Managing a business has become significantly more complicated for corporate directors and officers. Globalization, economic instability, increased competition and strengthened regulation, among many other factors, have all forced a new form of stress upon executives. Unfortunately, a management decision can result in an unforeseen consequence that can materially impact a company’s financial position and security — and, in certain cases, put an executive’s personal assets at risk.
In law, directors and officers are the “stewards” of a corporation, and in their capacities as such, they assume a personal financial responsibility for the decisions they make and their outcome on the business and its stakeholders. What is startling, however, is this liability is quite often misunderstood or even completely overlooked.
In the 2013 Baker v. Ministry of the Environment, a highly publicized Canadian environmental case, the Ontario Divisional Court ruled that a group of directors must personally contribute millions of dollars to the costs associated with cleaning up contaminated land.
Today, we continue to see companies, large and small, reeling from the repercussions of events like this. Data breaches, corporate insolvencies and environmental incidents are common examples of debilitating management events that test the limitations of insurance.
Many of Canada’s major general insurers underwrite a suite of specialized liability policies that were designed specifically for these types of emerging risk. A sophisticated directors’ and officers’ liability (D&O) program is imperative to the success and continuity of any corporation and the security of the individuals who manage it. Nevertheless, every management team faces a unique risk profile and should speak with a licenced insurance broker to more clearly understand which coverages are a right fit for their business and staff.
D&O liability insurance: A policy that provides coverage to directors, officers and the entity itself for loss arising from certain wrongful acts, including management errors, omissions, misstatements, misleading statements, neglect or breach of duty.
Side A differences-in-conditions (Side A DIC) insurance: A highly specialized policy that complements traditional D&O coverage and provides a dedicated excess insurance limit to directors and officers.
Employment practices liability (EPL) insurance: A policy that provides coverage for loss arising from certain wrongful acts that may occur during the hiring, management and termination of employees.
Fiduciary liability insurance: A policy that provides coverage for loss arising from the mismanagement of employee benefit plans.
While the D&O policy is certainly one of the most valuable corporate assets, individuals insured under the policy must be aware its coverage is not always ironclad. What many buyers tend to misunderstand is that the D&O policy limit is shared between all insured parties — namely, the entity itself and the directors and officers who manage it.
Statistically, claims brought against the entity are more common, more complex and more costly to defend than those brought against individual directors and officers. In fact, certain claims can exhaust an entire policy limit, leaving directors’ and officers’ personal wealth exposed to loss.
This is precisely where a Side A DIC policy comes into play. As a complementary product to traditional D&O coverage, the Side A DIC is structured specifically to protect insured individuals in cases where all other coverage has been fully exhausted or is otherwise inaccessible.
The “differences-in-conditions” policy feature provides drop-down coverage for when a certain loss is excluded from the underlying coverage. In essence, it is meant to bridge the gap between unavailable corporate indemnification, an unresponsive or unavailable underlying D&O limit of liability, and the directors’ and officers’ personal assets. Arguably, the real value of this policy is its exclusivity; the Side A DIC can never be accessed by the company, but is dedicated to the very individuals who serve it.
Attracting, retaining talent
One of the less obvious benefits of D&O liability insurance is its role in the attraction and retention of corporate talent. This is more often the case in early-stage businesses, where a single heavy-hitting executive can significantly propel the company through certain milestones, secure additional capital investment, win a key contract, or improve its relationship with stakeholders. That being said, somebody of this calibre will come at a cost — and, in many cases, she will require an adequate insurance program prior to the execution of her employment contract.
Ryan R. Seager is a senior underwriter, executive and management liability, at RSA Insurance Company of Canada in Toronto. For more information, visit www.rsagroup.ca.
Without a stand-alone Employment Practices Liability (EPL) policy in place, a company may be exposed to significant financial loss in the event of an employment-related claim.
While a traditional D&O policy does provide a limited EPL extension for the insured persons (directors and officers) under the policy, unless “entity coverage” is purchased deliberately, the company would remain exposed to significant employment-related risk. Since executives at many companies are fairly removed from routine employment practices, claims made against an insured person are less common than those made against the entity.
Employment-related allegations, regardless of their merit, are highly costly to manage and defend. For many companies, a “stand-alone” or “entity” EPL policy may be a highly valuable investment. This is especially the case for companies with employees based in the United States, where employment-related litigation is significantly more common and corporate defence costs are astronomical.
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