Canada: Characterizing D&O Insurance Policies In Québec Civil Law

1. Introduction

Although directors' and officers' (hereafter « D&O ») insurance has existed in the United States since the 1930s, D&O policies arrived more recently in Québec. Québec-issued D&O insurance policies have generally been based on policies issued in the United States. This has raised some interesting questions on the application of Québec insurance law to these policies. Although there is a lot of jurisprudence on D&O insurance in the United States and some in the rest of Canada, there is remarkably little on the subject in Québec. The recent Superior Court decision in Boralex inc. v. AIG Insurance Company of Canada1 constitutes a first Québec case in which a D&O insurance policy – and more specifically an « indemnity » policy – is categorized as a liability insurance policy within the meaning of the Civil Code of Québec. This, in turn, has consequences including modifications to the written terms of many D&O insurance policies in Québec.

In this article, we discuss the origins, purpose and nature of D&O insurance policies, the way such policies are categorized outside of and in Québec, and the effects of the categories.

2. Origins, Purpose and Nature of D&O Insurance Policies

a. Sources of D&O Liability

Directors and officers of corporations, whether incorporated under the Canada Business Corporations Act2 (hereafter « CBCA ») or the Québec Business Corporations Act3 (hereafter « QBCA »), face significant exposure to liability. In recent decades, through the introduction of numerous statutes, their exposure has increased significantly.

The following are some notable sources of directors' and officers' liability.4

Liability towards Corporation

Section 119 of the QBCA requires directors and officers of corporations to act with prudence and diligence, honesty and loyalty, and in the best interests of the corporation. Section 122 of the CBCA contains similar requirements. Although the directors and officers owe fiduciary duties solely to the corporation, jurisprudence provides that their duty to exercise the care, diligence and skill of a reasonably prudent person must take into account not only the corporation and its shareholders but also other stakeholders such as employees, creditors and customers, although this liability is subject to the business judgment rule5.

Oppression Lawsuits

Under sections 439 and 450 of the QBCA and sections 238 and 241 of the CBCA, the following « complainants » or « applicants » :

  1. past or present registered holders or beneficial owners of a security of a corporation or any of its affiliates ;
  2. past or present directors and officers of a corporation or its affiliates ; or
  3. any other person who, in the discretion of the court, has the interest required to make an application ;

can apply to a court for an order when, amongst other things, the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer.

The courts have the power to order a party to compensate or pay money to a complainant or applicant.

Prejudicial, oppressive, and unfair conduct comes in a variety of forms including :6

  • stronger interests exercising power to the detriment of the equitable rights of less powerful stakeholders ;
  • discriminatory effects arising from poor management ;
  • unjustified disregard for the complainant's / applicant's interests in the decision-making process.

Securities Litigation

Securities are regulated by the provinces.

In Québec, chapters I and II of Title VIII of the Securities Act7 establish rules for civil liability (i.e. actions for damages) against directors, officers and others, resulting from the subscription, acquisition or disposition of securities, with respect to primary and secondary market violations. That said, actions for damages in a securities context can still be brought under ordinary rules of civil liability.

The Ontario Securities Act8 contains similar provisions for civil liability for directors and officers for primary and secondary market violations. The Ontario statute sets out secondary market liability with respect to « reporting issuer » corporations (including those that are publicly listed in Canada) and those with a « real and substantial connection to Ontario » at sections 138.1 and following.

Wages and Salaries

Under section 154 of the QBCA, directors are liable to the employees of a corporation for all debts not exceeding six months' wages payable to each employee for services performed for the corporation, subject to certain restrictions.

Section 119(1) of the CBCA provides for similar liability for directors of federal corporations.

Taxes, Deductions and Contributions

Pursuant to section 227.1 of the Income Tax Act,9 a director is liable for a corporation's failure to deduct or withhold an amount of taxes and remit it as required under the Act.

In Québec, section 24.0.1 of the Tax Administration Act,10 provides for the liability of directors where a corporation has failed to remit, deduct or collect amounts when it was required to do so under a fiscal law, or where the corporation has failed to pay employer's contributions required under a number of statutory regimes (including for the Québec pension plan, parental insurance, and the Régie de l'assurance maladie).

Environmental Liability

In Québec, section 115.50 of the Environment Quality Act11 provides that directors and officers of a corporation having defaulted on the payment of amounts owed under the statute or regulations are solidarily liable with the corporation for the payment of the amount, subject to due diligence defences. Section 115.40 of the Act provides that directors and officers are presumed to have committed the same offense as the corporation, unless they can show due diligence. Section 115.36 of the Act also sets out fines and penalties applicable to individuals, which are doubled if an offence is committed by the director of officer of a corporation.

Section 280 of the Canadian Environmental Protection Act12 provides for the liability of directors and officers of corporations for penalties in respect of offences committed by the corporation, if the director or officer « directed, authorized, assented to, acquiesced in or participated in the commission of the offense ».

b. Mechanisms to Mitigate D&O Liability

The above-mentioned liabilities, while understandable from a policy perspective, are quite substantial and can pose major risks to the patrimony of a director or officer of a corporation. An absence of adequate financial protection can lead to a flight from boardrooms and a dearth of qualified candidates for the positions of directors and officers.13

There are different mechanisms geared towards reducing and mitigating the risks of directors' and officers' liability.

