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The Truth about Directors & Officers Insurance

The financial risk of lawsuits brought by shareholders, employees, customers, regulators, creditors and/or competitors that may target both a company and its directors and officers, is a serious reality in today's business environment. Directors and officers are responsible for the appropriate and profitable management of a company and, accordingly, can incur personal liability for wrongful conduct - such as not paying proper attention to business affairs, acting on false information, or non-compliance with legislation and regulations -- in relation to the performance of their duties.

Many general liability insurance policies do not include personal coverage for directors and officers, making Directors' and Officers' (D&O) insurance a wise investment for Canadian businesses looking to protect their board members.

What is D&O insurance?

D&O insurance provides protection for directors' and officers' personal assets. Additionally, in some cases D&O insurance coverage can be extended to cover the corporation as a whole, as well as employees, committee members, and volunteers.

D&O insurance policies typically feature three clauses, commonly referred to as Side A, Side B and Side C.

  • Side A offers protection for the personal loss of directors and officers if a corporation is not able to indemnify them due to legal or financial reasons.
  • Side B coverage provides reimbursement to corporations for the amounts that they are required to pay directors and officers for indemnifiable claims.
  • Side C provides coverage for the corporation itself, typically regarding securities claims.

These clauses are intended to help corporations and individuals pay for many different costs arising from a lawsuit, including a valid legal defense, investigations, settlements and damages that Insureds may be liable to pay.

Since lawsuits targeting directors and officers arise from many sources and can quickly become very expensive, it is prudent and advisable that all companies fully explore their options when it comes to sufficiently protecting themselves.

Minimizing risk

While D&O insurance is a wise investment for corporations, this protection from financial loss is arguably more important for the individuals themselves. In addition to carrying effective coverage and appropriate limits of liability, companies and individuals can further reduce the risk of litigation by taking a proactive approach.

One way to minimize the potential for D&O lawsuits is for companies to invest in training focused on the common law and statutory responsibilities imposed upon directors and officers. This training should also address corporate governance best practices and be followed by the implementation and monitoring of the proper policies and procedures.

Establishing clear guidelines regarding operations, financial reporting and who has access to sensitive information can go a long way toward minimizing lawsuit exposure. All business decisions made by directors and officers should be in writing and clearly explained. Transparency on the part of directors and officers is essential to avoiding litigation.

According to Jim White, Vice President, Partner and Senior Advisor in HUB Internationals HKMB's specialty D&O practice, "The market for D&O insurance continues to be very competitive in Canada. With ever broadening coverage and several insurers competing to drive down prices, it is an opportune time for companies who have not bought this coverage before to seriously consider doing so."

Of course, even if directors and officers perform their duties in good faith and to the best of their abilities, the risk of lawsuits always remains. It is in these cases that corporations will be thankful for investing in a robust and specifically tailored D&O insurance policy. Canadian businesses should contact a HUB International specialist to explore their options and find a program that ideally suits their needs.