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.

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Directors’ and Officers’ Indemnification

October 26, 2010

 

Many D’s & O’s, (trustee, advisory board members, committee members, etc.) make the assumption they will be indemnified in the event of a lawsuit, and some rely entirely on the protection under statute, or their corporate bylaws.

Indemnification language can be found in the OBCA, CBCA, other legislation or specific Acts (eg. Insurance Companies Act, etc. which may trump other statute), corporate bylaws, and the D&O insurance contract. The problem is there is no consistent wording and in many lawsuits the assumed ‘standard’ wording has failed directors and officers, leaving them personally liable for significant costs.

Therefore, I urge directors and officers to consider arranging individual contractual indemnities, using the advice of a lawyer, and negotiate the appropriate insurance coverage.

Here are some examples of indemnification wording failure:

  1. Bylaws can be changed by the corporation without the knowledge/decision of the individual (as long as litigation involving the trigger of the indemnity has not started), either while holding their position (because they missed the meeting and didn’t review their minutes or because they were overruled by a majority of the board) or after they have retired (with no obligation to inform a former director or officer.)
  2. Some Bylaws and/or Acts use ‘may’ indemnify wording rather than the stronger ‘shall’ indemnify wording,
  3. Bylaws and/or Acts are more vague than an individual contractual indemnity,
  4. Certain Acts block corporate indemnification for certain types of claims (ie. claims brought by a regulator or trustee, derivative actions, pollution or bankruptcy),
  5. Bylaws and Acts don’t always stipulate the trigger of defence cost obligations and may result in reimbursement or advancement, but not Pay-On-Behalf, leaving the director or officer with a very big debt,
  6. D&O Contracts almost always use a ‘presumptive indemnification’ wording (not always easy to find in the policies), where the insurer presumes the corporation will provide indemnification and if the indemnification is not forthcoming the corporate deductible will be applied (which can be from the thousands of dollars to the millions of dollars, and remember the deductible only applies to the ‘covered’ portion of the lawsuit)  which could leave the director or officer with unfunded defence cost or even settlement obligations, while at the same time having to fund lawsuits against his/her corporation and insurance company (don’t forget, looser pays in Canada, and Insurers and Corporations can quickly incur very large defence costs),
  7. With Informal Investigations, Inquiries or Request for Interviews, increasing in popularity many D&O policies, bylaws and statues have not been written to consider these (arguably) voluntary costs, and there may be a gap in the funding for theses expenses. However, I don’t recommend that any person agree to such a proceeding without legal representation.

This whole issue can be further complicated by the growing trend of ‘contracting out’ for officer or director/advisor positions because none of the traditional avenues of indemnification have contemplated this trend.

But ‘supportive presumptive indemnification’ and/or improved ‘advancement of defence costs’ language can be negotiated into the D&O insurance policy and individual contractual indemnities are becoming much more common.

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 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 receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Class Actions, Lawyers E&O and Law Firm ODL

October 6, 2010

Will Lawyers’ E&O (aka Errors and Omissions or Professional Liability for Lawyers and potentially their firm) insurance and Law Firm Outside Directorship Liability (ODL) insurance (see former post) get more expensive in Canada? I would suggest that the recent certification of a few Ontario based class action claims should not create panic. But, this risk should not be ignored.

Regarding lawyers’ E&O, even despite the increased limits capacity, largely from Lloyds syndicates, premium reductions seem to be flattening. It can be argued that the large real losses experienced in Canada (see here for Torys LLP and Hollinger) were not priced into the market. The early stage cases that are being watched by law firms and their insurers are Allen v. Aspen Group Resources (here), because it names Weirfoulds LLP and one of its lawyers, Robinson v. Rochester et al. (here), because it names Fraser Milner Casgrain LLP, and, most importantly, the claim brought by Trillium Motor World Ltd. (here), because it alleges up to $750 million in damages and names Cassels Brock & Blackwell LLP and two of its partners as defendants. Potential insured losses from these claims are definitely not built into market pricing. Therefore, I suggest that a premium increase of 10-15% should not be a surprise.

