Legal Developments and Emerging Risks in the D&O Market

February 28, 2011

Greg Shields appreciated the generous offer to contribute a guest blog article to the widely-followed Recovery Partners Blog.  Please see introduction from Alex Jurshevski at Recovery Partners and the link to the article below.

In this latest blog posting, Recovery Partners welcomes a contribution from Greg Shields, an Insurance Professional and Partner at Mitchell Sandham Insurance Services. Greg’s blog is timely and examines the linkage between US Bank failures and the market for Director’s and Officer’s (D&O) insurance. The article details legal developments and emerging risks in the D&O market and we suggest that all Company Executives, Directors and their Advisors read this cogent analysis of how these might affect them and the companies with which they are associated.

Please hit this link www.recoverypartners.biz/blog to go to the article without delay.

If you or your clients need advice in the area of crisis management, risk advisory, debt restructuring, distressed M&A; loan buyouts or Sovereign Debt management then please do not hesitate to contact Alex Jurshevski at www.recoverypartners.biz .


Canadian Directors’ and Officers’ Liability Insurance (D&O) and the Recent IMAX Decision

February 22, 2011

Canada is seeing a material change in home-grown D&O loss experience. On Valentines day we saw a new decision in the first case to be brought under Ontario’s new, at the time, “Bill 198”, aka, part XXIII.1 of the Ontario Securities Act (the “Act”), section 138.3, which provides a statutory cause of action for secondary market misrepresentation. In the IMAX case, the underlying securities litigation commenced September 20, 2006, when Siskinds LLP, here, and Stutts, Strosberg LLP, here, brought their case alleging misrepresentation and breach of duty of care. Justice K. van Rensburg, in her decision, here, certify class proceedings. The defendants appealed this decision,  here, and on Feb. 14, 2010, Justice D.L. Corbett denied the defendants motion for leave to appeal.

We all know what happens to settlement amounts when a court decision goes in favour of the plaintiff class, but here we can consider what could be material to directors and officers in Canada. The IMAX 2005 information circular listed a D&O policy with a $70 million limit of liability. Though the circular does not provide a lot of detail, it does say they had a split deductible of $100,000 “for each claim under the policy other than claims made under U.S. securities law as to which a deductible of $500,000 applies”, and paid an annual premium of $962,240. This split deductible suggests at least some portion of that tower of D&O coverage was extended to cover the corporate entity for some of its individual loss and expenses.

There is a lot of litigation left in this case, but a full limit loss should not come as a surprise to anyone. Outside of the magnitude of an insured loss on this size of D&O coverage in Canada, the materiality of the case will depend on potential for loss above the limit. More importantly, loss above the limit if any part of it is borne by the individual directors and officers.

In 2005-2006, and even today, Excess Side A DIC (Side A = loss not indemnified by the corporate entity, DIC = difference in conditions, or an excess policy written to be broader than the underlying policy) was not a guaranteed purchase for public corporations of this size in Canada. Therefore, if the (assumed)  A, B, C primary policy extended through the entire limits of the tower, then the comfort level of the individual directors would be largely based on the size of the limit of liability. (In case it needs explaining, A is the insuring agreement in the D&O policy that responds to loss not indemnified by the corporation; B is the insuring agreement that protects the corporate entity for loss it incurs on behalf of the individual directors and officers; C is the insurance agreement that protects the corporate entity for its own loss and expenses in certain claims, like securities claims. But, this is just a glancing overview because an appropriate explanation requires discussion on “presumptive indemnification”, “hidden entity coverage” and many other D&O coverage issues.)

 Now we can start to see the very reasonable misconception in the D&O policy. It is marketed as a D&O policy, when, much to the surprise of individual directors, it is in fact a corporate entity policy.

