No Defence Costs from a D&O Policy

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,  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


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