Regarding Law Firm ODL premiums, I should first make sure there is no confusion of the term. First, I am not making any reference to ‘Employed Lawyers’ (lawyers on the company side) liability or insurance, as such coverage has very little market acceptance and is a topic for a future post. Second, ‘Outside Director’ usually refers to a member of a board of directors who is not also an executive, officer or employee of that company (but does not mean they are automatically considered ‘independent’, which is a topic for another post.) Third, ‘Outside Director Liability’ may refer to the personal risk exposure of such individual. But, the insurance world seems to (and for this blog I will) use the term Outside Directorship Liability (ODL) describe insurance coverage for any members of a board of directors (or even any officer or employee of that company) who also act in the capacity as a director of an Outside (not a subsidiary or direct affiliate) Entity. As a side comment, this ‘ODL’ cover can be an extension to the company’s D&O policy (thereby, potentially exhausting limits of liability otherwise available to the other members of the board) or purchased on a ‘stand-alone’ basis with limits of liability dedicated to all combined Outside Entity exposures of the board and therefore not share the limit of liability of the company’s D&O policy – again, a topic of a previous post. A common condition of ODL coverage is that the holder and  directorship be at the knowledge and/or written request of the company, and specifically endorsed onto the policy. So get your position, public, private or non-profit, in writing with your entity and in its D&O program, preferable on a standalone ODL basis.   ODL insurance is most commonly provided by extension to a company’s D&O policy. Law firms usually have a standalone ODL policy, partly because law firms are less likely (than public companies of similar size) to even buy a D&O policy, partly because lawyers are better aware of the risk of holding board positions and the pitfalls of indemnity (for another post), and partly because they know their E&O policy won’t cover them for this exposure. Other concerns and warnings about ODL and Lawyers E&O insurance will have to be left for another blog.

Now back to law firm ODL premiums. This is a much smaller market, which seems to be dominated by a few ‘programs’ rather then negotiated and priced on a client-by-client, risk-by-risk basis. This arguably should mean greater volatility in pricing. However, product acceptance not readily available, and loss experience is not public and very determine, so there is either a lack of significant market upheaval, or it is just very quiet. Therefore, the volatility could be coming, and I would budget for increased premium (I cannot offer a range), reduced coverage, and more strict underwriting criteria. To reduce uncertainty, my best suggestion is to seek alternatives. This will not be easy or cheap. There is a lack of underwriting and loss experience in the domestic, competitive marketplace, based on a long period of ‘program underwriting’. Therefore, underwriters entering, or reentering the lawyers ODL market may only be motivated by opportunistic pricing. To the buyer this may seem like ‘pound of flesh’ mentality from underwriters who have not profited from this class of business for an extended period. However, underwriters add premium for risk and the lack of data will mean more risk premium. They will be willing to listen to individual prospective clients who have made the effort to manage their ODL risk. This means identifying the exposure and making every attempt to mitigate it. Documentation and classification of risk, for each individual, each Outside Directorship position and each Outside Entity, will payoff in overall risk management value. Criteria for classification will require a significant amount of information on each Outside Entity, as well as its unique relationship with each lawyer/director (I call it the risk matrix criteria.) The exercise might already be happening, and, if its not, it should. Risk information, along with any related loss experience or potential claims, will become the insurance submission. Based on the possible ‘double-down’ nature of D&O insurance in Canada (because the potential ODL Insurer might already have a significant exposure to the underlying Outside Entity), this submission may need to be marketed to a number of different insurance carriers, but based on the sensitive nature of the information it should not be a shotgun submission.

There is a great article by Luis Millan in Lawyers Weekly, that includes quotations from very experienced Canadian lawyers and goes further than the financial exposure by appropriately discussing “the distraction, effort and impact” a lawsuit or class action can have on a lawyer and his or her law firm. It also discusses the reputational damage to the lawyer and the plaintiff lawyer’s attempt to increase the number of deep pockets in their suit.  

