SWG PL - D&O: 4 Critical Reasons Directors & Officers Need Insurance
August 5, 2020
Directors and officers form the management team of a corporation. Directors supervise important business affairs of a corporation and are responsible for making decisions about its activities. Officers, by contrast, are appointed by the directors to oversee daily aspects of the organization.
In Canada, directors are required to fulfill two principal duties: a fiduciary duty and a duty of care. In addition, directors are obligated under a range of specific duties, including employment, tax, and other legislation. Thus, they are required to act in good faith, with a view to the best interests of the corporation and its stakeholders.
Why Directors and Officers Need Insurance
D&O insurance is different from E&O. Whereas E&O is concerned with the product or service that the corporation offers, D&O insurance focuses on corporate governance and decision-making.
As such, D&O provides coverage for defence costs and damages from wrongful acts allegations and lawsuits brought against an organization’s board of directors and/or officers. This includes negligence, omissions or misleading statements made by the directors and officers that result in a lawsuit being filed against the corporation.
Here are four important reasons all directors and officers should get D&O insurance.
1. Breaches of contract and negligence:
Directors are personally liable if the corporation breaches corporate statutes and statutes dealing with income tax, the environment, and an array of other specific concerns.
Directors may also be liable under more general laws for breach of contract or negligent misrepresentation as a result of their actions as directors. For example, the Supreme Court of Canada held the directors of a private corporation personally liable for a breach of trust by the corporation because they had full knowledge of the corporation’s actions, and therefore, knew about the breach of trust. (1)
Directors are generally held responsible for their own wrongful acts even if they claim they were acting on behalf of the corporation.
2. Fiduciary duty:
As fiduciaries of the organizations they serve, directors have a duty to act in the best interests of the corporation, which includes its various stakeholders.
The fiduciary duty obliges the director to prefer the interests of the corporation over others, including shareholders. It also prevents directors from disclosing the corporation’s confidential information, while obliging them to share with the corporation any significant information within his or her knowledge acquired from others.
3. Duty of care:
The duty of care means that, under Canadian corporate statutes, directors are required to exercise the care, diligence, and skill that a reasonably prudent person would exercise in similar circumstances.
Practically speaking, the duty of care means directors should take steps to ensure they have the information they need to make informed decisions, to assess such information critically, and to seek input from and test the recommendations of their advisors.
4. Conflicts of interest:
Under the Canadian Business Corporations Act (CBCA), directors are required to disclose conflicts of interest between themselves and the boards on which they serve.
Subject to certain exceptions, a director who discloses a conflict of interest must also refrain from voting on any resolution to approve the contract or transaction that gave rise to such conflict of interest. Furthermore, some provincial statutes require that these directors also not attend any part of a meeting at which such contracts or transactions are discussed. (2)
SWG PL: Directors and Officers
SWG PL - Directors & Officers Liability insurance pays on behalf of individual directors, officers, trustees, volunteers, employees, and members of any duly-constituted committee damages and expenses in the event they are sued in conjunction with the performance of their duties with the corporation.
The indemnity includes defense costs and damages that the corporation cannot pay, either because indemnification is not permitted, or the corporation is not financially able to do so.
The policy will pay on behalf of the corporation for those amounts the corporation is required or permitted to pay on behalf of its insured persons.
The policy provides full entity coverage for the corporation itself by paying on behalf of the corporation the defense costs and damages that it is legally obligated to pay.
● Affirmative coverage for: Employment Practices Liability (EPL), Third Party Wrongful Act, Personal injury and Publishers Liability
● Broad definition of claim include Demands for monetary damages, non-monetary or injunctive relief, civil, criminal, administrative, regulatory, mediation or arbitration proceedings. Civil, criminal, administrative or regulatory investigations. Extradition proceedings. Any request to toll or waive the statute of limitations
● All-in-one policy includes D&O, Entity, Employment Practices, Fiduciary and Outside Directorship coverages
● Legal Assistance Hotline
● Claims made policy
● Prior acts coverage is built in the wording and extends back to the inception date of the first D&O Liability policy
● Duty to defend
● Costs in excess
● First dollar defense (deductible not applicable to defense costs)
● Waiver of deductible in the event of no liability
● Worldwide coverage
● Broad definition of Insured include the non-profit corporation (entity coverage), any past, present and future deemed or “de facto” directors, officers, trustees, employees, volunteers and any committee members
● Broad definition of claim
● Broad definition of Wrongful Act includes Employment Practices, Third Party Employment Practices, Personal Injury and Publishers Liability
● Corporate brand protection – Crisis management event expenses coverage
● Corporate investigation costs coverage
● Pollution defense costs
● Excess coverage for Side A (Directors and Officers)
● Non rescindable Side A
● Bi-lateral discovery period
● Order of payments
● DeFacto Executive Extension
● Final adjudication language for personal conduct exclusions
● Deletion of hammer clause
● Spousal and domestic partner coverage
● 100% defense costs allocation
● 60-day notice for non-renewal
● Multi-year policies – annual aggregate, annual installments
● Fiduciary Liability – options for shared or stand-alone limits
● Professional Services Extension
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Content is current as of the date of broadcast and is subject to change without notice.