|
Are D&O's Really at Risk?
|
A better pointed question, are they willing to risk personal assets to serve as a director or officer of a non-profit organization and thus be exposed to the same risks, but without opportunity for gains, as their director of for-profit corporation counterparts? No matter how strongly heartfelt their convictions toward the cause and belief in the organization they serve, their answer is likely 'NO'.
Most directors & officers are aware (or becoming aware) of the significant personal risk that service as a director or officer entails. Common law and many statutes and regulations impose onerous duties and personal liability on corporate directors and officers.
Directors and officers are expected to balance the interests of an increasingly broad spectrum of 'stakeholders' in the non-profit organization, such as members, donors, employees, government agencies, the local community, and others. The Canada Business Corporations Act and numerous Statutes in each Province impose many duties on the non-profit corporation director.
Protection is available. Transfer a good part of the risk by purchasing Directors' and Officers' Liability Insurance, popularly know as 'D&O'. Also take measures to minimize your exposure.
So why would the directors pay, and not the corporation?
Allegations which are most commonly made and which have to be defended by directors include:
· Acting beyond the scope of their authority
· Giving wrong advice
· Breach of fiduciary duties
· Authorizing excessive spending
· Failure to supervise subordinates or affairs properly
· Unauthorized company borrowing
Remember, the above only need to be alleged for legal and other costs to be incurred in defending the director. The possibility of these types of charges being made are most likely the result of the following:
· Bankruptcy
· Waste or mismanagement of assets
· Employee dismissal
· Board room disputes
· Breach of contract
It is worth remembering that directors can be held liable for acts committed by other directors simply because they sit on the same board. Also, such damages can extend to the entire personal estate of the director involved.
The corporation may indeed be required to reimburse the directors, because of an 'indemnification clause' found in most corporate bylaws. However, in order for that clause to have any effect, the corporation must have sufficient funds put aside to fund the payouts to the directors. In many of the examples above, funds would not be available. Ironically, a sufficient 'reserve fund' held in trust for the directors' indemnification could in itself trigger lawsuit for assets mismanagement when the economical alternative of purchasing D&O insurance is available.
What does the D&O Policy actually do?
The coverage provides personal protection for Directors and Officers of Profit and Non-Profit organizations against liabilities which may be imposed upon them while performing their duties.
Protection is provided against Wrongful Acts, or Alleged Wrongful Acts. A simple definition of a wrongful act would be:
|
"any error, misstatement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted, by an insured, individually or otherwise, in their insured capacity." |
The insurance protects individual directors and officers when they are sued individually or jointly. When the operation of an 'indemnity clause' in the corporate bylaws causes the corporation to indemnify the directors, the policy will cover the corporation for this instance. Coverage includes damages, judgments, settlements, costs, and defence costs.
It should be emphasized here that the Corporation is not insured by a D&O policy (except for the corporate reimbursement coverage indemnifying the directors). The insurer will not defend the Corporation if it is named in the lawsuit.
There is no 'standard form' of coverage. Each insurer has an unique wording, which should be examined for understanding of what is and what is not covered.
There are three areas of general exclusions:
Matters Too Precarious to Underwrite
Prior or Pending Litigation. Excluded are matters arising from any litigation, claims, and/or legal or quasi-legal proceedings already in process or known about when the policy coverage begins.
Issues Where Other Insurance is Applicable
Excluded are claims which are more appropriately covered under other policies, such as: Bodily Injury and Property Damage, which would be covered by an Automobile policy or a Commercial General Liability; or Pollution, which can be provided under an Environmental Impairment Policy.
Matters Uninsurable under the Law, such as Dishonesty
Such things as Insider Trading, Remuneration illegally paid to Directors, or any personal profit to which they were not legally entitled, are all examples which are not the subject of liability insurance (which is intended to cover negligence).
