Area of Law: Business Law
Answer # 0258
Directors and officers liability insuranceRegion: Ontario Answer # 0258
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.
Is your business protected?
Whether you’re a start-up or well-established business, life insurance can help protect your business so that you can still achieve your business goals in the event of the unexpected. It’s important to get professional advice for your unique situation, and it is more affordable than you think. For a free consultation and quote, contact an Empire Life Insurance advisor today.
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