The Principles of Indemnification, and Why Trustees Should Care About It

By Lawrence White    //    Volume 20,  Number 2   //    March/April 2012

You are indemnified if you are sued because of a decision you make as a trustee. What does that mean, and why is it important?

Indemnification is a principle borrowed from insurance law. As explained in The Law of Higher Education (Jossey-Bass, 2007) by William A. Kaplin and Barbara A. Lee, indemnification is the standard mechanism by which a college assumes liability for risks incurred by its trustees. Under an indemnification agreement, the “indemnitor”—for our purposes, the college—agrees to be responsible for defending any lawsuit filed against the “indemnitee”—the trustee—and to pay legal fees incurred by the indemnitee and any judgment or settlement arising from the lawsuit.

Indemnification is insurance against the consequences of being sued. Those consequences are more than theoretical. Within just the past few months, lawsuits have been filed against trustees for approving tuition increases, authorizing construction of campus facilities, terminating an administrator, allegedly failing to prevent sexual harassment, and allegedly contributing to the death of a college football player. The consequences of being named as a defendant in even an insubstantial lawsuit can be formidable. Defense costs can be as high as $250,000, and settlement payments range even higher.

Cognizant of the fact that talented trustees will not serve unless protected against the risk of litigation, virtually every college in the country indemnifies them against lawsuits. That is accomplished either by including an indemnification provision in the governing board’s bylaws or by enacting an institutional indemnification policy.

Trustees are indemnified only if they act within the scope of their duties as trustees. They, for example, would not be entitled to indemnification in actions relating to their businesses or personal lives. Nor would they qualify if the institution determined, after appropriate investigation, that they acted in bad faith or in a manner inconsistent with their fiduciary obligations. Under some indemnification policies, trustees forfeit their entitlement to indemnification if they are ultimately adjudged by a court to have committed negligence or engaged in acts of misconduct in the performance of their duties. A trustee, for example, might be deemed ineligible for indemnification if he or she had a conflict of interest, failed to disclose it, and voted anyway on a matter subsequently giving rise to litigation.

Indemnification involves an exchange of promises between the institution and the trustee.

The institution’s promises to the indemnified board member. Under a typical indemnification provision, the institution pledges to hold the trustee harmless against all financial consequences associated with litigation. The trustee is indemnified against claims asserted in any kind of action (civil, criminal, administrative, actual, threatened, pending, or completed), and for payments in virtually any form (judgments, fines, settlement sums, and lawyers’ fees).

The board member’s promises to the institution. Indemnification policies usually impose specific obligations on an indemnified trustee and reserve specific rights. The institution always retains the right to select counsel for the indemnified party. That party must cooperate with the institution by being available for consultation, providing documents when requested, appearing at proceedings as directed by counsel, and materially assisting in the defense of the lawsuit.

A trustee may always elect to be represented by privately retained counsel (in which case the trustee would bear all costs). If, instead, the trustee applies for indemnification, the institution’s counsel conducts a short investigation to verify that the trustee’s actions were within the scope of duties and were not undertaken negligently or in bad faith. Once the determination is made that all preconditions for indemnification are satisfied, the trustee will be asked to sign a written indemnification agreement. That agreement usually recites that the institution may withdraw indemnification if, during litigation, facts are discovered that would limit or exclude the indemnitee from continued eligibility for indemnification—which, when trustees are indemnitees, virtually never happens.

Think of indemnification as insurance against legal liability arising from your service as a trustee. Like other forms of insurance you purchase—life, homeowners, health—you should derive peace of mind knowing you have coverage.