The problem (for individual directors): $70 million may seem like a large limit, and may have looked good on a benchmarking chart, but there  was, and is, no legal precedent of insurability of a Bill 198 claim in Canada. From the little I know of Strosberg, here, and Lascaris, here, I will be shocked if they settle this case at policy limits. As far as I know there is no institutional plaintiff, but, the entire class pool has yet to be identified, and I imagine Silver and Cohen would be willing to bough-out in favour of a large pension plan, if that is what is necessary to fund a “scienter” position and a removal of the liability cap. Though there are only a few cases of personal (unindemnified, uninsured) director contribution settlements in Canada, institutional plaintiffs in the US are known to agree to a settlement only after they have won some level of personal contribution.

The directors might also seek comfort in the “priority of payment” provisions in the policy, but, these were not as common in 2005-2006, and there is limited precedent. My concern for their use is they may motivate a follow-on shareholders claim, or a (current) shareholder attempt to block proceeds of the policy from being eroded by individual director’s defence. Thanks to the Insured vs. Insured exclusions, or other policy limitations, this follow-on claim may be excluded, or further erode the available policy limits.

There may be some critics who will suggest that IMAX will not have a material effect on Canadian directors and officers. For those people I will include a link to some light reading of the recent NERA report, here, on Canadian securities class actions.

I think IMAX will have a material effect on directors, officers, and D&O premiums in Canada, but it might take years for it to play out. If you are not willing to wait that long to fully understand your D&O policy coverage, and the key issues of “continuity”, “sharing of limits”, “limit erosion and exhaustion”, “severability” and the 96 other important terms, please don’t hesitate to contact 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 an experienced and 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 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


D&O Liability and Governance Discussion Points:

February 18, 2011

XBRL:

Many directors and officers know nothing about the SEC deadline, of June 15, 2011, for foreign private issuers (XBRL.ca, here, says there are 350 in Canada) to meet interactive data reporting requirements (explanation of XBRL, here). I have not been able to develop an opinion on the potential ramifications of XBRL on Canadian governance and compliance risk, or on directors and officers liability, but, change never comes without some costs.

IFRS:

IFRS is for many people a thing of the past. But the repercussions on governance, risk management and D&O insurance have not even started and may not be known for years. The concern of D&O underwriters is the significant increase in reliance on management assumptions and estimates in corporate financial statements. Some accountants are suggesting that the number of notes to the financial statements will jump from 30 to 300. Others have even said that had Nortel been reporting under IFRS the corporate problems would have gone on much longer, and loss to stakeholders would have been much larger. This over disclosure will do far more harm than good, especially to directors. Disclosure and transparency is a good thing. But when it becomes overwhelming for investors, and even for professional analysts, the result will be a more confusing and unreliable financial statements than before our current level of disclosure was mandated. The difference is that the over disclosure will allow more protection for “allegedly” negligent executives, and their outside auditors, accountants, analysts, investment advisors and lawyers, because when a professional liability lawsuit is launched they will be able to point the four words  (out of 10,000) in two obscure notes as their get out of jail free card. That escape from liability has a good chance of driving an increase in “risky” behaviour, and it leaves the shareholders, creditors, employees, suppliers, and the directors, holding the bag.

If you would like to receive more information please contact me, Greg Shields, Partner, Mitchell Sandham Insurance Service, gshields@mitchellsandham.com, or at 416 862-5626.

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.


Theft of Company Documents: Employment Practices Liability (EPL) – A Loss Control Opportunity

February 8, 2011

I don’t like to post US case law, but this situation presents a good loss control opportunity for Canadian companies. This decision, reached on December 2, 2010, is an interesting EPL case. In Joyce Quinlan v. Curtiss-Wright Corporation, the New Jersey Supreme Court found that an employee (even the Executive Directors of HR) can search for and remove company documents and use them to help prove her case of discrimination by her employer. But, to caution those considering such an act, the court did not go so far as to protect her from losing her job for taking the documents. So this employee won her “failure to promote” discrimination claim, but lost her claim for wrongful dismissal.

