36 THE NAFCU JOURNAL May–June 2023 Part of a credit union’s day-to-day involves both defending itself from and the filing of lawsuits. From pursuing judgments in general district court to seeking relief from the automatic stay in federal bankruptcy court, credit unions are very familiar with the various stages and levels of litigation. Sometimes, even credit union officials find themselves individually entangled within an adversarial proceeding involving the credit union and a third party. Federally-insured credit unions have the option to choose to indemnify its officials, but that protection comes with some limitations. This article will tackle the circumstances when a credit union may indemnify credit union officials and impermissible indemnification. What is Indemnification? Generally, indemnification occurs when one party contractually agrees to cover the financial losses of another to the benefit of a third party. Indemnification is normally extended to employees who incur losses when working on behalf of their employers for a business-related purpose. If there is such a promise to cover legal liabilities, the employees are said to be “held harmless.” As in any business setting, many legal scenarios arise that can trigger a credit union’s indemnification clause. Some trigger-event examples include, but aren’t limited to: board members being sued for privacy breaches; when an employee COMPLIANCE CENTRAL INDEMNIFICATION FOR THE BOARD OF DIRECTORS By JaMonika Williams, NAFCU Regulatory Compliance Counsel claims wrongful termination from the credit union; or a member claims their civil rights were violated by the actions of an official. Permissible Indemnification NCUA regulations permitfederal credit unions to indemnify their employees from litigation costs. Part 701.33(c) states that: “A Federal credit union may indemnify its officials and current and former employees for expenses reasonably incurred in connection with judicial or administrative proceedings to which they are or may become parties by reason of the performance of their official duties.” Emphasis added. Since a federal credit union’s indemnification policy is essentially a contractual obligation, NCUA mandates credit unions must follow the standards established by the state where the federal credit union’s principal or home office is located or by the Model Business Corporation Act. Determining which standard to follow is found in Article XVI of the model bylaws, shown below: “Section 8. Indemnification. (a) Subject to the limitations in § 701.33(c)(5) through (c)(7) of the regulations, the credit union may elect to indemnify to the extent authorized by (check one). [ ] Law of the State of ________: [ ] Model Business Corporation Act: The following individuals from any liability asserted against them and expenses reasonably incurred by them in connection with judicial or administrative proceedings to which they are or may become parties by reason of the performance of their official duties (check as appropriate). [ ] Current officials. [ ] Former officials. [ ] Current employees. [ ] Former employees.” Further, to help alleviate the financial burden of legal proceedings, some credit unions may purchase insurance policies. Impermissible Indemnification NCUA forbids the indemnification of officials who incur a loss while classified as a dual employee, or perform egregious violations against their fiduciary duties. Dual employees are defined as federal credit union employees who perform work functions for another business entity by virtue of a “sharing arrangement between the federal credit union and the other entity.” An NCUA letter provides a brief example of a sharing arrangement, such as a federal credit union employee selling non-deposit investment products to members on or offsite. In practice, if the shared employee incurs a loss while working for the other entity, the federal credit union may not cover the potential litigation costs and expenses for this employee.
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