Directors’ and Officers’ Liability Claim Example – Supplier

October 28, 2010

 

Sunview Doors Limited v. Pappas 2010 ONCA 198, Released 16 March 2010, here – allegation of breach of contract for unpaid accounts following bankruptcy, but also an allegation of breach of trust against two directors and an office manager  “pursuant to the combined operation of s. 8 (statutory trust) and s. 13 (pierce the corporate veil)” of the Construction Lien Act (“Act”)”, with this s. 13 ultimately creating joint and several liability. Supplier was successful. My rough guess at total Loss – $110,000.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered 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 comments and opinions are 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 site from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


INSIDER TRADING and CANADIANS IN THE NEWS

July 21, 2010

 

Unlike many recent news events, this connection to Canada is a positive one because it showcases the efforts of Canadian researches, even if not involving Canadian statistics. From the Wall Street Journal Online, July 3, 2010, by Gregory Zuckerman, here, author of The Greatest Trade Ever, called Hedge-Fund Lending Draws Scrutiny, here, refers to a “coming publication in the Journal of Financial Economics” by 4 academics, Debarshi Nandy, Nadia Massoud and Keke Song, at York University’s Schulich School of Business in Toronto, and Anthony Saunders, at New York University’s Stern School of Business. The publication tracks the short-selling of U.S. company securities and compares such activity between companies that have borrowed money from a hedge fund and companies that have borrowed money from a bank. By studying over 350 companies and the short-selling activity in the five days leading up to the public announcement of company borrowing or loan agreement amendments,  and comparing it with the 60 day period before the deal, there is material difference between the companies that borrowed from banks and those that borrowed from hedge funds. The difference could suggest that the trading activity “raises questions about whether the very firms lending money are using nonpublic information to trade against their borrowers, or whether information is leaking out to others.

I look forward to reading the full study and to learning that securities regulators are acting on this information to identify and prosecute illegal insider trading and market manipulation.

The term insider trading is not by definition an illegal activity, but that is the way it is most commonly used. A 2005 article in CBC News, here, does a great job of explaining the term, and there are many more recent articles and publications to help update the legal and regulatory landscape.

The connection to insurance – illegal insider trading is commonly alleged within securities litigation. It can help motivate early settlement, but it can also increase the possibility of personal contribution out-of-pocket payment by directors and officers to this settlement. And YES I DO MEAN IN CANADA.

My concern is that many directors do not fully understand their insurance coverage, and may be misled into believing they need a Securities Claim Insuring Agreement in order to get coverage for a securities based lawsuit and for their defence against illegal insider trading allegations. This is simply not true. Most Directors’ and Officer’s Liability or Management Liability policies, even those without a Securities Claims Insuring Agreement, will respond to a securities claim and an insider trading allegation, subject to certain exclusions and terms which cannot be fully developed here, to individual directors and officers.

The Securities Claims Insuring Agreement, commonly referred to as ‘Side C’ may actually limit coverage, because it may extend the policy limit (and there is usually only one available) to the corporate entity, thereby increasing the possibility of exhausting limits otherwise available to the individual directors or officers, or it may apply exclusionary language that is not found in a standard Side A/B policy.

The protection of corporate assets is important, but directors are not obliged to do it out of their own pocket. The insurance agreement should be quoted, with full explanation and details made available for decision purposes, but that decision needs to be an educated one. It should include additional options of very high limits of liability, excess Insured Person’s coverage, excess independent director’s coverage, full explanation of severability, non-rescindable language, priority of payments (not just the CEO determined kind), etc., etc.

Subsequent to writing this Post, I enjoyed an exchange of emails with one of the Researchers, Mr. Nandy. He offered his permission to provide a link to the research paper, here, My comment and question for Mr. Nandy was “Cracking down on insider trading is necessary for Canada to promote its securities markets, but most good research material is U.S. focused. Your research in the study suggested your review of 360 US companies, did you attempt to gather the short-selling activity in Canadian company securities, and would a similar Canadian study even be possible based on publicly available information?

 His answer did nothing to improve my comfort in the Canadian Securities Regulator regime; “Unfortunately, we do not have similar data that is publicly available for the Canadian markets.”

Feel free to contact me for more information on identifying the needs of your ‘Insureds’ and structuring appropriate insurance coverage.
Greg Shields, Partner, Mitchell Sandham Insurance Brokers,       416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered 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 decision. 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 site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Bribery, Whistleblowing and D&O Insurance

May 6, 2010

Bribery continues to be a fairly quiet issue in Canada, but it is really heating up in the US and Internationally. In the US, enforcement of the Foreign Corrupt Practices Act (FCPA) has been used to bring or resolve 36 cases in the first quarter of 2010, up from 6 and 4 in the first quarters of 2009 and 2008, respectively, according to international law firm Willkie Farr & Gallagher LLP. The report and significant review of FCPA cases can be found at The D&O Diary, here.

Is bribery a brand new phenomenon, or the creation of a 20th century diabolical genius?  No, I would suggest it is as old as time, and practiced regularly throughout the world. However, motivation for whistleblowing could make the FCPA a front-running piece of legislation. The draft bill of the Restoring Financial Stability Act of 2010, (a very detailed review can be found on lexology.com, here), in a small section called Improving Investor Protection at the SEC, includes a proposal to offer “internal whistleblowers a financial reward of up to 30% of any funds recovered.”  Which in the SEC v. Siemens case, here, that could mean $480 million to a ‘good Samaritan’.  

