Mitchell Sandham Launches New Website!

February 1, 2012

Mitchell Sandham is excited to announce the launch of our new website!  Click here to visit.  The product is the result of several months of hard work by our team in analyzing, designing and writing the content for the new pages.  The new site offers significantly more detailed information regarding the suite of services and products that we offer.  In addition to the site’s informative content, the design is developed in a way to provide an efficient user experience.  Our goal is to provide visitors with the most accurate and current product information while demonstrating our knowledge and expertise in the field of insurance and risk management.

***To our current Blog followers:  We will not be using WordPress as our Blog platform going forward.  Our new website now incorporates our Blog within it.  In order to continue receiving our posts please visit the Blog section of our site and subscribe to the RSS feed, here.


Bribery Enforcement Action in the Insurance Business……Again

December 22, 2011

 

The insurance industry looks to be a target. This would not be a surprise if you read my recent blog, Bribery and the Board in the Insurance Broker Business, here. With only days left in 2011, I won’t go so far as to use the (2011 word of the year, at least as per my list) contagion, but I have a feeling I will be using the term “systemic” industry risk a lot in 2012.

This time it is Costa Rica. The funds were intended as education and training for INS officials (see how difficult it is to avoid doing business with public officials in the international space),  but some of it went to travel to “tourist destinations” or other purposes not provided within the brokers “books and records.” In this case, and unlike the previous Willis UK Bribery Act case, the NPA (non-prosecution agreement) made note of invoice and other records that made it obvious “that the expenses were clearly not related to a legitimate business purpose.”

The NPA included “failure to devise and maintain an adequate system of internal accounting controls with respect to foreign sales activities sufficient to ensure compliance with the FCPA.”

The price tag you ask?………….$25 million ($1.76 million penalty, with was a substantial reduction thanks to “extraordinary cooperation”, “timely and complete disclosure of improper payments”, and the 5.25 million pound payment to the UK’s FSA (Financial Services Authority); plus $14.5 million in disgorgement and prejudgment interest in a related SEC settlement) not to mention their legal, investigation and communication cost.

The ultimate cost will be difficult to determine, but is potentially much greater than the above, due to potential reputational damage, the new costs to “adhere to rigorous compliance”, and the costs of possible follow-on civil liability claims.

Who you ask…………….? Sorry,………………………………………………….. AON. Here, here, here.

The bigger question……….did they buy investigation coverage under the Marsh exclusive program, or negotiate it themselves with Chartis (to save the commission)? And, will they jump on the band wagon to market this case as the perfect “loss example” to their clients?

At the risk of defending a competitor, it is very likely that the SFO, SEC, DOJ, etc, have a great scapegoat in the insurance brokerage industry: 1) we are the best direct link to business of every size and in every sector, 2) going after international accounting/auditing/consulting firms is difficult because they have a longer history of successfully defending themselves from liability; 3) many of the clients of audit/consulting firms don’t retain them for risk management advice, 4) “do as I say, not as I do” doesn’t just apply to child raising.

The loss control opportunity (the investment in time and resources should reflect the risk, which means the risk needs to be identified to determine the applicability of the following):

  1. Get the “rigorous compliance, bookkeeping and internal controls standards” in place now, not after the enforcement action,
  2. Follow the DOJ “minimum best practices compliance program” as per their common Deferred Prosecution Agreement (the research is a good start, but here is a hint) aka Plea Agreement,
  3. Establish Legal and Compliance Committee of the Board (3 members, no execs),
  4. Appoint one or more senior executives to implement of oversee anti-corruption policies, procedures and standards, and provide adequate resources and an adequate level of autonomy from management, (note that US Sentencing Guidelines suggest that this compliance officer reporting to the General Counsel who reports to the board may not qualify, see here for NY Times article, “MF Global’s Risk Officer Said to Lack Authority”),
  5. Appoint a Compliance Consultant to aid in those activities and the reporting obligations,

The insurance spin – There are two insurance vehicles that come to mind for the transfer of direct “bribery enforcement” based loss:

  1. Standalone Investigation Costs Coverage – this is a new product, rarely purchased and largely unknown product, but no matter what the purchase decision, the due diligence alone is worth your (and your broker’s) effort,
  2. Investigation Costs Coverage as built into a D&O or D&O/Professional Liability policy – there is no rhyme or reason to the contract language so tread carefully. Make sure your broker identifies “Entity” coverage vs “Personal” coverage, and if this analysis covers less than a dozen areas of the policy, ask them  to try again,
  3. Request details on “formal” vs “informal” investigations, but recognize that the “broader” the policy the more onerous there “reporting” obligations, and the greater the risk of erosion or exhaustion of limits.

