Do You Need D&O Insurance?
The Canada Business Corporation Act and numerous statutes in each province impose many duties on the Company Director. The breach of any of these, if it leads to financial loss to the company or to the shareholders or others, can be grounds for an action for damages. There are further duties established by common law.
It is not uncommon for many claims to be unjustified or unfounded; however, the costs associated with their investigation and defence are often substantial.
Allegations commonly made and which have to be defended by directors:
- Acting beyond the scope of their authority
- Giving wrong or unprofessional advice
- Breach of fiduciary duties
- Failure to police the corporation or supervise subordinates properly. Anti-trust violations
- Improper or excessive company spending
- Unauthorized company borrowing
- Conflict of interest
Remember, the above only need to be alleged for costs to be incurred.
D&O allegations are most likely to occur following:
- Acquisitions/divestitures
- Mergers
- Foreign investment (especially in the USA)
- Public offerings
- Management buy-outs
- Lack of growth, reduced dividends, improper handling of negotiations
- Mismanagement or waste of corporate assets
- Employee dismissal
- Board room dispute
- Breach of contract
- Liquidation of the company
- Change in ownership of the company's share capital
It is also worth remembering that Directors can be held liable for acts committed by other Directors, simply because they sit on the same board. Such damages can extend to the entire personal estate of the Director involved.
- Financial protection for personal assets of an individual Director or Officer.
- Reimbursement of claims paid by the organization for its Directors and Officers.
- Designed especially to meet the cost of:
-Defending claims
-Compensatory damages which the Director or Officer may be legally obligated to pay following a wrongful act arising out of his position within the organization
A D&O insurance policy should be a serious business consideration for your company.
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