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 https://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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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.


Ryan Mitchell featured on CBC News

October 17, 2011

 

CBC News interviews Ryan Mitchell for comments regarding the Occupy Toronto Protest to find out what businesses can do to protect themselves during the event.   Click here to watch the video.  For more information regarding commercial insurance please contact Ryan Mitchell at (416) 862-5620 or rmitchell@mitchellsandham.com to discuss further.

 


Greg Shields of Mitchell Sandham Featured in CI Top Broker Magazine

August 15, 2011

Mitchell Sandham is excited to have an article featured in Canadian Insurance Top Broker Magazine, called “Bribery and the Board: Enforcement Around Corruption of Foreign Officials is Becoming More Strict” by Greg Shields.  Please click here to access the article featured in CI Top Broker.  To read the full article on the Mitchell Sandham Blog please click here.

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 https://mitchellsandham.wordpress.com/

CAUTION: These articles 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.


Injury Risk

August 12, 2011

 

Physical injury is an extremely important risk to organizations. Most high risk industries, like construction, have very strong employee safety policies and procedures. Some organizations, like amateur sport leagues, may not have the resources necessary to educate and respond to safety concerns.

Chartis has launched their “aHEAD of the GAME” program, here, to help organizations, coaches and families identify and reduce the risk of brain injury. It offers some very good statistics, resources, tips and loss control information.  We encourage every organization, ref, coach, parent and teammate to take advantage of this information and help reduce the risk of concussions and other brain injuries.

 


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


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.