Are You Indemnified? Don’t Be So Sure.

24 January 2014 Labor & Employment Law Perspectives Blog

The San Antonio Court of Appeals limits an executive indemnity provision that the parties intended to “provide as broad an indemnity as possible.”

Most executives assume that they won’t be on the hook personally for acts committed in their corporate capacity.  This assumption is based on good reason: executive employment contracts routinely require the company to pay the bill if its executive is sued for acting on the company’s behalf. Or, perhaps more accurately, such contracts appear to require the company to pick up the tab.

As it turns out, these executive indemnity provisions often aren’t as comprehensive as they appear.  For example, it’s long been the rule that to indemnify an executive for her own negligence or gross negligence, you have to say so expressly. As a result, a contract that says “we will indemnify you for everything” won’t prospectively indemnify an executive for negligence. When this “express negligence doctrine” kicks in, executives who thought the company had their backs must satisfy judgments on their own.

Last month the San Antonio Court of Appeals delivered yet another reminder of the narrow construction given to executive indemnity provisions (and a reminder to executives to double-check the terms of theirs).

The case, Hamblin v. Lamont, 04-12-00852-CV (Tex. App.— San Antonio, no pet. h.), involved a seismic map depicting gas reservoirs. The executive seeking indemnity misappropriated the map on behalf of his company and was found liable for two business torts: misappropriation of trade secrets and tortious interference with a contract. 

The executive’s indemnity agreement provided:

It is the intention of the Parties . . . to provide as broad an indemnity as possible and all ambiguity as to whether [the indemnitors] owe the duty of indemnity shall be resolved in favor of providing indemnity/indemnification.

According to the court, “as broad an indemnity as possible,” fell short of the “express” indemnity required for intentional torts (and for negligence and gross negligence as well). As a result, even though the executive took the map in his capacity with the company, he had to pay the judgment out of his own pocket. 

The court also speculated (but did not hold) that even if the contract’s language was broad enough to indemnify against intentional torts, public policy might not permit such indemnification.  In a dissenting opinion, Justice Martinez said that she would have construed the contract to indemnify the executive, and in her view, public policy wasn’t an obstacle. A motion for en banc reconsideration is pending.

The story has two morals.  First, agreeing to the “broadest possible indemnity” can potentially result in the narrowest. To avoid this result, executives need to negotiate the exact scope of their indemnification and get the specifics in the contract. In particular, indemnities for torts, negligence, and gross negligence have to be expressly stated. 

Second, even express indemnification may not protect an executive from certain liabilities. In particular, whether public policy allows indemnities for gross negligence and intentional torts remains an open question in Texas. In the meantime, a surefire guarantee not to receive indemnification is failure to put it in the contract expressly.

So, when’s the last time you dusted off the indemnity agreements in your life? It’s never too late to check the scope of your coverage. (That is, until it actually is too late.)

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