I am not attempting to ‘fear-monger’. In fact, despite the cases Cloud v. Canada (here), Cassano v. The Toronto-Dominion Bank (here), and Markson v. MBNA Canada Bank (here), which may suggest increased certification of class actions based on the Ontario Class Proceedings Act, there are still very few successful cases creating personal liability for individual outside directors in Canada. But, there are a number of current situations where directors are funding their own legal fees because of a failure of their indemnification from their Outside Entity and failure of their D&O or ODL insurance policy. The number of cases testing the law is increasing, and the costs to defend are significant. Therefore, loss costs will continue to rise, and risk management efforts need to be increased.

Please note, there are many more issues, concerns and nuances that I have not covered. But I would be happy to discuss them in person.

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 and 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.


Value of Communities and other Social Media, and Media / Advertising Risk

October 3, 2010

 

The value of Canadian electronic communities and other social media may be going up soon. The proposed legislation in Bill C-28 – the Fighting Internet and Wireless Spam Act (FISA) – will make some significant changes to the law. It will require consent for any email or text messages. Senders of electronic messages will be required to identify themselves, provide contact information and include an unsubscribe feature. Consent will be required for any software or program installation and the consent feature must first disclose any undesirable functions, including the collection of personal information. The FISA will prohibit alteration of data or the diverting of messages to an unintended destination.

The risks to electronic advertisers and media companies will also increase, because the Office of the Privacy Commissioner (OPC), the CRTC and the Competition Bureau will have new powers to share information and evidence with foreign counterparts to pursue violators outside of Canada, and therefore purse Canadians violating our laws in other countries. Penalties of violation of the FISA can be up to $1 million for individuals and up to $10 million for businesses. The Competition Act will be extended to false or misleading marketing in electronic messages. Certain exceptions within the Personal Information Protection and Electronic Documents Act (PIPEDA) will be restricted. And a private right of action will be extended to consumers and businesses to allow lawsuits for violation of FISA. The suggested damage awards are fierce, including $200 per violation to a maximum of $1 million per day, and actual loss, damages and expenses. And, if the Consumer Protection Act can be brought into play, the  recent Appeals Court decision in Riendeau v. Brault & Martineau (a great description of the risk was presented in an article No Crime, Lots of Punishment, here, available in Mondaq, by Donald Bisson and Shaun Emery Finn, of McCarthy Tetrault, here,) could mean substantial punitive damages, even without compensatory damages, and Class Action exposures. (The insurance aside to this is that many Professional Liability and D&O policies can only be triggered based on ‘compensatory’ damages, and if this portion of potential loss is not triggered then there might be no defence costs available from the policy.) There is a great article by Arnold Ceballos, here, in Lawyers Weekly, here, provides much better description of bill C-28.

The intent of most evolving legislation on electronic communication is to deter spyware, malware, phishing and the other vehicles used for theft of private information, identity or direct money. FISA might not accomplish that on its own, but it looks like it is going to make waves. The promotion on this bill suggests it is focused on ‘criminal spammers’ and that taking the ‘pro-spam’ side could be political suicide. However, I am sure the law of unintended consequences (are they really unintended by everyone?) will apply and the bill could significantly alter the way legitimate businesses operate, and it could very likely increase the current cost and risks of doing business.

When we think of Social Networks, we think of Facebook and Twitter, but there is a universe of ‘electronic communities’. Message boards, interactive blog sites, membership based information providers, are all communities based on ‘opt-in’ or ‘consent’ based interaction, even if some privacy aspects were not fully understood or communicated. If FISA is farther reaching than criminal spamming and has the affect of stopping other legitimate unsolicited contact, opt-in communities might be the only way to legally reach a large audience. However, the use of a community for distribution has risks. If you want to avoid the direct advertising costs to reach the members of a community, you will have to go through the slow and painstaking task of building your own membership within each community by producing content that is attractive to users. Some companies might urge employees to help with this new method of distribution by building their individual social networks to help promote the company. The result is a lack of control and oversight or what is legitimately considered media and advertising activity.

