may be amended only in writing, signed by both parties.
Getting Started with OnBoard
Creating an effective indemnity agreement is key to protecting board members from significant financial and legal damage. The provided instructions and templates can help you create an agreement to fit your company’s requirements.
However, signing an indemnity agreement is only one piece of the puzzle. You also need to ensure your board governance framework is strong enough to stay proactive in mitigating liabilities.
That’s where OnBoard comes in.
OnBoard is a secure, intuitive platform where administrators, directors, and company officers can manage board materials and monitor compliance. It includes features such as:
- Agenda Builder: Helps organize and distribute meeting materials
- Minutes AI: Automates the capture and drafting of accurate meeting minutes.
- Secure Document Sharing: Protects sensitive board documents with encryption and controlled access.
- Voting & Approvals: Facilitates secure decision-making.
- Meeting Analytics: Leverages artificial intelligence in the boardroom to highlight potential risks and key decision points.
Ready to see how OnBoard can improve your board’s governance? Request a free trial today.
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About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
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