For indirect loss you might only be able to look to your D&O or D&O/Professional Liability policy. The key for D&O coverage is:

  1. Don’t assume it is a D&O policy as almost every policy provide coverage to the corporate Entity,
  2. Know how your policy or program (layers of policies) is exposed to erosion or exhaustion,
  3. Follow-on or Downstream loss can come from many directions, so request information on how your policy responds to “derivative” demands, “securities claims”, and regulatory enforcement not included in the initial bribery/corruption enforcement,
  4. Since some “bribery enforcement” loss does not name individuals, then you may have skipped the “direct loss” comments above, and therefore I will repeat – the “broader” the policy the more onerous there “reporting” obligations, and the greater the risk of erosion or exhaustion of limits.

D&O, Professional Liability and Crime insurance underwriters are tightening their underwriting standards. They are raising the RED FLAG on the departure of Chief Risk Officer, Chief Compliance Officer, or General Counsel, and may no longer settle for “resigned to pursue other opportunities”.

Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at http://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Bribery and Anti-Corruption Enforcement Insurance in Canada

December 15, 2011

 

I speculate that the Governance, Compliance and Risk Management issue of Bribery and Anti-Corruption will go from a dusty item entered in to board minutes, to a material agenda item. This is not necessarily a good thing because none of the other agenda items can be easily de-weighted.

As mentioned in previous blogs, CFPOA, Corruption of Foreign Public Officials Act, only recently started receiving press based on the enforcement action against Niko Resources, here, here, here and here.

A March 2011 OECD, report, here, suggested the RCMP was had 20 active CFPOA enforcement investigations. Based on the CFPOA being sleepy legislation for most of its 13 year history, and considering that only two cases, Hydro Kleen and Niko, have seen the light of day, it can be extrapolated that there have been any new investigations launched in the last ten months.

With the inconsistent Canadian legal precedent on disclosure obligations for public issuers, and with few to no announcements by such public issuers disclosing any RCMP investigations, it can also be assumed that many of the 20+ companies have no idea they are being investigated.

With there being such little press and such small financial consequences (until Niko), it would also be a fair statement to suggest that Anti-Bribery, Anti-Corruption compliance programs within individual Canadian companies might not be receiving substantial resources or significant board/executive attention.

My strong recommendation is that this needs to change and change quickly. The best defence (to an investigation or enforcement action) is a good offence. This offence needs to be well worded, aggressively communicated, strongly enforced and meticulously documented.

The FCPA, the use counterpart, has seen very active enforcement. This enforcement has resulted in many follow-on claims including class action securities claims. Since we only have one enforcement action in Canada, that has been brought after the inception of Bill 198 (secondary market liability legislation), and it is too early to determine the risk of follow-on litigation, the only thing Canadian directors and executives can do is assume the financial, market and reputational risk of an CFPOA Enforcement Action will be material to the organization.

There is no doubt that more enforcement actions will soon become public. This means there will be a lot of Directors, Creditors and Shareholders receiving an unpleasant surprise in the new year. When the issue becomes public every company decision, announcement, prospectus and even individual discussions and emails will become the subject of scrutiny and conjecture.

It is usually at this point of crisis that risk management and insurance are raised. Insurance coverage will become a critical question. Directors and officers will want to know if their D&O insurance policy will respond. But they may not recognize that there is no such thing as a “standard” D&O insurance policy. They also might not realize that early response of the D&O policy to a CFPOA enforcement action or investigation may put these directors at a considerable personal risk.

The issues of policy limit adequacy, limit erosion or exhaustion, “notice” obligations, exclusions and continuity are too detailed for this blog post. These issues are also too specific to the specific to the actual insurance program in place and the unique investigative order and potential litigation.

There are dedicated Investigation Costs insurance products available and in the works. These policies are designed specifically for investigation costs, and in most cases they provided limits of liability that will not erode the limits available under the D&O program.

The only way to extract value from the risk management activity of “risk transfer to insurance” is to identify risk, develop loss control tools, determine coverage priorities and negotiate and buy insurance prior to “smelling smoke.”

Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at http://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.

 


Cybersecurity Disclosure …………… No, Not Canadian Specific Guidance

November 28, 2011

 

Here is the Cybersecurity disclosure guidance being provided by the Division of Corporate Finance of the Securities and Exchange Commission.

