A Primer on D&O Insurance

Why Consider D&O Insurance?

Directors & Officers can be held personally liable for misuse of funds, misappropriation of funds, knowledge of illegal or improper acts, making improper loans, fraudulent acts, transactions or decisions, which are not authorized by the bylaws of the corporation.

Directors & Officers must give undivided loyalty and are prohibited from using their position of trust for personal interests or gain. This includes secret profits from personal transactions, competition with the corporation, usurping of a corporate opportunity, conflict of interest.

Duty of Care requires prudence based on common sense. The test is “What a reasonably prudent person would exercise in comparable circumstances”.

Diligent attention to business is essential.  Failure to attend meetings, unquestioning reliance on co-directors, inaction or being a dummy director does not lessen the duty of responsibility.  A director cannot escape liability incurred by resigning.  The proper care and protection of the interests of the corporation must be considered first.

Duty of skill varies with the qualifications of the Directors & Officers and the scope of the corporation’s activities.

Duty of Prudence requires that Directors & Officers act carefully deliberately, and cautiously trying to foresee the probable consequences of a proposed course of action.

Duty of Compliance requires every Director & Officer to comply with the business corporations act, corporate articles, corporate By-Laws, and under all other statutory law and regulations including the criminal code, the environment protection act, income tax act, labour standards act, workmen’s compensation act, pay equity act, securities acts, and many others.  Directors & Officers are joint and several liable for improper conduct to

• Shareholders or members for the management of funds

• Creditors for breach of trust, misappropriation of funds

• Employees and Volunteers for unpaid wages, unsafe working conditions

D&O insurance policies provide coverage for legal actions against the insured by D&O for wrongful acts committed at any time prior to the end of the policy term. The coverage applies to amounts that the D&O are legally required to pay as a result of any claim brought against them as a result of wrongful acts, and includes damages, judgments, settlements and defense costs but excludes fines, penalties, and any other charges deemed uninsurable. Penal defense coverage covers fines, penalties, regulatory costs (i.e. workers compensation fines)

FAQs about D&O Coverage

• What is the purpose of Directors & Officers Insurance coverage?

A D&O insurance policy indemnifies the corporation and its Directors & Officers for wrongful actions which cause financial harm to a third party and result in a lawsuit.

• Are the directors liable for the activities of the corporation?

Many people believe that incorporation creates some kind of legal veil of limited liability behind, which they can hide. This is not the case. Directors and officers of a corporation are responsible for their actions and the actions of the corporation and in some instances the actions of other directors. The courts have assessed damages against directors of corporations for wrongful actions and in some cases the laws carry specific legal responsibilities for directors.

• Does D&O insurance cover legal cost, defense and lawyers fees, damages awarded?

Yes it does, as they are defined in the insurance policy contract wording. The policy contract is designed so that the insurer is responsible to defend the named insured from legal action due to a wrongful act and to pay the costs and damages subject to the deductible and policy coverage limit.

• Does corporate status affect an organization's ability to access D&O insurance?

Some insurers will offer directors and officers coverage to the boards of unincorporated groups but this is not common amongst all companies.

In an incorporated group all members, volunteers, officers, and directors are liable. Incorporation creates a legal entity, recognized in law. Liability for activities is then based on the actions of the organization and its directors. Insurance contracts can then be put in place to defend the entity and its directors whereas an unincorporated entity does not exist in law and the individual members retain liability. It becomes more difficult to contract to indemnify each director, so many insurers refuse to offer coverage on this basis.

• Why do I need general business liability insurance if I have Directors & Officers coverage?

D&O insurance does not cover your general business activities, such as meetings, contracts, newsletters, premises, etc…as a matter of fact, not having general liability could lead to a law suit against directors for not having it when a claim occurs.

• Our association has a number of chapter/branches/members. Are we able to include all of them under one Directors & Officers policy?

Generally speaking, this should not be a problem.

The upside is:

1. For reasons of risk management controls ie you would know the quality of coverage, it would be much more desirable to have one policy

2. Your premium would be lower

3. Your chapters/branches might be very thankful not to have to deal with this issue ie ‘Brownie’ points for you

The downside is:

1. It may be very time and energy consuming for you to have all chapters/branches involved  ie the in-fighting/control factor is quite common

2. Most insurers will not allow you to include all chapters/branches unless they all have the same bylaws

3. Some insurers will also not allow you to include incorporated chapters/branches because of their independent legal status.

4. If all chapters/branches are included in one policy, you must be reminded that they all share in the one limit of the policy ie if you have 10 chapters with a limit of only $1,000,000 and more than one claim occurs you may find yourselves with insufficient coverage and squabbling over who should be the recipient of the existing funds.

• Some organizations have found that their premiums have increased dramatically, coverage has been reduced, or their insurer will not renew their policy. What is happening?

Continued high loss ratios, disappearing investment returns and non existing profits have affected all. Associations are not an exception - as you may already have experienced - to the increased rates, reduction of coverage and/or complete cancellation or non renewal of policies.

You would be well advised to review your coverage, its limits and any activity vulnerable to loss. Ask yourself some of these questions and avoid adverse future effects to your coverage.

• Are our premises well protected from burglary or theft by dead bolt locks, alarms or security guards?

• Are your procedures such that they will discourage, prevent or reduce the possibility of fraud, errors and mismanagement?

• Are there limits or coverage that could be reduced or eliminated?

• Are there other available brokers from whom you can get better advice, coverage and value for your insurance budget?

Wolf Leue is Director, LMS PROLINK Ltd., a firm providing insurance services to associations since 1986 and now representing over 300 nonprofit organizations.

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