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I was pleased to be recently quoted in the covering story in the January 2015 issue of “Canadian Insurance”, however, the key message should be alarming for Canadian executives and directors. Recent adjudication by the courts relating to pollution clean-up costs at the now bankrupt Northstar Aerospace has left 13 executives and directors personally liable for $4.75MM, all stemming from a violation of environmental legislation. Equally alarming is that their D&O insurance appears not to have protected them. To senior level corporate people in Canada- you should read about this case, irrespective of the industry you serve in. Your key takeaway for your particular company and industry- understand your key operating risks and ensure that you are operating well within your various regulatory responsibilities.

Northstar manufactured parts for helicopters, and used trichloroethylene (TCE), a colourless degreaser. While the chemical was not deemed a dangerous substance, its use was extensive in the factory and there had long been concerns that prolonged exposure to the chemical could be connected to diseases like liver cancer, kidney cancer and lymphoma. The substance was found to be in the air in local houses, where it had probably been seeping in over the 40 years since the factory started using it. The Ontario government ordered a large scale clean up, but when the company went bankrupt, the obligation to continue the clean-up reverted to the D&O’s. So, why didn’t the leadership investigate the potential safety hazards from their operations long before the company faced bankruptcy?

In the case of manufacturing and with those industries handling dangerous chemicals, strict statutory liability applies to the use of such substances, meaning the corporation (and its leaders) must ensure safe handling or face personal liability. According to a paper from Jeffrey Carhart, Steven Wesfield and Adam Stephens, Miller Thomson LLP, entitled “Directors’ and Officers’ Liability- Summary of Federal and Provincial Statutes”, considering Federal and Ontario legislation alone, there are some thirteen statutes which govern Environmental Legislation, from the Environmental Protection Act, R.S.O. 1990, c.E.19 (Ontario), to the Environmental Violations Administrative Penalties Act, S.C. 2009, c. 14, s. 126 (Canada).1  

Most industries have their own operating rules and regulations. Per the Miller Thomson paper, noted as a non-exhaustive review of Federal and Ontario provincial statutes, there exist some 74 different statutes and acts that can impose liability on directors and officers, categorized as: Environmental Legislation; Corporate and Securities Legislation; Obligations to Employees; Pension Legislation; Obligations to Government for Taxes and Source Deductions; Non-Share Capital Corporations – Charities; Federal Financial Institutions Legislation. From each of these pieces of legislation come literally hundreds of sources of liability, such as: “Liability for employee wages”; “Misrepresentation in a document filed with the Commission or distributed to the public”; “Failure to deduct, withhold or remit appropriate (taxes)”; or “Failure to take reasonable care to prevent discharge of contaminants”.

Clearly therefore, it is key that the directors and officers who assume responsibility for the operation and oversight of a corporation must first understand the actual and potential risks of their operation, then must determine of how they might best operate within the laws which govern their activities. This requires seeking proper guidance from qualified experts in order to protect themselves from liability. In order to be equipped to do so, officers and directors must be well aware of the relevant legislation that that can impose liability, and understand how to mitigate their unique risks to avoid those liabilities.

Finally, once executives and directors identify, assess and treat their key operating risks, like those inherent in regulatory legislation applicable to their industry, proper commercial insurance should be arranged. In other words, to protect their personal liability, hand-in-hand with an audit of regulatory compliance should go an audit, conducted by a specialty insurance firm, of the applicability of the company’s commercial insurance.

Click here to read “It’s Cool we’re covered…no you are not” (Canadian insurance, January 2015).2

Call to action for executives and directors ….

  • identify, assess, and treat the key risks inherent in your company activities via a robust enterprise risk management type process;
  • engage legal counsel to advise the legislation applicable to your industry, and ensure compliance
  • engage a specialty insurance firm to thoroughly audit your commercial insurance, especially your directors and officers insurance.

 

References

  1. Jeffrey Carhart, Steven Wesfield and Adam Stephens, Miller Thomson LLP, “Directors’ and Officers’ Liability-Summary of Federal and Provincial Statutes” (2014);
  2. “It’s Cool we’re covered…no you are not” (Canadian insurance, January 2015, by Ronan O’Beirne)