There are statutory provisions that set out the circumstances in which directors and officers can or should be indemnified by the corporation and when the corporation can advance funds for the costs of defending certain proceedings. Sections 159 to 161 of the QBCA set out when corporations must indemnify directors and officers, when they may not, when they may provide an advance, and when monies must be returned to the corporation by the directors and officers. Section 124 of the CBCA contains the equivalent provisions for federal corporations.

Furthermore, corporations can supplement the statutory framework and can agree through contract, bylaws or other means to indemnify directors and officers in certain circumstances. Such mechanisms must, however, respect the statutory parameters set out above and cannot provide for indemnity where the law forbids it.

However, there are circumstances where the corporation's duty to indemnify (whether through statute or other mechanisms) might not apply or might provide insufficient protection. For example, present and former directors and officers may find themselves in trouble if the corporation is insolvent or has liquidity issues, or if they are in a conflict with the corporation. Furthermore, a corporation must obtain court approval to indemnify any directors or officers named as defendants in a derivative action (pursuant to section 124(4) of the CBCA and section 161 of the QBCA).

Moreover, the costs of defending a claim until its adjudication or settlement can be significant and prohibitive for many directors and officers, and even for the corporation that must indemnify them. Section 159 of the QBCA sets out certain circumstances in which a corporation must pay an advance to a director or officer to defend a claim, but this does not apply to a number of situations. Pursuant to section 124 the CBCA, there is the possibility but not a requirement for the corporation to advance the costs of defence. In light of the above, a director or officer might well be forced to defend himself or herself without an advance to pay legal fees and without any indemnification before the ultimate adjudication of a claim.

In this context, D&O insurance is an important tool that protects directors and officers (hereafter « Ds & Os ») from certain types of liability and defence costs, including amounts for which the corporation might not indemnify them. In light of corporations' duty to indemnify their Ds & Os, this insurance also benefits the corporations. As will be discussed further below with respect to side C coverage, D&O insurers have expanded the coverage offered in standard D&O policies to include other risks to corporations. As a result, the D&O policy constitutes an important tool for risk management. It goes without saying that the existence of a D&O policy can also be advantageous to claimants.

The QBCA and the CBCA allow corporations to purchase D&O insurance for their Ds & Os.  At section 162, the QBCA stipulates the following :

162. A corporation may purchase and maintain insurance for the benefit of its directors, officers and other mandataries against any liability they may incur as such or in their capacity as directors, officers or mandataries of another group, if they act or acted in that capacity at the corporation's request.

The CBCA's equivalent provision is at section 124(6) :

(6) A corporation may purchase and maintain insurance for the benefit of an individual referred to in subsection (1) [a present or former director or officer of the corporation, or another individual who acts or acted at the corporation's request as a director or officer, or an individual acting in a similar capacity, of another entity] against any liability incurred by the individual

  1. in the individual's capacity as a director or officer of the corporation ; or
  2. in the individual's capacity as a director or officer, or similar capacity, of another entity, if the individual acts or acted in that capacity at the corporation's request.

As can be seen from the insurance provisions cited above, there are few restrictions to the scope of the D&O insurance that a corporation can buy. As we discuss below, this allows for scenarios in which a D&O insurer can indemnify a director or officer even when the corporation has no legal obligation or may not be allowed to do so.

c. Origins of D&O Insurance

D&O policies were first introduced in the United States in the 1930s, in response to the stock market crash and the introduction of securities legislation providing for the personal liability of directors in certain circumstances. In the 1960s, D&O policies were introduced in Canada. Their popularity grew in the 1970s and 1980s. However, in the mid-1980s, the United States – and Canada, to a lesser degree – faced a liability and insurance crisis. Liability exposure for directors and officers increased significantly, but the insurance offer contracted. Insurers refused to underwrite certain risks, new exclusions were added to policies, and insurance premiums increased significantly. Corporations faced the risk of losing Ds & Os or being unable to recruit qualified individuals for these positions. During that period and in following years, D&O insurance rose in prominence and D&O policies became a commonplace insurance purchase for corporations.14

In Québec, D&O policies gained traction in the 1980s, particularly with companies whose securities were listed in the United States, or who had operations there. Over the years, the wording of Québec-issued policies has evolved with the changing wording in the United States and the rest of Canada. However, until relatively recently, the wording of these policies has generally not been adapted to Québec law. We will discuss the consequences of this situation further below.

d. Typical Terms of a D&O Policy

While there is no standardized wording for D&O insurance policies, a typical policy will share the following characteristics.

First, D&O policies are usually comprised of three types of insuring agreements or coverages, often called Sides A, B and C.