The good part is they don’t require disclosure that could act as a “roadmap” to infiltrate the registrant’s network security. And, in case you didn’t know your loss exposure, they provided a non-exhaustive list including, 1) repair and remediation costs, 2) incentives to repair relationships with customer or other business partners, 3) increased security protection and training, 4) lost revenue directly from downtime, and lost customers/prospects, 5) liability and other litigation costs, 6) reputational damage with customers and investors, and, 7) financial statement hits (warranty liability, product returns, capitalization of software costs, inventory write-downs.)

As for actual disclosure, the guidance points to specific forms (Form 6-K or Form 8-K to disclose the costs and other consequences of material cyber incidents – see Item 5(a) of Form F-3 and Item 11(a) of Form S-3) and they remind registrants of the materiality clauses (Securities Act Rule 408, Exchange Act Rule 12b-20, and Exchange Act Rule 14a-9) and the “substantial likelihood that a reasonable investor (note, not reasonable tech geek) would consider it important in making an investment decision or if the information would significantly alter the total mix of information made available.”

The “materiality” issue is still developing in Canada, and (no surprise) there are conflicting decisions and hotly debated arguments. Here is a recent Ontario Securities Commission case that draws some light on the subject (and here is an older one.)

Issuers do not have present risks “that could apply to any issuer or any offering.”

The key concern is that disclosure decisions must consider “risk” not just loss or actual incidents or threatened attacks. However, as will all disclosure advice, “boilerplate” language will be looked on unfavourably. Registrants need to evaluate their cybersecurity risk considering prior incidents, potential for reoccurrence, experience of competitors and other industry participants, magnitude of potential loss, and adequacy of loss control activities.

A further disclosure requirement is discussion regarding the effectiveness of policies, procedures and controls surrounding cyber incidents and the disclosure process itself.

Cyber Risk is a very new and developing field. Therefore, available guidance is not very specific. This risk will have to be treated like every other business risk. There are good insurance companies and good insurance products available to accept risk transfer of some, but not all, potential cyber losses. But, like every other specialty line of insurance, there is no standard or regulated policy wording or premium calculation. And, to make things more challenging, cybersecurity insurance policies can be of a rare breed of hybrid “first party” and “third party” coverage, with potential for “claims-made” and “occurrence” responses.

Greg Shields is a D&O, Professional Liability, CyberRisk, Employment Practices Liability, Fiduciary Liability, Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


No Defence Costs from a D&O Policy

November 11, 2011

It is common in Canada that Defence Costs under a D&O policy will stop upon exhaustion of the limit of liability. There is the exception for Quebec where defence costs are outside of the limit of liability, but even Quebec risk does not guarantee unlimited defence costs. If there is any question regarding “jurisdiction” (ie. any part of the plaintiff, defendant, wrongful act, or policy construction was outside of Quebec) you can be sure the insurer will attempt to push the case into another jurisdiction that does provide defence costs within the limit of liability. You can also be sure that the insurer will regularly apply to the court to relieve them from the burden of defence costs based on, 1) their offer to settle having been made or 2) the policy limits being exhausted or
potentially exhausted by indemnity. There is no rule as to how much the insurer will be responsible for above the limit of liability, but the insurer will eventually be relieved from their defence obligations.

The concerning new precedent (here – provided by Kevin LaCroix, OakBridge Insurance Services and his The D&O Diary) is out of the New Zealand High Court (Auckland Registry) in a case where a real estate development and investment firm went bankrupt. The liquidators and receivers made a charge against the D&O policy limits of liability because their claim are “for a sum significantly greater than the amount of cover available under the D&O policy,’ and the insurer is “bound to keep the insurance fund intact.” The court agreed, and directors are left to fund their own defence of a number of large civil and criminal lawsuits.

If you are a Canadian director or officer, with no exposure to New Zealand, this case should not keep you up at night. But it should not be ignored. It is a great example of the risk of erosion or complete exhaustion of large limits of liability on defence costs. It is great example of the need to restrict some or all of the D&O limits to specific “loss.” Broad policies are not in the best interest of every insured. The conflicts between the various insured’s should be front and centre, not hidden in a hundred pages of insurance contract. Priorities for the insurance coverage should be balanced over the interests of each insured, and the priorities should be established long before the contract language is negotiated. And it is warning that jurisdictional differences should be examined to determine the need for locally issued policies, but also that “legal risk” is present in almost every country in the World due to
underdeveloped case law regarding D&O insurance.

Kevin LaCroix offers an explanation of the case, details on “choice of law provision”, and broad “discussion” commentary in his blog post, here.

Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.

