Directors’ and Officers’ Indemnification

Many D’s & O’s, (trustee, advisory board members, committee members, etc.) make the assumption they will be indemnified in the event of a lawsuit, and some rely entirely on the protection under statute, or their corporate bylaws.

Indemnification language can be found in the OBCA, CBCA, other legislation or specific Acts (eg. Insurance Companies Act, etc. which may trump other statute), corporate bylaws, and the D&O insurance contract. The problem is there is no consistent wording and in many lawsuits the assumed ‘standard’ wording has failed directors and officers, leaving them personally liable for significant costs.

Therefore, I urge directors and officers to consider arranging individual contractual indemnities, using the advice of a lawyer, and negotiate the appropriate insurance coverage.

Here are some examples of indemnification wording failure:

1. Bylaws can be changed by the corporation without the knowledge/decision of the individual (as long as litigation involving the trigger of the indemnity has not started), either while holding their position (because they missed the meeting and didn’t review their minutes or because they were overruled by a majority of the board) or after they have retired (with no obligation to inform a former director or officer.)
2. Some Bylaws and/or Acts use ‘may’ indemnify wording rather than the stronger ‘shall’ indemnify wording,
3. Bylaws and/or Acts are more vague than an individual contractual indemnity,
4. Certain Acts block corporate indemnification for certain types of claims (ie. claims brought by a regulator or trustee, derivative actions, pollution or bankruptcy),
5. Bylaws and Acts don’t always stipulate the trigger of defence cost obligations and may result in reimbursement or advancement, but not Pay-On-Behalf, leaving the director or officer with a very big debt,
6. D&O Contracts almost always use a ‘presumptive indemnification’ wording (not always easy to find in the policies), where the insurer presumes the corporation will provide indemnification and if the indemnification is not forthcoming the corporate deductible will be applied (which can be from the thousands of dollars to the millions of dollars, and remember the deductible only applies to the ‘covered’ portion of the lawsuit)  which could leave the director or officer with unfunded defence cost or even settlement obligations, while at the same time having to fund lawsuits against his/her corporation and insurance company (don’t forget, looser pays in Canada, and Insurers and Corporations can quickly incur very large defence costs),
7. With Informal Investigations, Inquiries or Request for Interviews, increasing in popularity many D&O policies, bylaws and statues have not been written to consider these (arguably) voluntary costs, and there may be a gap in the funding for theses expenses. However, I don’t recommend that any person agree to such a proceeding without legal representation.

This whole issue can be further complicated by the growing trend of ‘contracting out’ for officer or director/advisor positions because none of the traditional avenues of indemnification have contemplated this trend.

But ‘supportive presumptive indemnification’ and/or improved ‘advancement of defence costs’ language can be negotiated into the D&O insurance policy and individual contractual indemnities are becoming much more common.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com

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