Liability Insurance for Directors & Officers

Business management has always had a duty to exercise due diligence in performance of their duties. However, following a string of well publicized corporate scandals and failures in the USA and Canada, the scope, performance, and accountability of directors’ and officers’ duties to shareholders, employees, creditors, and other stakeholders have been widened. There is also a trend towards holding directors personally responsible for acts of the corporation, in an attempt to force directors to take increased responsibility for oversight of the company’s operations.

So, whether your company is publicly traded, private, or non-profit, your directors and officers are exposed to a number of liabilities, and can be held personally liable for alleged negligence in the way they run the company, or because of unethical or even criminal behaviour.

D & O Liability Insurance—What Is It?

Directors and officers liability insurance (can also include Employment Practices Liability Insurance), covers your damages and/or defence costs in the event that you are sued for alleged wrongful acts while acting in your capacity as a director or officer. It could be compared to an errors and omissions policy that protects the business, except in this case the directors and officers liability insurance policy protects the directors.

Specific duties and responsibilities are imposed on directors as to the conduct in which they run a business.  These responsibilities are imposed under contract conditions.  Common law and statutory legislation and, in most circumstances, the individual director or officer will be personally liable.

Potential Areas of Liability

A lawsuit may be launched under these and other circumstances:

• Failure to act as required by law: Most provincial and federal legislation requires directors of incorporated or limited companies to maintain certain records, and file financial and other corporate reports. If however, these records are not maintained or properly filed, the director may be liable for an offence under one or more pieces of legislation.
• Wrongful Act: This has often been interpreted by the courts as: any actual or alleged act, omission, error, misstatement, misleading statement, neglect, or breach of duty.

Examples of a wrongful act can include such things as the wrongful dismissal of an employee, employee discrimination, or failure to remedy a safety or environmental hazard. Liability could also result from non-compliance with a corporate statute, mismanagement, or financial losses.

Note:  Liability is not limited to the business or corporation.

• As a director or officer, you can be held personally liable for your actions or in-actions
• Claims of ignorance in performance of your duties is not a defense
• Resigning from your responsibilities may not be accepted as a defense
• Indemnity provided by an insurance policy held by the Board of Directors may not provide adequate protection
• You could also be held liable for an alleged non-performance

Understanding Your Options

A directors and officers insurance policy is usually divided into two periods of coverage:

1. Coverage during the time period when you are acting as a director or officer
2. Coverage for the time period after you no longer serve as a director or officer (extended for a limited period); in other words, this part of the policy protects your assets if you are sued after you have completed your term of service or have retired, and are no longer serving as a director or officer. Coverage and/or reimbursement of costs are only available where the company has indemnified the individual(s) not the company.

It’s easy to learn more about directors and officers liability coverage.  Just contact us today!