 The US DOJ is good enough to provide a laypersons guide to the legislation, here, and the relationship with Canada is the broad language of “Who” (is the subject of enforcement) including, “any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm” and whether the “violator is an “issuer,” a “domestic concern,” or a foreign national or business.” A fairly easy test for many Canadian companies and individuals to pass. I won’t provide more details, at the fear of it suggesting that Canadian entities can avoid this legislation.

In the UK, the Bribery Act 2010, here, received Royal Assent on April 8, 2010, but I see not provision for whistleblower rewards.

The Canadian version of the legislation is called the Corruption of Foreign Public Officials Act (CFPOA), here, but I could not find any provision for rewarding whistleblowers, and even the Foreign Affairs and International Trade Canada, here, site suggests there has been only  one prosecution (2002) under the Act in its ten year history. However, there is one case of a Calgary energy company that acknowledged (Jan 2009) that it was being investigated by the RCMP for alleged improper payments to public officials in South Asia, here.   McMillan LLP, suggests, here, that this legislation should not be dismissed, in part, because “a corporation will meet the mens rea requirement where a senior officer or director “intentionally or recklessly, with knowledge of the facts constituting the offence, or with willful blindness to them “permits the offence to occur.” Though this legislation is not likely to keep most D’s and O’s up at night, there is a very real concern of the close US ties in our business activities, an in the significant loss that can occur from follow-on D&O claims. Therefore, I agree with McMillan that compliance with the legislation is important, and it should be a risk management priority because of the reputation damage and D&O defence costs that can result from an alleged violation. In the Calgary energy company case, the announcement of the alleged corruption corresponded with a relatively short term dip in the company stock price and a five year low in that stock. Luckily there were no follow-on claims.

The insurance implications: fines and penalties, from a CFPOA action, are usually excluded from D&O policies, but depending on the wording, there may be some coverage for defence costs. The real exposure comes from follow-on class action securities claims or derivative actions, which could mean significant payout from the D&O policy. The biggest concern is limits management, limits exhaustion and sharing of limits, because entity coverage for securities claims is the most likely case for the ‘entity’ exhausting limits that would otherwise be available to individual directors and officers. A big cheque from the insurance company may be good, if you maintain a $100 million limit, and the total loss is $25 million, but if your limit is $10 million, and the total loss is $25 million, your directors and officers might be very disappointed with ‘broad’ coverage. The Calgary company lost over half its value in a few short months, and if a claim had been brought and settled, even at a very low “plaintiff-style” damage factor, most Canadian public company D&O policies would have been fully exhausted.

If you would like to discuss any of these issues, please call me directly.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered 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 decision. 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 site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Concerns in Layering D&O Insurance Policies and Excess D&O

April 1, 2010

Unlike many other kinds of insurance, building towers to achieve large limits in D&O is commonly done by layering insurers, and their capacity, one on top of the other. Large limits in other lines can easily be built on a ‘quota-share’ basis, where one ‘lead’ insurer and policy wording is determined  (this insurer usually provides the primary claims-adjusting but the other insurers will make sure they are part of this process, and third party adjusters can also be pre-determined) and other insurers take a percentage of the overall policy limits. Yes this can be done in Canada, and can even be done with Canadian insurers and with D&O policies. The caution about quota-share policies, is that it is more difficult to maintain continuity of coverage, which is paramount in D&O.

Back to layering D&O: due to budgeting, corporate growth and new exposures, this may be done over the period of many years. If you are one of the (declining number of) insurance buyers who have maintained your primary insurer (the first layer of insurance excess of your deductible/retention) over many years, and you have not signed any warranty statements since the original inception of coverage, then you deserve some comfort about your continuity of coverage. However, this continuity is likely only achieved within the limits of liability of your primary policy. Subsequent new policies, which attach excess of the primary policy, don’t likely provide the same continuity as the underlying primary, or even lower excess policies. Therefore, summaries of your insurance program should always highlight the continuity provisions of the program.  However, continuity of coverage cannot be determined by the ‘continuity date’ provided on some, but not all, insurers’ declarations pages of the policy. Continuity may be most simply defined as coverage for ‘past acts’. It is a multifaceted provision in the D&O policy or program ( I won’t take the time to explain it in detail here), and is a product of each and every warranty statement (passive or aggressive) provided to any insurer, all prior or pending litigation exclusions, prior circumstances exclusions, past wrongful act exclusions,  (such exclusions may not be obvious as they may be  built into applications, definitions, exclusions, endorsements and excess policy wordings)and any gaps in coverage or changes in insurance carrier. And continuity is directly affected by the severability provisions and exclusionary language in each layer of coverage.

There is a great blog posting (here), in one of the highest authority D&O blogs I have found called  dandodiary.com (here), written by Kevin LaCroix, and it provides a great, unfortunately not Canadian, case example involving continuity and severability concerns in a D&O tower and the lack of true ‘follow-form’  coverage from excess insurers. We, in Canada, do have our own case law, raising similar issues and precedent setting decisions, (see Hanis v. Teevan, 2008 ONCA 678 for duty to defend, see Trisura Guarantee Insurance Co. v. Belmont Financial Group Inc. (2008) N.S.J. No. 436 for warranty statement misrepresentation, and Boland v. Allianz. Ontario Court of Appeal for knowledge of circumstances) but unfortunately, I have not found them all in one case, or with a wonderfully detailed review and discussion of the case (provided by someone else.)

If you would like to learn more about layering D&O policies and follow-form excess policies, or about continuity, severability and hidden exclusionary language and where they can be found in your program, please call me directly.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered 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 decision. 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 site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


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