It was not that many years ago that it was impossible for the average person or small company to reach a very large audience with any message. Now, one blog comment, tweet or video can ‘go viral’ and be viewed by millions of people within minutes. A few weeks ago I was sitting in my office, looking South down University, and could see a mass of black smoke billowing from a high-rise. I could not tell which building or the location, so I searched a number of different main-stream media sites, and could not find any information. It took them at least ten minutes to report on the story, but I had already gone to twitter and viewed multiple pictures from different angles, and knew the exact building and location of the fire, all within 60 seconds of seeing the smoke. One tweet about beg-bugs in a movie theatre is seen by millions of people and immediately broadcasted on mainstream media.

Many companies seeking to get that ‘viral’ hit for free corporate publicity will have almost no media experience and have few or no controls regarding copyright (music, art, video, image or print), libel, slander or defamation, and no planned response to a publication crisis. Many will say “there is no bad publicity” or “I will worry about that after I am able to reach 6 million people.” The problem is that electronic media cannot be controlled, it can’t be erased or deleted, and even an effort to mitigate a loss by ‘printing a retraction’ will not have the same affect because there is no chance the retraction will reach the same audience.

We have incredible opportunity to share information and promote ourselves and our businesses, but it does not come without risk. Legislative changes, like the proposed Bill C-28, PIPEDA and many others, might reduce annoying, invasive or even harmful electronic communication; might reduce the current level of disruption of online commerce; might increase consumer confidence and the electronic marketplace; but it won’t do any of this with risk.

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 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.


Reputational Risk

October 1, 2010

 

Economist Intelligence Unit, here, a division of The Economist, here, conducted a survey of 269 business executives representing 19 industries, and the result was Reputational Risk was the top of the list of 13 available categories, and ahead of Regulatory Risk, Human capital Risk, IT Network Risk, Market Risk, and Credit Risk, see here. The question was raised, is Reputational Risk a standalone category or a consequence of other risks, and the respondents were evenly split.  Supporters of ‘consequence’ side may include risk managers who have made great efforts to structure their Governance, Risk Management, and Compliance (GRC) systems, identified their primary risks and attempted to quantify the costs of each, but are ultimately frustrated with the challenges presented by Reputational Risk. The supporters of Reputational Risk as a ‘standalone category’ may include risk managers in industries where primary risks are very hard to identify and quantify. Though Reputation was considered “one of the most important corporate assets”, a surprising revelation from this survey was that failures in Regulatory Risk and Legal Risk management were considered the greatest threat Reputation, yet environmental breaches were considered “an unlikely source of reputational damage.” Now take the survey into context, it was published in 2005. I barely recall ‘social media’ being uttered in 2005, but today, a simple twitter suggestion of bed-bugs can reach millions of people and keep hotel patrons and movie-goers away in droves. I have not been able to find a recent recreation of this study, but I would suggest that even if a 2010 survey was available (and I’m sure it is) it might be reliable for a period of only months, not years.

My support (yes it is 2010 support, and I cannot point to a written log of such support in 2005) would go to the ‘standalone category’. Damage to reputation is a very real secondary risk to every primary risk, however, since is can also be a direct loss, with no primary risk cause, the risk has to have its own policies, procedures, measurements (prioritize if not quantify) and unique solutions. This means, crisis management plans, dedicated ‘category owners’, internal (separate from) external communication plans, oversight/policing of Reputational Risk Management component of every divisional/category Risk Committee, involvement in executive level Reputation Planning (including establishment, maintenance and monitoring.)

It is largely agreed that Reputational Risk is difficult to quantify. With it also, 1) being difficult to identify the source of risk, 2) having a financial cost (potentially) much greater than most primary or corresponding risks, 3) needing the attention of every employee in the organization, and 4)  being one of the top concerns of corporate executives, it needs to be given a separate category and very serious attention.

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 and 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.