Area of Law: Insurance Law
Answer # 2756
Directors and officers liability insuranceRegion: Ontario Answer # 2756
Duties of directors and officers
Directors are elected by the shareholders of a corporation to guide the business operations. Officers are selected by the directors to manage the day-to-day operations of the corporation and include positions such as ‘president’ and ‘treasurer’. The duties of the various officers are established by the directors and by the by-laws of the corporation.
Both directors and officers have a fiduciary duty to the company, which includes the duty to:
- act reasonably, in good faith, and in the company’s best interest,
- place the interest of the organization before their own,
- act within the scope of applicable bylaws.
Under the law, directors are liable for:
- corporate income tax,
- GST and HST on its sales,
- payroll remittances, including the employer’s portion of CPP and Employment Insurance, and
- environmental issues.
What is D&O liability insurance?
Directors and Officers liability insurance (D&O) protects directors and officers from claims made against them while they were serving on a board of directors and/or as an officer of a company. Claims are usually based on the assertion that a director or officer committed a wrongful act in the performance of their duties.
A wrongful act can include:
- misstatements, or
- unlawful discrimination.
D&O insurance provides coverage for:
- the costs of defending a claim, and
- if they lose, the payment of claims, known as damages (including awards and settlements).
Who can buy D&O insurance?
D&O insurance can be purchased to protect the directors and officers of:
- public companies,
- private companies, and
- not-for-profit organizations.
In most cases, a D&O insurance policy will cover current directors and officers of an organization, but some policies may be structured to also include:
- all past and future directors and officers,
- senior management, and
- volunteers in a not-for profit organization.
What types of claims does D&O insurance cover?
D&O insurance usually provides coverage for:
- financial losses to a shareholder or to the corporation, including bankruptcy of the company,
- failure to act according to government laws or a corporate by-law, such as not filing reports or maintaining records,
- non-compliance with a statute, such as employee discrimination or wrongful dismissal, or failure to pay taxes,
- misrepresentation to creditors or customers,
- acting beyond their authority, such as improper or excessive spending or unauthorized borrowing,
- conflicts of interest, and/or
- other breaches of fiduciary duty.
What types of claims does D&O insurance NOT cover?
D&O insurance does not cover intentional illegal acts, such as:
- embezzlement, or
- decisions made for intentional personal gain.
How much does D&O insurance cost?
The cost of D&O insurance will depend on the type and size of the organization and the details of the policy. The average cost of $1 million of coverage is usually between $5,000 and $10,000 a year. However, for a low-risk small business, the premiums for $1 million in coverage can be a low as $500, while a high-risk business with the same coverage could pay as much as $50,000 a year. For more information about directors and officers insurance, contact an insurance agent or broker.
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