 


Director and Officer Liability without Culpability

September 30, 2011

 

There has always been risk of personal loss to directors, even in absence of intent to harm. Such loss is usually financial loss and not criminal incarceration. However, even though this financial loss may be limited to legal fees incurred to achieve dismissal  or settlement (at least in the situation of absence of intent), such fees can be staggering to individuals and their personal loss will also include physical and emotional stress, damage to reputation and lost opportunities.

Today, corporate directors and officers are subject to criminal prosecution (and potentially a criminal record) based on the “responsible corporate officer doctrine” and their responsibility for the corporation not for their own conduct.

In this blog I usually stick with Canadian experiences. But due to the level of US exposure for many Canadian companies (and their executives and directors), this blog posting, here, of Kevin LaCroix in his The D&O Diary blog is worth sharing.

The Canadian perspective on risk management of criminal or quasi-criminal proceedings is three fold. First, indemnification provisions under the Canadian Business Corporations Act, here, one of the provincial Acts, or an industry based Act, should be reviewed for its trigger of indemnification or denial of indemnification. Under many such provisions the term “may” indemnify,  or
“may” advance moneys, is used, but some contain the word “shall”. These provisions also require the subjective test of “honesty” and “good faith”, and in a criminal or administrative action an additional test of “reasonable grounds for believing the individual’s conduct was lawful”, must be met before indemnification is provided.

Second is the individual contractual indemnity. By-laws may be unique to individual corporations, and they may or may not improve on statute language. Comfort will depend on the wording, but blanket bylaw indemnification can be modified and
restricted with no notice to current and (more importantly) former directors and officers, as long as a proceeding has not started. Therefore, individual contractual indemnities should be considered. I will leave this language between you and your lawyer, but there are being used more often in Canada and should be considered by every director and officer.

Third, insurance, is referenced in some indemnification provisions. The wording of the provision could be “may purchase and maintain insurance for the benefit of an individual” but it is very important to remember that this is full extent of the Government’s involvement in your D&O insurance policy. There is no vetting of that policy, there is no standard or even common policy wording in the Canadian D&O marketplace, and there is no control over who (individual or corporate entity) has access to that policy. The coverage of the policy is the responsibility of each and every director and officer. And though many directors will look to the “due diligence defence” and “reliance on officers and other experts” for protection from liability, the failure of an officer to properly procure a D&O policy for the director will mean that the director will have to cover their defence costs in the underlying suit, while they take on the cost of bring a claim against the officer for negligence. When it comes to financial statement preparation, “reliance” might provide comfort, but not when it comes to the D&O insurance policy.

The due diligence on the D&O insurance policy purchase cannot be done in this short blog posting, but, when considering criminal and quasi-criminal actions, here are a few things to look for:

  1. Is coverage limited to “civil” action?
  2. Is the reference to “criminal”action or proceeding or “penal defence” only given under a “sublimit ofliability”?
  3. Do the intertwined definitionsof “Claim”, “Loss” and “Wrongful Act” explicitly cover, exclude, limit or remain silent on “criminal” action or proceeding?
  4. Is there any reference to “Bill C-45”?
  5. Is the “Bodily Injury / Property Damage” exclusion limited (“for” preamble) or broad (“based upon, arising from, ….” Preamble)?
  6. Does the “benefits” or “statutory” exclusion extend to a health or safety act?

This is not an exhaustive list of issues under the D&O policy, but, regarding criminal actions, it is a good start. It is important to know that no D&O policy will cover the actual fine or penalty related a criminal or quasi-criminal act.

If you would like help navigating the risk of being a director officer, or you would like more information on insurance and D&O claim examples, please don’t hesitate to contact me directly.

Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at
gshields@mitchellsandham.com,  416-862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at http://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Canadian Class Action Securities Claims: Legal Fees increase in Early Stage of Securities Claim

August 22, 2011

In Pennyfeather v Timminco Limited, here, the court determined that Plaintiff particulars can be compelled prior to the class action certification order, but, in turn, the statement of defence may be required prior to the order as well.

In the Pennyfeather case the plaintiff did not provide particulars, and argued that defendant’s request was premature because they are only necessary in order to plead a defence and this is not required pre-certification. He also argued that this would provide a “tactical manoeuvre for defendants, and would delay the hearing of the leave (to pursue claim under Part XXIII.1 of the Ontario Securities Act – secondary market misrepresentation) and certification motion, causing prejudice to the plaintiff and class members.”