The legal decision surrounds the US Federal Computer Fraud & Abuse Act (CFAA). Though we don’t have this legislation in Canada, Canadian courts will at least consider US decisions if Canadian precedent is not available. In this case the court was very careful not to protect employees who exceed their employment authorized access to gather information from their employer’s database without a business reason (say for romantic reasons or personal vendettas.) But, the majority of the court felt they needed to protect “the employee’s right to be free from discrimination or retaliation.”

In this article, “When Is It Okay For An Employee To Steal Trade Secrets?” found on mondaq.com, here, and written by Michael R. Greco of Fisher & Phillips LLP, this court applied a specific test called “totality of the circumstances approach.” In coming to their decision, they considered the following; 1) the manner in which the employee obtained the documents (innocent or active investigation), 2) what they did with the documents (shared only with their lawyer or leaked to third parties), 3) the content of the documents (privileged or proprietary information), 4) if the employer had a clearly defined, routinely enforced, confidentiality policy, and did the employee violate their duty of loyalty to safeguard confidential information obtained during employment, 5) if the document was material to the employee’s case or just disruptive, 6) why the employee took the document instead of merely describing it to counsel so that it could be sought in discovery, and, 7) all of the above factors must be considered in the context of the strong competing interests – the employee’s interest in being free from discrimination and retaliation, and the employer’s interest to operate it business within the bounds of the law with an expectation that its employees will behave with loyalty.

The value of case law for loss control purposes is that for every situation that goes to trail (and subsequently to appeal) there must be tens, if not hundreds, of similar situations that were never made public. Public or not, these employment situations can cause significant loss to a company, in legal fees, severance costs, down-time, management distraction and reputational damage. Therefore, if the success or failure of the case hinged on a few specific actions, then every company could benefit by taking a few actions to avoid the same loss.

This case demonstrates that courts look at the specific actions taken by corporations. The mere existence of a boilerplate policy or procedure is not enough. It must be appropriately communicated to all stakeholders, and the company must be able to demonstrate that the policy has been routinely enforced. This time it is regarding confidential corporate data. But it is just as applicable to sexual harassment policies, insider trading procedures, and many other loss control tools.

If you would like more information on Employment Practices Liability, Directors’ and Officers’ Liability, Professional Liability or Fidelity insurance, please contact me, Greg Shields, Partner, Mitchell Sandham Insurance Service, gshields@mitchellsandham.com, or at 416 862-5626.

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 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 site from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Mitchell Sandham Provides Safety Tips in Advance of Storm

February 1, 2011

Travel with a vehicle emergency kit in anticipation of extreme weather

Environment Canada has issued a storm watch across areas of Ontario for today and tomorrow. In anticipation of this we are proactively reminding our clients to stay safe while driving and to ensure they have taken proper precautions within their homes as well.

Below is a list of tips that we encourage you to follow ahead of the storm activity:

· Use extreme caution when travelling in your vehicle.

It’s extremely essential to have an emergency travel kit ready in your vehicle at all times, in the event of extreme weather. Kit contents should include:

· Blanket
· Flashlight and batteries
· Fully-charged cell phone
· Extra clothing – includes hats, gloves and boots
· First aid kit
· Map or GPS
· Bottled water
· Ice scraper and/or snow brush
· Flares
· Extra windshield washer fluid
· Battery booster cables
· Bag of sand or salt
· Shovel
· Candy or chocolate bar for energy
· Paper towels
· Matches

An emergency kit should also be kept inside the home as well in the event of power outages and should include:

· Bottled water
· Flashlights/battery powered lantern
· Fully charged cell phone
· Non-perishable food items
· Essential medications
· Essential items for babies or elderly people with special needs

By keeping abreast of weather conditions and having the right items on hand you will be better prepared for severe weather activity.

This is in no means a full list of precautionary items to follow although it will certainly provide a good starting point for you.  For further information please contact our office.

Ryan Mitchell, CAIB, CPIB
(416) 862-1750, rmitchell@mitchellsandham.com
www.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.  Information contained within this posting is courtesy of RSA Insurance Company.