DOL Seeks to Void Fiduciary Indemnification

In an April 23 article in the National Law Review, Erin Turley, Allison Wilkerson, Eliot Burriss, Emily Rickard, and Rick Stepanovic observe that the Department of Labor has recently argued in litigation that agreements that indemnify ESOP fiduciaries are void against public policy. Indemnification means that one party, in this case the company sponsoring an ESOP, agrees to compensate another party, in this case the ESOP fiduciary, for losses incurred in connection with the performance of the party's duty. Typical indemnification clauses note that they do not apply to losses incurred because of a breach of fiduciary duty or by bad faith, gross negligence, willful misconduct, or material breach of agreement.

The DOL argues that Section 410 of ERISA prohibits blanket indemnification of ESOP fiduciaries. The authors examine various cases in which this idea has been tested, and note that circuit courts have come to different conclusions about indemnification agreements. In some cases, the DOL has asked for indemnification agreements to be voided as part of settlement agreement. The authors observe that voiding indemnification provisions "can limit defense budgets, make settlements more likely, and potentially create dangerous precedent for ESOPs."