Indemnification is the organization’s direct expression of willingness to protect its board members (and its senior staff) from the financial burdens of liability. The organization makes a financial commitment to rely on its own resources to pay a board member’s legal costs in case he is called as a defendant in a lawsuit relating to his role as a board member.
If the state laws allow indemnification and the organization decides to adopt a policy on this issue, the details of the policy should be outlined in the bylaws.
Implications of indemnification for the organization:
- Existence of a policy may help with board member recruitment.
- The financial capacity of the organization to pay has an effect on its promise to deliver.
- When a payment is due, this commitment may have quite devastating consequences for the budget.
Implications of indemnification for a board member:
- The main caution of indemnification as a protective tool is its limited effectiveness. If there are not enough funds to pay a board member’s expenses, the protection may be minimal or create a false sense of security.