Directors and Officers Liability Insurance

Can you operate without it?

Coverage under a Directors' and Officers' Liability Insurance Policy (D&O) has traditionally secured to protect the personal assets of individual directors and officers. Personal liability is created by more than 200 pieces of legislation and a growing body of case law, and it is government's and society's attempt to motivate appropriate corporate behaviour. Though a corporation exists as a separate legal person, it can only operate through the conduct of its directors, executives and employees. If a corporation was liable, or vicariously liable, for all conduct of these individual, and there was no legal or financial risk to the individual, their conduct might not always be in the best interest of the corporation. There is no legal obligation for the corporation to purchase D&O insurance on behalf of their directors and officers, and some corporate investors and owners believe that their directors should be willing to perform their duties without the safety net of insurance. However, the reality is that innocent people, who are acting in the best interest of the corporation and its stakeholders, and are working at the highest level of honesty and diligence, can still be sued, or drawn into litigation, or made the subject of an investigation, at their own cost. Therefore, in order to attract the best candidates for board and executive positions, Directors and Officers Liability Insurance is a requirement for most companies. D&O insurance is also an appropriate use of funds for the corporation because in the event of litigation or investigation involving a director or officer, the insurance coverage will allow the board and management to focus on business concerns and not on their own personal liability.


Directors and Officers Liability - some typical risks and consequences

It is difficult to list or define typical risks and consequences to individuals holding board and executive positions because of there are many different categories of 'stakeholder' who can bring a claim, and statue and common law regarding director and officer liability is vast. Stakeholder claims may include, but are not limited to, 1) the government for unpaid corporate taxes, 2) employees for unpaid wages or for wrongful dismissal allegations, 3) competitors for intentional interference with economic interests or for civil remedies of conspiracy, 4) shareholders for misrepresentation in the prospectus, brought under section s. 130 of the Securities Act, R.S.O. 1990, c. S.5, 5) an industry regulator for failure to supervise management, or directly for fraud, 6) a client for effectively charging illegally high interest rates, 7) a consumer for negligence and breach of fiduciary duty for failing to take reasonable steps to, a) prevent a mining disaster, b) notify of a breach of privacy, c) prevent an ecoli/ listeriosis/hepatitis outbreak, 8) third party suppliers to attempt to cancel 'ab initio' a contract alleging material non-disclosure, 9) pensioners for pension benefit shortfall. Many Canadian claims examples are available on request to support these risk exposures. Claims examples are a great tool to help identify and communicate risk, but they are also a great tool for loss measurement and for risk mitigation and risk control. The primary consequences of these risks are the considerable legal fees, but the greater costs are more difficult to quantify. These secondary costs include, but are not limited to, damage to reputation, lost customer revenue, reduced financing opportunities (and the corresponding higher cost of capital), inability to attract and retain top employee talent, privacy breach notification costs, distraction of management and board personnel.


Directors and Officers Insurance - our insurance packages will protect you

Buying Directors and Officers insurance is not an easy task. In many cases, the insurance premium costs are low enough to suggest this financial product is a readily available or even commoditized purchase that should be based solely on price. Nothing can be further from the truth. Unlike other types of insurance, there is no standard or regulated contract wording, or pricing matrix. There are more than twenty insurance 'providers' of D&O in Canada, and more than fifty difference policy wordings, and hundreds of endorsements that can materially alter the coverage available from that policy. Further, the procurement process, the policy renewal process, and the Claims/Circumstance notice process is integral to value of the policy. Therefore, an experienced, involved and truly independent insurance broker is an absolute must for every D&O insurance buyer, whether large or small, private, public, non-profit or pseudo-Government entity. Because Directors and Officers insurance may be the only protection available to your individual directors, officers or employees for their personal assets, it is your right, if not your obligation, to ask your insurance broker to specifically explain and provide risk/benefit advice on ' continuity of coverage ', extent of ' entity coverage ', ' severability of exclusions and application ', potential for ' limit exhaustion ', ' insured vs insured ' exclusions, 'change in control' provisions, premium financing issues, ' notice provisions ', and ' excess Side-A DIC' coverage. If your broker cannot explain to your satisfaction each of these terms, ask them if someone in their office can. If there is still no satisfactory response, call Mitchell Sandham. Not all insurance companies, insurance policies or insurance brokers are created equal. Please also see our other blog postings for issues regarding Directors' and Officers' liability, Fidelity risk, Professional Liability Insurance, Errors and Omissions Liability and other Enterprise Risk Management Techniques.

Contact Mitchell Sandham Now for a no-obligation quote that will be tailored to meet your specific directors' and officers' liability insurance needs

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