Protect Yourself: Snapshot of Directors & Officers Duties, Liabilities, and Insurance

Protect Yourself
Oversight of protection for directors & officers against litigation may be one of the most important actions a business leader undertakes, yet this function is often overlooked. As a guest speaker at the Canadian Society of Corporate Secretaries (CSCS) annual conference in Montreal in August 2015, I outlined a key rule which surprised some attendees: D&O’s must personally take the time to ensure that they are properly protected from litigation. Many busy business leaders mistakenly believe that is the job of others to protect them, failing to rigorously oversee the various processes which must be in place. The intent of this paper is to provide a quick summarized snapshot for busy business leaders on: the basic duties of D&O’s; current litigation and trends; the basics in D&O insurance and common mistakes; and common best practices. This quick read could save you from scrambling if and when you are named in litigation later. 

Not establishing a well reviewed process to protect D&O’s from litigation can be disastrous, and often this task is delegated to junior people, or a supplier. The following is a point form summary of the key points addressed at the 2015 August CSCS Conference. This list provides for business leaders a quick-read scan of some important topics which will assist in protecting against significant liabilities. For a more detailed review, at the bottom of this article is a click to a PowerPoint presentation which was presented on this subject:

  1. Protect yourself – D&O’s must protect themselves through a combination of oversight of the process, and direct involvement, ensuring: a) proper conduct is understood by all D&O’s; b) indemnification and personal indemnification agreements are provided; c) arranging thorough, state-of-art D&O insurance ;
  2. Three areas of Legal Liability for D&O’s: Fiduciary Liability; Duty of Care; Statutory Liability;
  3. Some Key Federal and Provincial statutes affecting D&O’s: Corporate and Securities Legislation: Obligations to Employees; Obligations to Government for Taxes and Source Deductions; Environmental liability- D&O’s should take care to learn the pertinent legislation which applies to their industry and operation, and should be updated on litigation which occurs in their industry;
  4. Corporate Indemnification: Indemnification may not be provided if the organization: a) is bankrupt or unable to provide funds; b) unwilling to indemnify; c) not allowed by law;
  5. Personal Indemnification Agreements: Personal Indemnities are increasingly used by D&O’s to supplement corporate indemnification;
  6.  Some current examples of Claimants & Allegations in litigation against D&O’s in Canada: D&O Claims come from many different types of Claimants and Allegations, and frequent occurrences include from: past, current, or prospective employees and partners; Competitors, suppliers, and other contractors; Government and regulatory agencies; Shareholders and investors; Other;
  7. Typical D&O Insurance Coverage’s: Side A: D&O Liability- for when no indemnification is available from the organization; Side B: Corporate Indemnity Coverage – for when the insurer reimburses the organization for amounts paid to indemnify D&O’s; Side C: Entity Coverage – for claims against the entity, with/ without D&O named; Employment Practices Liability- for allegations of employment wrong doing including wrongful dismissal, discrimination, humiliation, and sexual harassment claims against D&O’s, and against the organization; Fiduciary Liability- administration and maintenance of employee benefit plans;
  8. Three common mistakes in D&O insurance which can void coverage: a) Not Reporting to the insurer, “Circumstances which might give rise to a claim”; b) signing a “Warranty Statement” on the application more than once, and not “Polling ” (surveying for knowledge of circumstances) all D&O’s before signing a “Warranty” application clause; c) Watering down the “Policy Aggregate” with “Corporate” coverage, and not leaving enough limits for coverage for the D&O’s, especially Side A coverage;
  9.  Shopping D&O Coverage: focusing on price and not prioritizing coverage quality, can leave management and directors severely exposed. This is a common practice of organizations seeking to save dollars, and leads to potential non-insured exposures;
  10. A shortlist of current D&O risk related issues business leaders need to be aware of: a) Northstar Aerospace- a landmark Ontario case involving significant personal liabilities of D & O’s; b) Cyber liability is exploding; c) Pension funds underwater in 2013, some recovered in 2014 and 2015, but low interest rates are forcing investment risk taking; d) significant Class action activity; e) Foreign Corrupt Practices legislation; f) Bill 198 Ontario; g) Canadian Anti-Spam Legislation;
  11. Non- Securities claims: D&O’s in Canada, be they in private companies, public companies, government or other type of organizations, are experiencing claims in a number of areas, including: a) #1 in Frequency- Employment Practices Liability (EPL); b) Oppression claims brought by partners and minority shareholders of private companies, including retaliation; c) misrepresentation, breach of contract, mismanagement, negligence in oversight of the company/operations, tortious interference; d) Cyber liability;
  12. Some Trends in D & O Securities claims in 2014; a) “credit related” litigation is mostly gone (asset backed paper); b) noticeable decrease in claims against Chinese domiciled companies – TSX barring new Chinese issuers; c) Liability for “experts” is increasing including against Accountants, Engineers, Corporate lawyers; d) The US courts are punting back litigation which occurred outside the US;
  13. Typical Extensions of Coverage: policies should be regularly reviewed, to include new extensions which the insurance marketplace innovates annually- older policies will not be current. Do not rely on coverage which hasn’t been revised in the last number of years. See PowerPoint at the end of this blog for a list of some extensions.

Presentation Conclusions:

  • Managing D&O liabilities requires active risk management by business leaders- don’t delegate. Overview the entire process to ensure that proper steps have been taken
  • D&O’s must protect themselves through a combination of: a) proper conduct; b) indemnification and indemnification agreements; c) D&O insurance
  • Understand legislation which pertains to your industry and operations
  • Review examples of common litigation against D&O’s
  • Avoid common D&O insurance mistakes-review the insurance management process, ask questions
  • Do not buy D&O coverage based on price. Secure quality coverage by a reputable insurer
  • Regularly audit the D&O insurance to take advantage of rapidly improving coverage availability and the very competitive D&O insurance marketplace. Ensure the coverage compares to best practices  in order to cover the maximum number of claims scenarios and to cover  advancement of defense costs- insurers in this line of coverage innovate regularly as new players offer new products

CSCS – D&O Risks, Duties, Litigation, Insurance Essentials, Current Best Practices and Market Trends- August 17, 2015

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