Justice Perell decided that demanding plaintiff particulars, as well as the statement of defence pleadings, be closed “before the action moves to a certification motion” because, 1) the first of the five interdependent class action certification criteria, under s. 5 (1) of the Class Proceedings Act, 1992, is “show a cause of action”, and this would be resolved without the delay of the traditional challenge of the statement of claim, 2) early dismissal of the class would reduce costs, and, 3) it could reduce the common outcome of plaintiff’s request for leave to amend statement of claim.

If other judges apply this logic, early stage legal costs will be more expensive, but the result could be expedited decisions, earlier settlements, earlier dismissals, and shorter term distraction of management, directors and financial analysts.

This is a big case, as it pits Won Kim of Kim Orr against Alan D’Silva of Stikeman Elliott. A number of months ago both individuals were on a panel discussing Bill 198 and Secondary Market Liability and Class Actions Securities Claims, hosted by Chartis. A few of the developments they discussed included, 1) the current Canadian court split decisions on plaintiffs getting access to the defendant’s Directors’ and Officers’ liability policies, 2) the extraordinary costs of e-discovery, and 3) the significant number of Canadian class action securities claims.

The underlying action in Pennyfeather is a $520 million class action, launched in May 2009 against Timminco and certain officers and directors. It alleges that they knowingly mislead investors about growth and profit potential between March and November
2008, specifically regarding its solar-grade silicon. The case was awarded to Kim Orr in late 2009.

The D&O insurance implication are very interesting. The 2009 Management Information Circular suggested their D&O policy had a policy period of May 1 2008 to May 1 2009, with a $40 million limit and $100,000 deductible, as well as a $5 million excess Side A DIC (which commonly is a policy where the limit of liability is dedicated to non-indemnified claims against individual directors and officers,  written on a difference in conditions basis whereby the terms of the policy are broader than the underlying D&O policy.) Some information circulars will mention a split deductible for “securities” claims and for non-securities claims, which would give a good indication that the underlying policy provides considerable extensions to the corporate entity, thereby subjecting the policy to the risk of limit erosion or exhaustion to the detriment of individual Insured Persons. This circular provides no such guidance.

The 2010 circular suggests the same structure was renewed in 2009-2010 with the addition of a new additional excess limit of $5 million Side A DIC available only to independent directors. The premium increase year over year (and then again in 2011) was not extraordinary, which could suggest that the 2008-2009 policy was the one triggered by this claim. Under most common D&O policies that means that this is the only policy that would respond to all future loss “based upon, arising from, or in consequence of the prior noticed claim, including any future claims based on interrelated wrongful acts”.

A common reaction of D&O insurers to a potential limit loss claim is to extend limits of liability with each subsequent renewal and not provide a “refreshed” policy. However, even if insurers do provide a new policy, with new limits, it is rare that those new limits will have any exposure to an existing claim or related downstream claims.

Not knowing the level of “Entity Coverage” in the underlying D&O policy it is difficult to comment on the adequacy of limit in the first triggered policy. But, when the share price is $30 in mid 2008, $3 at the end of 2008, and 30 cents in 2011, and there are 196 million shares issued and outstanding, it would take an army of lawyers to make me comfortable that $45 million is going to carry this litigation over the many years it may have left.

Directors of all public companies should be requesting from their insurance broker commentary on the extent of “limit sharing” in their D&O program. The answer should not stop at Insuring Clause 3 “Entity Coverage for Securities Claims”, but should consider all extensions, endorsements, definitions and exclusion ‘carve-backs.’ Directors should also look at the precedent setting claims and seek outside legal advice on the potential cost to defend these claims and litigate their various motions and counter claims. Then directors should turn their focus internally to determine their unique circumstances to help determine appropriate limits of liability based on their priorities and insurance coverage structure. I have provided a few ideas in an earlier blog post, here.

Be wary of insurers bearing gifts, because a broad policy is not necessarily beneficial to all stakeholders in that policy. Insurers underwrite policies knowing and accepting the possibility of a limit loss. If they are going to suffer a limit loss no matter what the extent of coverage (insuring agreement A, B, C, D or 1,2,3,4) it might just be in their best interest to make the policy extremely broad, extract to most premium they can, and write their cheque very early in the claim process. Payment of the limit usually terminates their involvement in the litigation (except perhaps in Quebec where they will continuously apply to the court to end their ‘defence outside the limit’ costs), and therefore no more distraction or claim management costs, and a big pat on (their own) back for paying a limit loss.

There are many competing and conflicting interests in a D&O policy, and the only way to navigate that potential mine field is to determine coverage priorities before the policy is purchased or renewed. Entity Coverage is an extremely valuable use of premium dollars, but that value might inure only to the shareholders who are suing you.

Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at http://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


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