Indemnification is when one party agrees to cover any losses or damages another party might face while doing business. This is important for companies because it protects directors, officers and key employees from having to pay out of their own pockets if they face lawsuits for actions taken in their official roles. This protection allows them to focus on their jobs without worrying about personal financial loss.
However, there are some situations that indemnification doesn’t cover. While most limits usually depend on the specific agreement, it is generally unenforceable for acts that go against public policy. This can include willful misconduct, gross negligence or fraud.
Gross negligence
Gross negligence means showing a serious lack of care or acting recklessly, putting others at risk. It’s more than just a small mistake – it’s a big departure from what a reasonable person would do. For example, if a company executive ignores clear safety rules and someone gets hurt, this could count as gross negligence. In such cases, the indemnification agreement won’t protect them from lawsuits or liability.
Willful misconduct
This involves intentional wrongdoing or actions taken with the knowledge that they are likely to cause harm. It means the person acted with intent to deceive or harm others. For example, if an officer knowingly falsifies financial reports, such conduct will likely fall under willful misconduct.
Exclusions for criminal acts
A person cannot use indemnification to protect themselves from the consequences of their criminal action. These acts typically include:
- Fraud: Intentionally deceiving others for financial gain
- Embezzlement: Misappropriating funds entrusted to them
If a person engages in illegal activities, companies cannot cover their legal expenses or any damages they might owe.
Protect your interests
Disputes can happen when there is confusion about what an agreement covers. If you or your business is facing issues regarding indemnification, seek professional legal counsel. An attorney can review your agreements and explain your rights and obligations under Georgia’s laws.