Directors & Officers Liability

While a company is legally permitted to cover the costs incurred as a result of personal liability stemming from activities performed on behalf of the company, this ability, called indemnification, (dealt with in the by-laws of the company) may not apply to every situation. In some cases, the liability is the sole responsibility of the director or officer or other insured.

D&O insurance is intended to:

  1. protect the personal assets of the individual director or officer, where they are
    not indemnified under the company’s by-laws.
  2. indemnify the corporation for its own responsibilities under the by-laws to indemnify
    (where permitted) its directors and officers for expenses or losses incurred by them.

Policies are also often extended to:

  1. indemnify the corporation itself where its has responsibility apart from the directors and
    officers (not all policies automatically cover the “entity.”).
  2. protect directors or officers who are serving at the organization’s request or direction on
    other boards (outside D&O).
  3. protect directors and officers in addition to the “entity / corporation” for personal liability
    relative to employment practices claims.
  4. protect other employees that are sued for alleged wrongful acts in addition to the directors
    and officers and the entity.
  5. provide penal defense costs for certain successfully defended cases.
  6. provide fiduciary liability coverage (pension trust legal liability).
  7. provide employee benefits E&O coverage.
  8. provide professional services coverage for lawyers and accountants

In addition:

  1. “Side A” coverage is sometimes issued to protect the directors and officers personally as a
    separate coverage, with no corporate reimbursement section or entity coverage so that the
    policy cannot be appropriated by a receiver for the benefit of creditors as a whole.

Directors and officers can be sued by:

  1. the entity itself or by;
  2. other current or former directors and officers,
  3. employees,
  4. shareholders,
  5. investors,
  6. lenders,
  7. vendors,
  8. customers,
  9. competitors,
  10. various government officials,
  11. the CCRA,
  12. consumer groups, and
  13. many other third parties.

There are generally two types of actions for D&O lawsuits:

Derivative suits by shareholders or members suing for poor performance, incompetent management, mistakes, bad judgment, etc. Non-Derivative suits from all other parties, particularly employees.

FEDERAL & PROVINCIAL STATUTES that deal with responsibilities of directors and officers include:

1. Bank Act
2. Bankruptcy Act
3. Canada Deposit Insurance Companies Act
4. Consumer Protection Act
5. Loan and Trust Corporations Act
6. Real Estate and Business Brokers Act
7. Competition Act
8. Excise Act
9. Income Tax Act
10. Unemployment Insurance Act
11. Corporations Tax Act
12. Canada Business Corporations Act
13. Retail Sales Act
14. Securities Act
15. Pension Benefits Act
16. Personal Information Protection and Electronic Documents Act
17. The Wage Earners Protection Program Act
  • Merger and Acquisition disputes
  • Financial Performance, bankruptcy
  • Executive compensation
  • Stock or public offerings
  • Conflict of interest
  • Inadequate or inaccurate disclosure
  • Financial Reporting

This form of insurance fills some of the gaps left by CGL, Umbrella and D&O policies.
This type of insurance protects the entity (corporation), its directors, officers and employees if a claim is brought by or on behalf of a current, prospective or past employee for a broad range of allegations such as:

  • Wrongful dismissal, discharge or termination of employment; (subject to the comments made about wrongful dismissal in the D&O notes, except that under this form the entity (corporation) is an Insured party and thus will receive indemnity for defense costs and damages over and above any compensatory award for the breach of contract). In case of bankruptcy some policies will pay for the actual contractual awards.
  • Breach of any oral or written employment contract or quasi-employment contract;
  • Employment related misrepresentation;
  • Wrongful failure to employ or promote;
  • Wrongful deprivation of a career opportunity;
  • Negligent evaluation;
  • Invasion of privacy;
  • Employment related defamation;
  • Employment related wrongful infliction of emotional distress

Claims are covered through:

  • A written demand for monetary damages;
  • A civil lawsuit commenced by the service of a complaint or similar pleading;
  • An arbitration proceeding;
  • A formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar documents.
  • Payment of Wages Act. Responsibility (personal liability of directors for 6 months wages).
  • Harassment, humiliation
  • Pension and Benefit disputes
  • Union Disputes
  • Alleged breach of contract – defense costs only. There is Canadian case precedent which rules that breach of contract is uninsurable.
  • Extension or refusal of credit
  • Debt collection
  • Deceptive trade practices
  • Contract disputes
  • Restraint of trade
  • Dishonesty, fraud
  • Cost, quality of products or services
  • Copyright, patent infringement (except where covered under another policy)
  • Product, company defamation, libel, slander or plagiarism due to the content of a presentation or publication by the organization. (except where covered under another policy)
  • Business interference
  • Competitor disputes
  • Non-payment of sales taxes, GST and
  • payroll taxes (usually in the event of bankruptcy)
  • Exercising poor due diligence in a business acquisition
  • Allegations if unfair dealing
  • Alleged breach of contract – defense costs only. There is Canadian case precedent which rules that breach of contract is uninsurable.
  • Alleged breach of contract – defense costs only. There is Canadian case precedent which rules that breach of contract is uninsurable.

There are other types of claims against directors, which are covered under other policies, but which are not mentioned here.

Forms of Coverage:

Basic D&O Coverage. Comes in two sections; one covering the D&O’s directly for situation where they are not indemnified by the corporate entity and the second covering the corporate entities obligation to indemnify its D&O’s. Deductibles vary; some polices have separate deductibles applicable to the two sections, others have no deductible applicable to the first section (direct D&O coverage).

Exclusions vary greatly and often there is no coverage for claims by closely held entities or by directors of small closely held firms. Some policies exclude mergers and acquisitions and some give partial pollution coverage. All exclude property damage and bodily injury type claims (these are intended to be covered under CGL, Umbrella, Pollution, Malpractice and other types of liability insurance.

Entity Coverage. Currently almost all charitable organizations have entity coverage. This obviates the necessity of apportionment of defense costs between Insured directors and officers and uninsured corporate entities (In the absence of an apportionment endorsement setting out a predetermined split). It also provides indemnity for the entity itself which sometime bears the brunt of the award. Many “for profit” organizations also have this coverage, however, there may be a reversal in this trend due to certain high profile bankruptcies where the policies have been ceased by the liquidator as part of the corporate assets. This defeats the original purpose of D&O which was to protect the directors and officers in exchange for them sitting on the board. For this reason there may be a move away from entity coverage or at least separate policies for the entity and the D&O’s. By having separate policies, the problem of D&O’s not having access to their protection in the event of bankruptcy is avoided. At time of writing, I don’t know of anyone currently doing this.

Association Liability Insurance. D&O policies issued to charitable organizations usually include entity coverage, administrative E&O coverage and coverage for employees, in addition to the D&O’s.

Statutory proceedings for allegations of non-compliance. Because the proceedings do not involve a suit for damages, the defense costs for these types of action are not covered. This type of coverage is usually the subject of a special policy. (Some D&O insurers will issue an endorsement to cover). If the allegations are part of a suit for damages defense costs are covered under a civil suit, but not for quasi-criminal proceedings brought as a result of non-compliance with certain statutes such as the Environment Act or the Workplace Safety and Health Act. You might want to ask your broker to try to extend the policy to cover.

Criminal defense costs. In allegations of criminality incidental to a tort suit, defense costs are generally covered, but where there is no suit for “damages” and it is only a criminal prosecution there is no coverage.

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