However, in most states there are limits on indemnification. For example, in most states indemnification is precluded if a court finds a director did not act in good faith or in a manner reasonably believed to be in the best interests of the corporation. Some states preclude indemnification in a derivative action if the liability involves negligence or misconduct by the director in the performance of a duty to the corporation. Most states laws do not prohibit insurance giving broader coverage of officer liability than permitted by indemnification. By reviewing and comparing coverages of the insurance products of different insurers, officers can usually find this broader coverage at reasonable rates.
Most states laws permit broader protection by insurance than by corporate indemnification.
Insurance will provide greater protection in derivative actions brought by or in the name of the corporation. Many boards, as well as members of senior management, are not aware that the business judgment rule under most state corporate statutes does not protect officers. Unless their employment agreements otherwise provide, officers are liable for negligence directly to their corporate employers as well as derivatively to their shareholders.