  • The Side A insuring agreement provides that the insurer will pay on behalf of Ds & Os loss (i.e. damages and defence costs) resulting from claims alleging their wrongful acts. However, Side A coverage only applies when the corporation does not indemnify the Ds & Os.
  • The Side B insuring agreement provides that the insurer will pay on behalf of the corporation loss which Ds & Os are legally obligated to pay as a result of a claim and for which the corporation indemnifies them. In circumstances where a corporation is not able or permitted to indemnify its Ds & Os (such as the statutory restrictions discussed above), Side B coverage does not apply and one must revert to Side A coverage.
  • The Side C insuring agreement provides that the insurer will pay on behalf of the corporation loss which the corporation is legally obligated to pay as a result of securities litigation against it. Although, at first glance, Side C coverage does not appear related to directors' and officers' liability, it was developed long after Sides A and B, principally for the purpose of avoiding allocation disputes regarding the portion of loss due by the Ds & Os (which might be covered by Side A or B) and the portion due by the corporation in the event of securities litigation.
  • On occasion, a D&O policy might include coverage for other types of liability of the corporation, such as for employment practices liability, or errors and omissions.

The insuring agreements set out above have been described summarily. However, the policies invariably contain nuances that require careful review. Terms such as « insured », « claim », « wrongful act » and « loss » are specifically defined and are circumscribed by the policy terms and conditions and by jurisprudence.

D&O policies are written on a « claims-made » basis, i.e. their coverage is triggered by claims that are made during the policy period,15 as opposed to being « occurrence » based, i.e. coverage being triggered based on the timing of the wrongful acts at issue in the claim.

D&O policies generally stipulate that defence costs are included within and shall erode the policy limits. Typically, D&O policies provide for a deductible or self-insured retention (hereafter « SIR ») for Sides B and C of the policy, but not for Side A. The deductible or SIR is generally applicable to defence costs as well as to damages.

D&O policies may contain « duty to defend » provisions, or may provide for « reimbursement » or « indemnity ». Those with « duty to defend » provisions specify that the insurer pays for and directs the defence of the insured. On the other hand, a policy drafted on an « indemnity » basis generally provides that the insured will select defence counsel with the consent of the insurer and will direct the defence, with the insurer reimbursing the fees incurred on behalf of the insured, although most such policies provide that the insurer will advance rather than reimburse funds for defence costs. D&O « indemnity » policies generally provide that the insurer has the right to be involved in the defence, and its consent is required to settle a claim or to incur defence costs.

To continue reading this article, please click here.

Previously published in Développements récents en droit des assurances (2015), Service de la formation continue du Barreau du Québec.


1 Boralex inc. v. AIG Insurance Company of Canada, 2015 QCCS 972, EYB 2015-249344, [2015] J.Q. No. 1939. The decision is currently on appeal at the Quebec Court of Appeal. The author Catherine Tyndale and our colleague John Nicholl represented AIG in this matter.

2. Canada Business Corporations Act, R.S.C. 1985, c. C-44.

3 Business Corporations Act, CQLR, c. S-31.1.

4 Each province has its own statute for corporations but, for the purposes of this article, we refer only to the QBCA and the CBCA where applicable. Where other federal and Quebec legislation applies, we refer to it. Securities legislation is the only exception, where we refer to Quebec and Ontario statutes.

5 Peoples Department Stores inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64.

6 Steven DONLEY & Nigel KENT, « Directors and Officers Liability in Canada : A review of Exposures and Coverages Available under D&O Policies » (June 2008), Clark Wilson LLP at 5 ; Dennis H. PETERSON, Shareholder Remedies in Canada, (Markham, Ont. : LexisNexis, 1989) (Loose-leaf updated 2007) at 18.25, 18.26, 18.31.3.

7 Securities Act, CQLR, c. V-1.1, ss. 213.1 and following.

8 Securities Act, R.S.O. 1990, c. S.5, ss. 130 and following. Other provinces have primary and secondary market liability provisions modeled on Ontario's statute.

9 Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s 227.1.

10 Tax Administration Act, CQLR, c. A-6.002, s. 24.0.1.

11 Environment Quality Act, CQLR, c. Q-2, s. 115.50.

12 Canadian Environmental Protection Act, S.C. 1999, c. 33, s. 280.

13 This was the case during the D&O crisis of the 1980s. See William KNEPPER & Dan BAILEY, Liability of Corporate Officers and Directors, Volume 2, 8th ed. (Matthew Bender, 2014) at 23-1-23-2.

14 Ronald J. DANIELS & Susan HUTTON, « The Capricious Cushion : The Implications of the Directors and Insurance Liability Crisis on Canadian Corporate Governance », (1993) 22 Can. Bus. L.J. 182 at 189-198 ; Herbert S. SILBER, « Directors' and Officers' Liability Coverage : Directors' Liability and the Scope of Policy Exclusions in Canada », (1990) 8 Can. J. Ins. L. 95 ; KNEPPER & BAILEY, supra, note 13, at 23-1-23-2.

15 Most policies will also permit the insured to notify the insurer of circumstances which might give rise to a covered claim at a later date, and if sufficient information is provided in that notice, the insurer will treat the later claim as triggering the policy in force at the time the notice was given.

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.

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Catherine Tyndale
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