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Directors and Officers Liability Policy Overview


Agenda

Directors and Officers Responsibilities

Corporate Indemnification

Insurance Policy

Structure

Definitions

Who/What’s covered

Exclusions/Endorsement

Indemnification Issues

Limits and Premium Considerations

(Company and Underwriting)

Claims Examples

Start Ups/Early Stage Company Insurance


Directors And Officers Responsibilities

Duty to exercise due diligence in overseeing the activities of the organization that they serve.

They are required to act in good faith and in the best interest of the organization.

Directors have three basic duties: - Duty of Diligence (Duty of Care): Act reasonably, in good faith, in the

organization’s best interest. - Duty of Loyalty: Place the interest of the organization before your own. - Duty of Obedience: Act within the scope of the organization, within

applicable rules and laws.


Corporate Indemnification

The Corporation may/shall indemnify a Director or Officer for costs, expenses and damages provided:

– in all actions, if they acted honestly and in good faith to the best interests of the Corporation

– in a criminal action, they believed their conduct was lawful


Insurance Policy

• Insuring Clauses/Sides A, B, C,….. Directors and Officers ( no deductible) Corporation Indemnification of D&O’sCorporate Liability Employment Practices Liability Securities Liability Fiduciary LiabilityInvestigative Cost (Derivative Demands, sub limited)

• DefinitionsClaim, Wrongful Act, Wrongful Act with respect to EPL Loss, Securities Claim, Reporting requirements, Defense Costs, Securities Claim,Subsidiary, Conduct , M&A Triggers/Notice, EPL - Reasonable Notice


Definitions - Who is Covered

• Insured means the “Company” and “Insured Persons”

• Insured Persons (NFP)– past, present or future duly elected or appointed Directors, Officers,

Trustees, Executive Director, Dept Heads, Committee Members, Employees and/or Volunteers

• Insured Persons (FP)– past, present or future duly elected or appointed Directors, Officers,

Trustees, Governors, Employees if named with a D&O, Estates, Heirs, Lawful Spouses, Domestic Partners or Legal Reps, “acting solely in their capacity as such on behalf of the Corporation”


Definitions

• Wrongful Act any actual or alleged acts, errors or omissions, misleading statements,

negligent or breach of duty by D&O’s (Insured Persons) either individually or collectively, while acting in their capacities as a D&O of the Corporation

• Claim (Written)

a civil, criminal, governmental, regulatory, administrative or arbitration proceeding made against any Insured seeking monetary or non-monetary relief,


Insurance Policy

• Defense Provisions Costs inside or outside limitsInsurer has no right or duty to defend, reimburse Insurer has a right and duty to defend, appoint or approve counsel Waiver of Retention for “no liability” claims

• Standalone D&O PolicySpecifically for D&O’s only No Corporate coverageNo sharing of limits

• Claims Made concept Policy responds to a claim made during the policy period Wrongful act may have occurred in the past Claim presented to insurer as soon as possible within the policy term


Insurance Policy

• Retention (Deductible)

• Endorsements & Exclusions Financial Impairment Prior Acts Pollution LossHammer clause Predetermined Defense Cost Allocation Additional Side A (D&O limit) Professional Services Exclusion (E&O)Financial & Professional Services Exclusion Bodily Injury, Property Damage Exclusion Extended Reporting Period or Run Off


Indemnification Issues

• The inability due to insolvency or insufficient funds

• Discretionary attitude of the board

• Public policy and statutory limitations

• The scope of indemnification permitted by law and the scope of liabilities imposed on Directors & Officers

• Indemnification is on a reimbursement not on behalf of basis • The unavailability of coverage in Commercial General Liability, Product

Liability and Professional Liability policies


Limit and Premium Considerations(Company and Underwriting)

Profit or Not for Profit Private or Public (Canada, USA or Foreign)Size of Corporation (Asset Value/Sales)Corporate StructureBusiness ActivitiesMarket Cap Countries of OperationFinancial Strength Sleep Factor


Claims examples

.

Misrepresentation Suit from a Prospective Investor

Employee count: approximately 75 Annual revenue: approximately $25,000,000

An officer of XYZ Corporation held a conversation with a potential investor in which they discussed the future plans for the company, including the launch of new products over the coming six months. Based on this information, the investor committed over $500,000 to the company. After a year, the products the investor had anticipated did not appear in the marketplace and the value of the original investment declined. The investor sued XYZ and its directors and officers for misrepresentation, seeking over $10 million in compensatory and punitive damages

Following two years of litigation and $250,000 in defence costs, the parties finally reached a settlement with the plaintiff for $335,000.

Claims examples provided by Chubb Insurance


Claims ExamplesSale of Subsidiary – Misrepresentation

Employee Count: approximately 145 Annual revenue: approximately $7,600,000In early 2000, XYZ Company sold 100% of its primary asset of its subsidiary ABC Limited to QRS Corporation. Prior to the transaction in 2000, Transport Canada performed an inspection of the asset. In 2004, Transport Canada performed another inspection. During the 2004 inspection, they informed the claimant that much work was needed in order to keep the asset in operation.According to the 2004 inspector, these were repairs that should have been pointed out in the 2000 inspection. The defects were major and could not have been ignored 4 years prior. These repairs allegedly added up to $8.6M. Without these repairs, the asset would have to be put out of service. In 2005, a demand letter was sent to the defendant. The parties tried to come to an agreement but did not have any success. QRS Corporation alleged that XYZ Company knew, at the time of the transaction, of the poor condition of the asset, and that they did not perform the necessary repairs on the asset knowing it would be sold soon. The plaintiffs allege that the Directors and Officers misrepresented the quality of the asset to benefit from a higher sale price and that they acted in bad faith, fraudulently, and to their personal profit.

Insurer is defending the company’s directors and officers with respect to the misrepresentationclaim. Insurer has paid approximately $689,000 in defence costs and $7,000 in indemnity.Claims examples provided by Chubb Insurance


Claims example

Human Rights: Ontario – Retaliatory Wrongful Termination and DiscriminationEmployee count: approximately 120 Annual revenue: approximately $20,000,000

This matter was brought before the Human Rights Tribunal of Ontario. The applicant, a 21 year employee, alleged that she was the victim of retaliation in the form of wrongful termination. The applicant felt that her termination was the result of her previous allegation related to discrimination and harassment on the basis of her disability (depression). She sought $430,000 in damages.

The matter settled for $75,000 representing common law notice and mental anguishdamages. Defence costs of $10,000 were incurred

Claims examples provided by Chubb Insurance


Start Ups/Early Stage Companies Insurance Requirements

• General Liability (Product & Premises)

• Professional Liability (Errors & Omissions)

• Property • Employment Practices Liability • Directors and Officers Liability • Cyber Liability (Network, Privacy, First Party Issues)

• Intellectual Property Coverage (Patents)

• KRE


Questions ?

Presented by:

Philip BerFinancial Service Brokers Ltd.

Office: (905) 731 2816Cell: (416) 729 1389

email: [email protected]

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