- Am I Covered?
- Directors and Officers Liability Insurance
Am I Covered?
So, you have recently been asked to become a member of the board. While you welcome the opportunity, you're unclear about the protections you'll be afforded.
In another scenario, you have been sitting on a corporate board for a few years and realize that you have never taken a good look at your liability protection.
In both cases you're thrilled with being a board member but know the role carries the burden of liability. The recent explosion of financial scandals, mega bankruptcies and class actions are enough to make even the bravest corporate souls consider their exposure. More and more, directors are becoming the choice target for litigation with investors seeking compensation directly from the pockets of board members. These lawsuits are the result of new corporate governance rules, and regulators having imposed severe sanctions against directors. Now, with the possible addition of criminal liability hanging in the air, knowing how and where you are protected is crucial.
As legal turmoil is so momentously on the upswing, with recourse against directors coming not just from investors, but also shareholders, creditors, employees, regulators, trustees and suppliers, you need to ask yourself some pointed questions. "Am I covered? What is my protection? What circumstances can affect my insurance coverage? Should I get additional protection? If so, which one?"
In some circumstances it is possible for the director to benefit from an indemnification by the corporation. But this type of indemnification, if available, may be limited and will only be reliable so long as the corporation is in sound financial shape.
To effectively minimize the risk of liability, directors would be wise to implement and adhere to good corporate governance policies and, if possible, receive indemnification from the corporation that favours board members. In addition to these protections, appropriate coverage through a directors and officers liability insurance policy is an excellent top-up.
Directors And Officers Liability Insurance
Directors and officers liability insurance, also known as D&O insurance, is a specialized insurance policy that, subject to certain exceptions, indemnifies directors for losses resulting from wrongful acts committed.
This type of insurance policy is usually on a "claims made" basis. This means that it is not the wrongful act itself that triggers the coverage; rather it is the demand for money or damages made against the director within a time period designated by the policy that activates the safeguards. There must therefore be a policy in existence at the time of the claim which will respond to wrongful acts that are alleged to have occurred earlier. Individuals who cease to be officers and directors should check to see whether they continue to be covered as "former" directors and/or officers.
Furthermore, keep in mind that there are many liability statutes that the D&O policy does not provide coverage for. In these cases you are compelled to rely on corporate indemnities.
All directors need to carefully review their D&O policy in order to understand the limits of their coverage and its possible exclusions, such as the following:
- Claims of shareholders brought against you on behalf of the corporation and charging you with breach of your fiduciary duties.
- Claims against you for accounting and profits resulting from the purchase or sale of shares of the corporation.
- Regulatory or disciplinary process against you.
- Deliberate, fraudulent, wilful acts or omissions or any wilful violations of statute or regulation by you.
- Claims based on or arising from you having gained personal profit, remuneration or advantage to which you were not legally entitled.
- Claims made for bodily injury, mental or emotional distress, sickness, disease or death of any person or damage to or destruction of tangible property including loss of use.
In an age of corporate accountability, the use of D&O liability insurance in North America is increasing as more public and private boards take steps to protect themselves. In response to recent scandals, insurers have begun to restrict the coverage available. In fact, exclusions such as those above are added to insurance policies in order to address the types of corporate misconduct that put Enron and others in the news.
Regardless of your experience level on the board, you need to know what protections you have against liability. Ensure that your coverage is sufficient and that you understand its limits and exclusions. There are potentially serious consequences for inadequate coverage, so knowing the terms of your policy should be required reading. Consultation with insurance and legal advisers can help you thoroughly understand your protection. Gowlings offers top professionals that can show you where you are covered and where you are exposed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.