It would be nice, but there is no single insurance policy that covers every element of risk out there. And there is no one business operation that actually requires every insurance policy available. So anytime someone writes an article like the ones you have been following here, it is a challenge to appropriately offer enough insight into the insurance industry to allow anyone willing to read the articles information enough to truly understand all of the nuances – For this article, we will discuss very briefly Directors and Officers Liability. This is a topic that could easily fill pages, but what I hope to achieve is that you will perhaps see the value to take the next step, which is to talk to your insurance professional and get the broader perspective.
We often hear about the executives of high profile, publicly traded companies being held responsible for the mistakes they have made resulting in the loss of millions of dollars to their shareholders, clients, government agencies or suppliers. We may also become aware of the responsibility we assume when we are asked to sit on a small, not for profit, boards of directors at the church we attend or the condominium corporation where we live. In each case, whether large publicly traded firms or small not for profit organizations, there is risk we take as directors and officers. The decisions we make when we sit on a board can potentially put our personal assets – our homes, cottages, cars and savings – on the line…
Big companies absolutely know the value of having a good Directors and Officers Liability insurance policy in place, and many insurance programs for Condo Corporations or Churches will build in a piece to cover the Directors and Officers of these organizations. And just for the record, if ever asked to sit on a board it is absolutely imperative that confirmation of a Directors and Officers Liability policy is made before even considering taking on the position.
But what about those businesses that are neither public nor not for profit? The privately owned businesses that manufacture and build and repair and provide services and employ hundreds of thousands within the work force in this country and who have an ownership and management team all making key operational decisions every day?
Many privately run business owners assume they have protected themselves by creating a legal corporate entity that protects them as an individual and in the worst case they can shut the doors and walk away if they are sued, but this really is not an effective means of managing the risk of running a company. Transferring this piece of the risk of business can be done by purchasing a Directors and Officers Liability policy specifically designed for the private company.
So here is a little of what you should know about D&O Insurance, to get the process started.
Every Director and Officer of every private company acts under a duty to that company: A duty of care – requiring due diligence in the management of the company and a duty of loyalty to the company – dictating there is no conflict between the interests of the corporation and the interest of the Directors and Officers of the corporation. In essence, Individuals running a business need to act prudently and in the best interest of the company. When they do not, claims may be brought against them personally.
We see claims under D&O insurance coming from employees, customers and clients, competitors, shareholders and government. The legal expense of defending against a suit, whether it is bona fide or frivolous, can be huge. When looking to purchase D&O coverage, make certain that the policy is written on a duty to defend basis.
Coverage areas that should be part of the Directors and Officers Liability policy is coverage for the Entity itself as well as the directors and officers for their “wrongful acts”. Employment Practices may be included within the policy, which includes coverage for allegations of harassment, discrimination and wrongful dismissal. And the fiduciary duty of the directors and officers may be covered under a directors and officers policy, as well. As insurers make every effort to streamline coverage and to be innovative and competitive, polices are including more and are delivering better insurance options to private business owners. It was not that long ago that a business could really only access all of this coverage by purchasing three separate policies.
Many D&O policies include coverage for insured individuals who sit on boards outside of the company as well. A perfect example might be an executive in a company sitting on an industry related association. There may or may not be a policy for someone like this under a policy purchased by the association, but in its absence the individual will at least have coverage through their own D&O policy. Revisiting an earlier statement , it is imperative that before accepting any position on any board of directors, ensure it has a D&O policy.
And finally, all insurance policies have coverage and exclusion clauses. Whether we are talking a Directors and Officers Liability policy or car insurance, they all follow a similar format; they all state what is covered and then list where coverage does not apply. So read your policy wordings, understand what they entail and ask you insurance professional to explain the areas that are difficult to understand.
There are policies available to cover all aspects of risk, whether personal or corporate, property or operations within that property. The cost of purchasing appropriate insurance is far less than trying to pay for a loss without insurance.
Tim Tokrud has been a partner at Gifford Associates Insurance Brokers Inc in Ottawa since 2008 and has worked within the insurance industry since 1988. He can be reached at tim.tokrud@giffordassociates.ca
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