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Directors and officers liability insurance

Region: 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:

  • errors,
  • omissions,
  • 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:

  • fraud,
  • 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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