Liability insurance and indemnification by the corporation provide protection to an officer or director of a corporation from having to pay out-of-pocket for expenses that arise due to litigation. Indemnification refers to an agreement by the corporation to pay legal fees and other expenses when an officer or director faces a civil claim or criminal prosecution. An indemnification agreement also requires the corporation to pay a settlement or judgment against an officer or director. In some instances, public policy may limit when a corporation may indemnify an officer or director, such as when litigation is based on intentional wrongdoing.
Liability insurance for directors and officers, also referred to as D & O insurance, is provided by third party insurers to provide protection for the corporation and the directors and officers for expenses that arise due to litigation. Most state statutes expressly permit corporations to purchase D & O insurance, although policies are very expensive, potentially costing hundreds of thousands of dollars for larger corporations.