Study 6 - Directors and Officers Liability Flashcards
Who governs the law that places a standard of care on the directors and officers of a corporation or institution?
The federal Canada Business Corporations Act and its provincial and territorial counterpart, the Business Corporations Act
Duty of Care
The obligation that a person has to exercise reasonable care with respect to the interests of others, including protecting them from harm
Under the law, D&O’s are to act in the best interests of the corporation. In the execution of this responsibility, D&O’s have 2 primary duties:
- A fiduciary duty
- A duty of care, diligence, and skill
Fiduciary duty
Arises when a person is entrusted with the responsibility of protecting the interests of another
Directors will be excused from liability if it can be shown decisions were made in good faith with the best interests of the corporation in mind under the _____________
Business judgement rule.
The business judgement rule provides a shield for decisions made by directors and officers in that the court won’t fault them retrospectively if they have exercised care consistent with their fiduciary duty and duty of care in reaching a decision or taking a course of action.
A board of directors is entrusted with _____________
Guiding the entity in its affairs. In most corporations, the goal is to maximize the value of shareholders’ investments. Claims can arise from board activities that involve directors and officers.
Exposures to Loss
There are many reasons why a suit may be brought against a director or officer. Some examples include:
- Lack of growth, failing dividends, improper handling of negotiations
- Conflict of interest situations (for example, executives attempt to enforce trade with a company in which they have substantial interests)
- Failure to police the corporation effectively
- Antitrust violations
- Fraudulent reports, financial statements, or certificates
- Improper expenditures
Directors and Officers (D&O) liability insurance
Coverage that offers protection against the wrongful acts of directors and officers when discharging their legal duties for the company.
D&O Policies are written on a claims-made and reported or claims-made basis. Traditionally they have been divided into 3 sections:
- Non-indemnifiable loss coverage for directors and officers (Side A coverage)
- Indemnifiable loss coverage for directors and officers (Side B coverage)
- Entity coverage (Side C coverage)
Side A Coverage
- Provides direct coverage for D&O’s where the corporation is not or cannot indemnify the D&O’s
- The corporation may not indemnify their directors or officers because they are financially unable to or because their bylaws prohibit it
- Claims addressed under this insuring agreement generally do not have a retention
Side B coverage
- Provides reimbursement to the corporation for the indemnification it provided to the D&O’s
- In these instances, the entity’s bylaws allow for the indemnification of the D&O’s
- Claims addressed under this insuring agreement are subject to a retention
Side C Coverage
- Provides coverage for the entity if it is named in a claim
- Claims addressed under this insuring agreement are subject to a retention
Advantageous extensions of coverage that may be included
- prior acts coverage
- coverage for former directors and officers
- coverage that includes legal proceedings brought outside of Canada
- outside directorship liability coverage
- contingent pollution coverage
- notice of non-renewal from insurer
Typical exclusions
- proven deliberate dishonesty
- criminal acts
- libel or slander
- bodily injury or property damage (covered under CGL)
- failure to maintain adequate insurance
- fines and penalties
Underwriting includes analysis in several areas including:
- Financial strength - a review of the latest annual report and current financial statements
- Management - Information on the management of the firm would be assessed: length of service of principal officers, ratio of inside/outside directors, suitability of management from the standpoint of educational and occupational background, general business reputation of principal directors and officers
- Industry standing - A review of what the company is noted for: its product and its level of acceptability by the public. Consideration would be given to the regard for the company by its peers within that industry
- General history - Organizational structure, history of shareholder litigation, fights for control, excessive management changes, price-fixing, antitrust allegations, and other similar conflicts
Directors or officers of non-profit organizations can be personally liable for such claims as:
- wrongful dismissal
- discrimination
- enforcement of association or government regulations
- breach of fiduciary duties
- providing advice to members
- uncollected withholding taxes
- inadequate training of volunteers
Fiduciary Liability (Exposure)
Most organizations have a fiduciary exposure if pension, profit-sharing, and medical, dental, life, accident, and disability plans are offered to employees.
Organizations typically hire independent firms to manage these plans.
An organization can be held liable for failing to prudently select and monitor these investment advisors.
Fiduciary Liability Coverage
- Responds to claims from employees and former employees arising out of the mismanagement of pension and employee benefit plans.
- Claims-made coverage that can be added to a D&O liability policy or on a standalone basis
Fiduciary policies defend the company, employees, D&O’s when they are legally obligated to pay for a “wrongful act” which include:
- any error or omission
- a breach of obligations, duties, or responsibilities
- improper choice of financial advisors, actuary, or insurance company
- failure to fund a plan adequately
- failure to disclose important details to plan members
Wrongful Acts in a D&O policy include:
- negligent acts
- errors or omissions
- misstatements or misleading statements
- breaches of duty
Potential plaintiffs or claimants include:
- shareholders
- creditors
- employees
- customers
- suppliers
- competitors
- government
- regulatory agencies
- the Canada Revenue Agency
D&O’s Fiduciary Duties
D&O’s have a primary fiduciary duty to their organization. They:
- must act honestly and in good faith with a view to the best interests of the corporation
- must perform their duties in good faith and in a manner they reasonably believe to be in the best interests of the corporation
- must not engage in personal activities to the detriment of the corporation
- are prohibited from using their position to further their private interests
- are required to perform their duties in accordance with applicable statutes and the terms of the corporation’s charter
