A broker sued by a client
typically has a lot of questions about rights and responsibilities. But none is
more important than: “Who is liable for my defense and for the possible damages
that follow?”
What
we're talking about here is indemnification — essentially, the protection a
firm will (or won't) afford a broker in a legal crisis.
The issues surrounding indemnity can be complex, but a rep in legal trouble
might be pleasantly surprised at the level of protection a firm can provide.
You
Have Rights
Too often, a rep might not
even know that the right to defense or indemnification exists. The right to
defend and indemnify oneself traditionally arises from one of several sources.
A hiring letter or employment contract is the most obvious. Such rights might
also exist in the firm's charter, its by-laws or in an insurance policy. Further, state statutory law
or common law may also provide for indemnity. The right to indemnification
extends to many different areas, including judgments, fines, amounts paid in
settlements and expenses — including attorney's fees related to the lawsuit.
As
a general proposition, there are three types of statutory indemnification for
corporate officers. First, the firm may be required by law to indemnify the
broker. Second, the firm may be permitted by law, but not required, to
indemnify. Or, third, the firm may be prohibited from doing so, regardless of
its intentions or desires.
Moreover,
a broker who is an officer is not automatically entitled to be indemnified for
every act committed while an officer. Generally, the act must be in connection
with being an officer, not merely during the time while a broker is an officer.
The distinction is a fine, but important, one. If a broker is sued for an act
he could have performed without being an officer, the law will not impose an
obligation upon the corporation to indemnify. Moreover, the law prohibits
indemnification by a firm against certain types of acts that the law finds
reprehensible.
What You Give Away
Several practical
considerations also need to be factored in. First, indemnification usually
carries with it some right to control defense. That might mean that the firm
has reserved the right to decide who will represent the broker in any
litigation, and may even elect to have common counsel. The obvious advantage,
of course, is that this practice tends to be a low- or no-cost proposition for
the broker. However, the interests of the firm and broker may not always remain convergent.
Moreover,
the benefits of having the firm pay the costs of any judgment or award can be
illusory. To be sure, knowing that the firm will stand behind the broker and
pay any judgment or award is comforting. But just because someone else pays the
damages does not necessarily mean that the broker has not suffered any loss or
injury. And a firm may well pursue a scorched-earth litigation strategy,
possibly wreaking havoc on the broker's name and reputation in an effort to
minimize the amount it must pay in monetary damage.
In
addition, a broker needs to be careful when entering into any type of
separation, severance or release agreement with a firm upon departure. Drafters
of such documents are most commonly concerned only with getting the broker up
and running again, and with dissolving any restrictions on the broker's right
to do business. But these documents commonly contain broad-based releases that
may affect the right to defense and indemnification after the document is
signed.
Because the law only deals
with indemnification in certain situations, a broker trying to determine
whether his or her firm must indemnify should first determine why he or she is
being sued. A broker does not have to be a current employee of the firm in
order to be entitled to indemnification. However, it is important that the
claim asserted against the broker arise from actions that the broker performed
as an officer of the firm.
Will your firm pick up legal costs?
by Jonathan P. Arfa on Jun. 14, 2013
Summary
A broker sued by a client typically has a lot of questions about rights and responsibilities. But none is more important than: “Who is liable for my defense and for the possible damages that follow?”