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The personal liability of Directors & Officers for economic losses sustained by stakeholders in managing the affairs of the corporation.
The uncertainty and financial strain as to whether the Corporation can, or will be permitted in law to indemnify its Directors & Officers.
The duties owned: The law requires Directors & Officers have the best interests of the Corporation in mind when discharging their duties.
- Due Diligence
The bodies of law codifying the conduct of directors & officers are many including:
- The Ontario Business Corporation Act (The Business Judgment Rule)
- Securities Law
- Environmental Law
- Employment Law
- Taxation Law
THE LEGAL TREND:
Following the litigation patterns of the United States, Canadian businesses are being challenged more often and in new ways. New legislation is making it easier for stakeholders to “get at the controlling minds” of the Corporation and hold Directors & Officers personally accountable for their actions. Stakeholder awareness, fuelled by a strong media presence has increased shareholder litigation and employment practices claims.
Whether the organization is for profit or non profit, public or private, the performance of Directors & Officers will be reviewed to determine if there is any liability.
“A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such directors believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.”
Section 309 (a) of the California Corporate Code.
The following groups could seek indemnity from Directors & officers failure to discharge their duties properly.
- Customers, Suppliers
- Government Agencies
WHAT COVERAGE DOES A D&O POLICY OFFER?
As no two policies are the same, and off the shelf wordings may not do the intended job, it is important to investigate the scope of coverage.
Directors & Officers Policies may be summarized as follows:
A) To pay the Loss of each & every Director, Officer or employee for any actual or alleged Wrongful Act in their respective capacities except when they are indemnified by the Company
B) To reimburse the Company if indemnification for the Loss described in A) has
Wrongful Act: Any breach of duty, neglect, error, misstatement, misleading statement omission or act by Insureds in their respective capacities as Directors & Officers.
Loss: means damages, judgments, settlements, pre- and post-judgment interests and defense costs.
Loss does not mean:
1) civil or criminal fines or penalties
3) employment-related benefits
4) matters uninsurable by public policy
1) written demand for monetary or non- monetary relief
2) A civil, criminal, administrative, regulatory or arbitration proceeding
3) A human rights tribunal proceeding or investigation
The use of exclusions can certainly restrict coverage. Each insurer carries their own standard supply. Exclusions can be removed or restricted which has the positive effect of broadening coverage.
Although it is very difficult to ascertain how much is enough, clear attention should be paid to the legal landscape and current litigation trends.
For example: are you a public company trading on NASDAQ, or a private company with employees based in the U.S. In limit selection, it is important to understand defense costs are an integral part of the limit; limits are capped by an aggregate so claims presented in a given policy period may erode the amount of coverage available.
This deductible is applied to the reimbursement loss incurred by the Company by way of its indemnification of Directors & Officers for which it is permitted by law and financially capable of doing so. The deductible is paid by the Company.
The scope of coverage can be broadened by endorsements offered by the Insurer. Employment Practices and Fiduciary Liability can be included. The investigation should be done to see if separate policies should be purchased so as not to erode the policy limits for pure D&O claims.
*These coverage descriptions are for illustration purposes only. For full particulars, recourse must be made the actual policy wordings.
Contact BKIFG now to discuss this risk as it pertains to your business.