Directors' and Officers' Insurance
A director's and officer's responsibilities, duties and obligations are more extensive than you might think. There is a misconception that directors can avoid their obligations by hiding behind the corporate veil, but nothing could be further from the truth! All organizations and the individuals who run them are exposed to a multitude of risks.
A Director's Role and Obligations
- First and foremost, directors are responsible for the proper management of the organization, be it in terms of managing funds, managing employees, implementing policies and procedures, complying with the law and much more.
- Duty of prudence and diligence; In legal language, the expression "to act in a prudent and diligent manner" means to act in a customarily prudent and diligent manner.
- Compliance with the organization's obligations; Act within the framework of all laws, whether municipal, provincial, federal or international.
- Duty of honesty and loyalty; To look after the interests of the organization.
- Fiduciary duty; Directors must act impartially and put the company's interests ahead of their own, in other words, not place themselves in a conflict of interest situation.
Who is Covered on a Directors' and Officers' Policy?
The policy provides protection for members of the Board of Directors. However, in the majority of insurance contracts, members of senior management are also included in the definition of insured, and sometimes even employees and volunteers.
Example of a Claim
One of the most common examples of a complaint is an allegation of fraud against a director. In this situation, the insurer would respond to defend the director. However, if the judge determines that the director is guilty, the insurer would cease its defense.
Another common example of a claim is related to employment practices, such as allegations of wrongful dismissal, psychological harassment or sexual harassment.
The Personal Liability of a Director or Officer
It is important to consider that a director's personal liability may be at stake. The fact that you act on behalf of the organization does not mean that you are exempt from personal liability.
The Civil Code of Quebec states that you cannot conceal yourself behind the organization to avoid personal liability. For example, to conceal fraud, to commit an abuse of right or to contravene a rule of public order.
In addition, a director may be held personally liable under several laws that impose statutory responsibilities. For example, directors are jointly responsible for providing six months' salary and twelve months' vacation pay in the event of the organization's bankruptcy. It's a myth that non-profit organizations can't go bankrupt. Yes, they can!
In the event of litigation, and in the absence of an insurance policy to defend you, a director could find himself having to dip into his savings, his RRSPs and potentially have to sell certain assets to defend himself and settle the amount of a claim.
Who can Sue Directors and Officers?
- Anyone;
- The government in the case of unpaid source deductions or unpaid taxes;
- An employee alleging wrongful dismissal;
- An employee or volunteer alleging sexual or psychological harassment;
- Members alleging misrepresentation or mismanagement;
- A supplier alleging that the organization acted in bad faith under a contract.
Why Should you Consider Directors' and Officers' Insurance?
- Expenses incurred in defense or damages could affect profitability and impact the organization's ability to carry out its mission;
- To attract and retain quality directors;
- To gain access to experts (specialized lawyers);
- To pay defense costs for lawsuits or unfounded allegations.
On average, the cost of a directors' and officers' claim is $45,000. One in ten claims exceeds $100,000. Why risk your personal wealth or your company's or organization's assets when you can protect yourself with Directors' and Officers' Liability Insurance?
Which Documentation do I Need to Obtain a Quote?
- Most recent financial statements, audited if possible;
- Completed and signed insurance application;
- List of directors and officers;
- Organization chart (including all subsidiaries, if applicable).
The eligibility of any claim is subject to the terms and conditions of the insurance policy. The terms, conditions and exclusions of coverage are governed solely by the insurance policy.
