Why Purchase Directors' and Officers' Insurance?
Even if the company has agreed to indemnify the director for liability arising from his or her official duties, there are instances in which the company's indemnification will not be sufficient. These include situations in which the company goes bankrupt, is dissolved, or just lacks the funds to pay the claim. Even if the company has insurance for its officers and directors, such a policy may not apply if the company is the party suing the director. In addition, a company may reverse its policy to indemnify after the potential for liability exists. The company's insurance may also not indemnify a director once he or she ceases to serve as a director.
A very important point is that a promise to indemnify may not be a promise to defend. This means that the director or officer may be forced to defend the action, pay attorney fees, and pay the judgment before the company is obligated to reimburse him or her for those payments.
Also, most companies will not indemnify an officer or director who has been found to have acted in bad faith or received an improper personal benefit. These reasons might allow the company to deny indemnification.