When can a corporation never indemnify a director? Understanding liability to the corporation.

Indemnification in corporate governance is one of those topics that sounds dry until you see it in action. Think of it as a safety net for directors—payments for legal fees, judgments, and settlements that come up while they’re doing their job for the company. But like any safety net, there are strings attached. One of the clearest rules is a hard stop: a corporation can never indemnify a director who has been held liable to the corporation itself. Put another way, when a director is found to have harmed the company, indemnification should not shield that liability. Let’s unpack what that means in practice and why the rule exists.

A quick map to the answer

If you’re staring at a multiple-choice question like the one below, here’s the straightforward takeaway:

Under what condition can a corporation never indemnify a director?

• A. When the director resigns

• B. When the director has been held liable to their own corporation

• C. When the director is acquitted

• D. When the director wins a lawsuit against another party

The correct answer is B: When the director has been held liable to their own corporation.

Let me explain why that’s the boundary line.

Why indemnification exists—and why it stops short

Indemnification is built to protect directors from the financial burdens of defending themselves when they act in good faith, or at least within the scope of their duties. The core idea is to encourage directors to take crucial risks for the company without fearing crippling personal liability for every misstep.

But there’s a fundamental tension: a director’s duties include loyalty and care toward the corporation. If a director breaches those duties and the breach exposes the corporation to harm, allowing indemnification to cover that liability would be like rewarding the very conduct the governance framework is designed to deter. That’s why, when a director is found liable to the corporation, indemnification is not available to shield that liability.

In plain terms: indemnification is a shield for expenses and certain liabilities incurred in the course of duty, not a blanket cover for actions that harm the company. If the court or a finding shows misconduct or breach that makes the director liable to the corporation itself, the safety net isn’t extended.

What happens in the other scenarios?

Let’s walk through the other choices and see why they don’t automatically block indemnification. Keeping the focus on real-world dynamics helps.

• A: When the director resigns

Resignation doesn’t automatically erase the past. If the director incurred legal expenses defending actions taken while still a director, those costs can often be covered, provided there’s no finding of liability to the corporation. In some cases, indemnification may still apply to actions taken before resignation, unless there’s misconduct established that precludes it. So, resignation isn’t a blanket bar on indemnification.

• C: When the director is acquitted

Acquittal signals the absence of criminal liability; it’s easier to justify indemnification for expenses incurred in defense, since the director wasn’t found at fault. Even in civil cases, if the director isn’t found liable to the corporation, indemnification may still be appropriate for defense costs or settlements that don’t amount to a liability to the company. Acquittal or a finding of no liability keeps the door open for indemnification.

• D: When the director wins a lawsuit against another party

Winning against another party doesn’t automatically touch the director’s duties to the corporation. If there’s no liability to the corporation for that director’s actions, indemnification can be appropriate for the expenses of the litigation. The key is whether the director’s conduct implicated the company’s interests or breached fiduciary duties owed to the corporation. If not, indemnification can proceed.

Two layers of protection: statutes and policies

Most jurisdictions give governing bodies room to shape indemnification through statutes and corporate by-laws, and many boards also carry directors and officers (D&O) insurance to cover many kinds of claims. The essential rule remains: indemnification is about protecting the director from expenses when their actions align with the corporation’s interests or are at least exonerated on the merits. It’s not a free pass for harm to the company.

Delaware, MBCA, and the practical backdrop

In the U.S., many corporate matters hinge on state law. Delaware law, which governs a huge slice of corporate practice, typically permits indemnification for expenses in connection with defense of claims. The catch is that you can’t indemnify a director for liability to the corporation arising from breach of duties—loyalty, care, or good faith—unless a court approves or a contract or policy provides otherwise. The Model Business Corporation Act and other state frameworks echo that line: indemnification exists to cover the grey area of defending and resolving disputes, not to absolve proven breaches.

The governance takeaway

What this means for boards and directors is practical and straightforward: when you’re building policies around indemnification, create clear carve-outs for liability to the corporation. That clarity protects the company and preserves the integrity of the governance framework. It also helps avoid sticky situations where a director’s personal interests clash with corporate interests and the line between indemnifiable protection and accountability becomes blurry.

How this lands in real life

• D&O policy design: Most boards pair indemnification with D&O insurance so directors aren’t left unprotected in the ordinary course, while still respecting the core rule that liabilities to the corporation aren’t indemnifiable. Insurance may pick up defense costs, settlements up to policy limits, and similar items, depending on the policy language.

• Board policy language: In-house counsel often drafts indemnification bylaws that specify who qualifies, what expenses are covered, and under what circumstances indemnification is available. Clear language helps prevent disputes when a director’s conduct is under scrutiny.

• Governance culture: The rule isn’t just about dollars and fees. It reinforces accountability. Directors know: if the company proves a breach causing harm, indemnification won’t mask that fault. That clarity helps maintain trust among shareholders, employees, and external stakeholders.

A few practical takeaways for those studying corporate law

• Remember the boundary: indemnification is a shield for defense costs and certain liabilities incurred while serving the corporation, but not for amounts due because the director harmed the corporation.

• Distinguish liability to the corporation from liability to others: the former blocks indemnification, the latter may not.

• Look for policy language: many modern boards rely on by-laws and D&O insurance to manage the practical side of indemnification. The exact terms matter a lot.

• Consider the timeline: what the director did while in office and how a claim arises can affect whether indemnification is available.

• Don’t forget ethics and duties: fiduciary duties aren’t optional add-ons. They’re the backbone of why this rule exists in the first place.

A quick mental model you can carry

Picture indemnification as a corporate safety net for the kinds of costs that come with doing the tough work of governance. The net is there to catch you if you trip while acting in the company’s best interests. If your misstep turns into a fault that hurts the company, that’s when the net can’t save you. The moment the finding is that the director was liable to the corporation, the net’s purpose is defeated.

A closing thought

If you’re mapping out the terrain of corporate governance, this rule provides a clear landmark. It keeps the system oriented toward accountability while still offering protection and support where it’s warranted. The balance isn’t flashy, but it’s essential for healthy governance, steady leadership, and, ultimately, stakeholder confidence.

If you’d like, I can help connect this rule to real-world cases or draft a concise checklist for evaluating indemnification provisions in a company’s bylaws or insurance policies. It’s one of those topics that makes more sense once you see it applied across a few scenarios, rather than just reading the statute in isolation.