“Indemnification” is an agreement to pay back a person's losses and expenses after the conclusion of litigation. “Advancement” is an agreement to pay attorneys' fees and litigation costs while the litigation is happening; it is an “advance,” a loan, against a future indemnification right. Although the two concepts are intertwined, they are different.  If an agreement requires indemnification, but not advancement, the person (referred to as the “indemnitee”) could need to await the conclusion of the litigation before they have a contractual right to receive payment of litigation expenses. This means that the indemnitee could have substantial out-of-pocket costs during litigation, and would bear the risk that the indemnifying party has sufficient assets at the litigation's end to pay its indemnification debt. Litigation is expensive and indemnitees often do not want to hold this bag.

Although business entity statutes and operating/partnership agreements frequently provide for indemnification of managers and members for liabilities they incur in the course of the entity's business (see, e.g., Colo. LLC Act section 7-80-407), several courts have held that indemnification and advancement are distinct legal rights and that indemnification language does not mandate advancement.  See, e.g., Majkowski v. American Imaging Management Services, LLC, 913 A.2d 572 (Del. Ch. 2006); Downs v. Rosenthal Collins Group, LLC, 895 N.E.2d 1057 (Ill. App. 2009). Since advancement and indemnification are distinct, an agreement can provide for advancement whether or not the recipient will eventually be indemnified. See, e.g., Ficus Investments, Inc. v. Private Capital Management, LLC, 872 N.Y.S. 93 (2009).

The moral of the story. First, make sure agreements such as LLC operating agreements and partnership agreements, contain thoughtful manager and member/partner indemnification language. Second, recognize that, without more, an indemnification obligation generally may not create an advancement obligation. Third, when representing a potential indemnitee, recognize that litigation costs frequently are substantial and that they likely should be shifted to the entity during the litigation. Fourth, recognize that entities frequently will want their managers to be able to withstand the costs of litigation in order that the entity itself is protected; thus, in my experience, advancement discussions are more informational than adversarial. Fifth, draft good advancement language, which will generally recognize that there is an “advance” such that the funds need to be repaid to the entity in the event the person receiving the advance is not ultimately entitled to indemnification (unless, of course, the advancement right is entirely decoupled from indemnification).