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The Importance of Directors and Officers Liability - D&O

Guthrie Insurance

Good video from Chubb Insurance about the important of Directors and Officers Liability insurance protection.

Click to view Directors and Officers Liability video - D&O protection

This insurance is used to insure against claims arising from alleged negligent or wrongful acts, errors or omissions alleged to have been committed by present or former directors or officers of your Corporation.

The Director or Officer of a corporation has several responsibilities under Tort, Contract, Trust and Statute (Canadian or Ontario Business Corporations Act). A breach of any of these responsibilities by an act of neglect, error, omission, misstatement or breach of duty ("wrongful acts"), which leads to financial loss can be grounds for an action for damages against a director personally (their personal estate) whether actually at fault or not (the act may have been caused by a another Director sitting on the same board !). These suits can emanate from many sources including shareholders, employees, unions, customers, suppliers, government, special interest groups and the Corporation itself.

Whether the Director is actually held liable or not there may be significant costs incurred just to defend an action. The intent of a Director and Officers policy is to cover both these defense costs and the liability. If the Director is entitled to indemnity from the Corporation pursuant to the prescribed Bylaws then the policy would pay on behalf of the Company.

Some examples of allegations include:

1. Corporate law - Improper use of shareholder lists, improper declaration and payment of dividends, failure to comply with proxy requirements, acting beyond the scope of authority, inducement to bankruptcy, predatory pricing, allegations of false advertising, conflicts of interest, misleading representation of financials or assets, waste of assets, mergers, acquisitions, improper corporate gifts or contributions, patent, copyright or trademark infringement, failure to detect embezzlement, encroachment on competitors business, bad faith negotiations, M & A's, customer discrimination, etc.

2. Taxation Law - Liability for remittances arising out of the Income Tax Act, GST provisions and EI and CPP benefits e.g. tax irregularities, misrepresentations, and corporate remittances.

3. Environmental Law - Liability arising out of the Environmental Protection Act (specialized coverage required here).

4. Employment Law - Liability arising from Pay Equity, Employment Equity, Ontario Safety Act, Harassment, Discrimination, absolute liability for unpaid wages and vacation pay and violations of human rights.

5. Securities Law - Liability for insider trading and other violations of the Securities Acts, stockholder suits, hostile takeovers, "poison pills", "golden parachutes" etc.

6. Tort Law - Breach of contract, failure to deliver services etc.

The list is virtually endless as new circumstances arise and are tested in the courts.

Under common law a director must be prudent and loyal, honest and diligent, skillful and resourceful. A director can be found liable for a breach of any of these duties.

There are several exclusions in a D & O policy including (but not limited to); bodily injury and property damage (generally covered under the business liability policy), pollution, criminal/dishonest acts, insureds vs insureds, and prior and pending litigation etc


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