Canadian Directors Insurance Coverage Explained

Canadian Directors Insurance Coverage Explained

Reasons To Consider Canadian Directors Insurance Coverage

As a Canadian officer or director of an organization, you are exposed to a myriad of financial risks from numerous sources including employment-related matters, potential fines and penalties under the new Canadian Anti-Spam Legislation (CASL), and unpaid taxes should the organization become insolvent.  In addition, increasingly complex and stringent regulatory mandates and increased shareholder activism mean directors are at greater risk of being named in a lawsuit requiring them to incur significant expenses from mounting a legal defence and or paying any settlement or judgments.

The legal costs to defend a director of a Canadian private company can be substantial and in many cases, they exceed $100,000. If a Canadian director’s insurance coverage isn’t purchased it creates significant personal liability risk to directors, their spouses and their families because the costs directors can incur are not covered under a personal insurance policy or a company’s commercial general liability insurance.

Canadian Directors Insurance Coverage Fills The Coverage Gap

Unlike a commercial general liability policy that provides coverage for claims arising from property damage and bodily injury, a Canadian directors insurance liability policy specifically provides coverage for a “wrongful act,” such as an actual or alleged misrepresentation, misleading statement, neglect or breach of duty. A directors liability policy provides defence costs and indemnity coverage to the entity listed on the policy declarations.  In addition, a Canadian directors insurance liability policy also responds to provide coverage for individual directors and officers should the organization be unable (typically due to bankruptcy) or unwilling to indemnify the directors and officers of the company.

Why Do I Need Directors Insurance If Our Corporate Bylaws Including Indemnification Provisions?

Indemnification provisions are typically included in the charter/bylaws of a corporation. While they are helpful for large well-capitalized companies and are an important part of mitigating risk for any Canadian director, the reality is small & mid-sized privately, publicly-traded companies or nonprofit organizations often do not have the financial resources to fund the indemnity provisions, making the bylaws hollow and useless. Canadian directors’ insurance coverage can provide an extra blanket of security in the event of a covered loss.