Protecting Directors from Personal Liability: Guest Opinion
To excel in today’s competitive environment, boards must be willing to make bold decisions. However, bold decisions can be risky, particularly for directors worried about protecting their personal assets. Directors should feel comfortable being decisive without the threat of litigation hanging over their heads.
Most credit unions offer group liability insurance to their directors and officers to protect them from civil liabilities. In addition, many credit unions have indemnification provisions in their policies. These are good tools. Unfortunately, under certain situations, these practices may not be enough.
When directors and officers are no longer in office, group liability insurance and indemnifications policies may fail to protect them. Under a change-of-control situation, the liability insurance may be cancelled for outgoing directors. A change of control can occur with a merger, regulatory action or removal of the directors by the members. This is important because in many states, a director’s liability for decisions could extend up to a statute of limitations.
Whether voluntary or through an ouster, directors are not off the hook when they leave a credit union. Former directors may still face civil liability for decisions they previously made. We have seen lately that directors may be sued personally for their actions by a variety of plaintiffs. The plaintiffs can be disgruntled members, merging credit unions, regulators or third-party vendors. The claims for personal civil liability are often alleged in litigation where directors are believed to have breached their fiduciary duties. These claims can include accusations of conflicts, corporate waste, regulatory noncompliance and exercising bad judgment.
It is important to understand this is not an issue about right or wrong. Any director can be sued in a civil process, regardless of whether a wrongdoing took place. The plaintiff need only show a good faith belief that he is entitled to relief from the director. In any event, the director will face legal expenses for a defense against a possibly meritless claim.
One remedy to this dilemma is to put these liability protections directly in the hands of your directors and officers. As a first line of defense, credit unions should consider purchasing separate individual liability insurance policies for its directors and officers from your bond and liability insurance provider. Written in the individual names, these insurance policies cannot be subsequently cancelled by a group that has taken control of your credit union. In these circumstances, the individual policies extend benefits beyond the group policy. The credit union may pay the premiums for the individual policies just as it does for the group policy.
The cost for individual liability insurance policies can vary. The insurance premium depends on the coverage amount, the underwriting and the terms of the policies. In some instances, the individual insurance acts as a drop down policy. This means the individual insurance covers the gap left by the group policy. If the group policy is cancelled, the individual policy provides a measure of protection for each separable director.
Individual insurance policies are not just for directors. Staff officers and supervisory committee members may also benefit from this extra protection. Thinking broadly, a credit union should consider who in their organization is exposed to potential civil liability.
The second way credit unions protect their directors and officers is to offer indemnification for legal expenses. Credit unions realize their officials may be the target of lawsuits. Many credit union state in their bylaws and policies that they will reimburse directors for the cost of defending themselves in a lawsuit. Like liability insurance, indemnification policies can be revoked after a director leaves office.
Directors and officers are better protected if the promise to indemnify is put in a written contract. A written contract is binding and compels the credit union to make good on its commitment. If the credit union comes under the control of another group, it can be held to its promise to indemnify former directors and officers. Directors will rest better knowing that if a change in control takes place, they have an irrevocable guarantee.
There is a compelling corporate governance reason for protecting directors and officers from personal liability. Recruiting and retaining top talent is not just an issue for employees. Credit unions need astute and knowledgeable directors as well. For this reason, credit unions should up their game to become attractive places for prospective business leaders where they can operate to the best of their abilities.
Attorney Maurice R. Smith is president/CEO of the $1.3 billion Local Government FCU of Raleigh, N.C.
(919) 755-0534 or firstname.lastname@example.org