Directors and Officers Insurance
Directors and officers in Ontario play a vital role in business decisions that affect the interests of employees, stakeholders and clients. They have a duty to exercise due diligence in oversight of the management of the organization/community that they serve. Corporate directors are required to act in good faith and a responsibility to act in the best interest of the organization.
If you sit on a board of directors, whether a not-for-profit local charity, a church, or a for profit corporate entity, the decisions you make will impact certain stakeholders such as volunteers, employees, customers and clients, competitors, shareholders and government.
Ultimately a board is responsible for oversight on leadership and succession planning, growth, risk management and strategy decisions providing a governing body to steer the ship. Corporate governance has long focused on enhancing shareholder value making it imperative for the board to look forward to guide the course for growth and results while being mindful of risks.
Why Directors and Officers (D&O) Liability Insurance?
Mistakes happen. For board members, errors in judgment may find them legally responsible and personally liable.
Any number of unexpected events can put your board in a compromising position, such as financial losses, misleading statements (or lack of statements), wrongful employee dismissal, misuse of confidential materials, and much more. Because directors and officers must make decisions that are in the best interest of and protect the organization, it does not mean that those decisions are regarded as correct in the eyes of the stakeholders that may be impacted.
If a claim is made against a board of directors or an individual board member, in the absence of a D&O liability policy, the personal assets of the board members can be at risk. It is important to note, a D&O liability policy is not protection against reckless or illegal acts, rather it is meant to mitigate against legal costs for corporate directors diligently acting in good faith.
For this reason it is imperative that when you sit on a board of directors there is an insurance policy that protects your personal assets and that can cover the legal expenses that may be incurred when claims are made.
From local volunteer directors on a minor hockey league board in rural Ontario to start up advisory boards in Ottawa’s Tech hub, Kanata North, and directors responsible for decision making on boards for publicly traded companies across Canada, we’ve got you covered. Connect with your local broker.
Three Duties of Directors:
- Duty of Diligence (Duty of Care): Act reasonably, in good faith and in the organization’s best interest.
- Duty of Loyalty: Place the interest of the organization before your own.
- Duty of Obedience: Act within the scope of applicable bylaws.
Types of Boards we work with:
- Condominium Boards
- Church and Private School boards
- Corporate/Publicly Traded Company Board
- Non-Profit, Volunteer and Community Boards
- Private Company Boards
How does a D&O policy work?
In its simplest form, there are three agreements of insurance under a D&O liability policy; coverage for the corporation or organization if named in a lawsuit, coverage for individual directors and officers when the corporate bylaws agrees to indemnify the directors and officers in the event of a lawsuit and coverage for the individual directors and officers when there is no indemnification available from the corporation. Deductible may apply and limits may be inclusive of legal expense, or legal expense is over and above the policy limit.
Coverage is written on a “Claims Made” basis, which means that before the policy term is renewed, any claim that is potentially happening that became known in the policy period that is going to be replaced with the next renewal needs to be reported. Best rule of thumb; if you are aware of something that may give rise to a claim against the corporation or directors and officers – contact your insurance professional to discuss the next best step.
Why buy D&O liability insurance?
The purpose of a D&O liability insurance policy is to pay on behalf of the corporation/organization and the directors and officers who are the insureds under the policy for the wrongful acts it/they are held responsible for and where the claim is unfounded, to pay to defend them. The coverage provides the following protection:
- Protection of personal assets of a director or officer, as well as their spouse
- Defense regardless of whether or not allegations are true
- Damages awarded if negligent
Bylaws contain indemnification provisions to protect Directors and Officers. Despite these provisions, circumstances could exist where indemnification may not occur (the organization is financially impaired, becomes insolvent or is not capable of providing funds for defense or resulting damages).
Why is D&O insurance such a hot topic, and sold separately of an organization's liability coverage?
If a Commercial General Liability policy is designed to respond to claims for bodily injury or property damage suffered by a third party as a result of negligence, a Directors and Officers Liability policy is designed to respond to the financial losses suffered that may be caused by a wrongful act. Simply having one liability insurance policy may not be enough for your overall exposure.
What are my legal responsibilities under the law?
Under the law, Directors and Officers must (1) act in good faith and in the best interest of the society (2) act with a duty of care as a reasonably prudent person (3) perform duties in accordance with applicable statutes and your own charter.
What is a wrongful act?
It is an actual or alleged negligent act, error, omission, misstatement, misleading statement, neglect or breach of duty by the Directors and Officers, individually or collectively, in the discharge of their legal duties solely in their capacity as Directors and Officers of the organization.
Under what statutes can a director or officer be liable under?
The following are Federal and Provincial Statutes a Director or Officer can be liable under:
- Income Tax Act
- Employment Standards Act
- Bankruptcy Act
- Pension Benefits Act
- Competitions Act
- Unemployment Insurance Act
- Discrimination Act
And more, connect with your local broker to discuss questions.