Corruption and Bribery Compliance – Significant Measurable Metric

November 21, 2011


Bribery in your organization? Can you picture any one of your employees saying “all my competitors are doing it, so I am forced to grease the wheels just to compete”, or “there is a small chance that my (corrupt) activities will be uncovered, and even if they are uncovered I may or may not be disciplined; but, if I miss my budget for three quarters I will definitely lose my job.”

Canada is not known for its enforcement of corruption laws. In fact, it is a haven for fraudsters specifically because our weak history of enforcement. However, this is changing and your only protection is a documented effort to reduce corruption. There is considerable international political pressure on Canada to make Anti-Corruption and Anti-Bribery a top enforcement priority. The OECD (here) Phase 3 “Report on the Application of the Convention on Combating Bribery of Foreign Public Officials” mentions “enforcement more generally of the Corruption of Foreign Public Officials Act (CFPOA) may be uncertain, due to significant concerns that remain about Canada’s framework for implementing the Convention.” The OECD has been critical of Canada and our legislation because it is limited to “real and substantial” link to Canada, our interpretation of OECD Convention has been too limited, our enforcement has been “too low to be effective, proportionate and dissuasive”, and we have not committed enough resources to the prosecution of cases. According to the report we are on a tight leash and obligated to provide multiple reports on our progress through 2013. Perhaps the best evidence of our future focus is the Niko Resources case (see previous blog post, here,) which came out shortly following this report.

The enforcers of anti-corruption in other countries have a lot of power, and they are willing to exert it. Recently, the US Department of Justice (DOJ) and the UK Serious Fraud Office (SFO) joined forces in the Aluminium Bahrain B.S.C. (Alba) and Alcoa case. (This case has a Canadian spin, but not on the enforcement side, it just happens that one of the individuals recently arrested in London England on corruption charges was a Canadian citizen.) The case originated as a civil suit in 2008 in the US where Alba accused Alcoa, here, of misappropriating “$2 billion in Alba’s payments under supply contracts passed from Bahrain to tiny companies in Singapore, Switzerland, and the Isle of Guernsey, and that some of the money was then used to bribe Bahraini officials involved in granting the contracts.” The DOJ had a stay of prosecution executed in the civil suit to give them time to purse FCPA options.

I am going to hazard a guess that the top stated priority and top action item for most Compliance Officers in Canada is not controlling corruption. If controlling corruption is not a top priority in your organization, then I doubt you are comfortable that you can quickly document a host of “Significant Measureable Metrics” for Anti-Bribery and Anti-Corruption activities. There is not a lot of guidance to Canadian Officers on the subject of CFPOA loss control, but that is where we can learn from our US, UK and Australian counterparts.

The DOJ provides extraordinary information on its anti-corruptions initiatives. This is a key priority for US companies, and there are many examples of loss control initiatives coming out of US companies and their third party service providers. Thomas Fox and Howard Sklar team up in a production called This Week in FCPA, and in one of their recent sessions concentrated on Tone at the Top. They suggest that this is a key issue in FCPA defense and settlement negotiations. Here are seven ideas for Corporate Compliance Officers:

  1. Have CEO author a letter and attach it to the Code of Conduct and send to every employee in every country and region stating that breaching this Code of Conduct will not be tolerated;
  2. Have CEO record a video message to be played at every compliance training session, stating that breaching the Code of Conduct will not be tolerated;
  3. Have CEO send a quarterly email to every direct report reminding them of the Code of Conduct and that she/he will hold them to that Code and she/he expects them to disseminate this same message to each of their direct reports,
  4. Put compliance metrics in employee score cards, including the sales team,
  5. Train CEO to use the six most powerful words in compliance, “What does compliance think about that?” whenever she/he hears of a new market, new idea, new product, new effort, new program – every time, (and document this action),
  6. Everyone in the organization needs training but the workforce has to be grouped by risk category and the highest priority groups should get “in-person” training specific to their function and to the company’s Codes, Policies and Procedures that are in-force in that organization; and the underlying law (and document this action),
  7. Every person in the organization needs to know their internal alternative reporting options for conduct that breaches the codes and policies and procedures,
  8. Incorporate Audit Rights, (see here for more info on Audit Rights) into every contract; the DOJ demands that audit rights exist in every high-risk (anyone who is spending your money) third party contracts, (but there must be evidence of these rights being exercised).

This is very simple, but almost every good loss control technique is simple (see previous blog post “Risk Management is in the Details”). But I recognize this is much easier to say than do. CEO’s might not be the easiest people to train, but they will be the one in the spotlight of the RCMP / SFO / DOJ, and there are many examples (including the Canadian one) of the ultimate punishment being directly related to the value of policies, procedures and related actions of the company and its executives at the time the corruption and/or investigation became known to the executive team.

The above comments will add to the “measureable metric” list and improve the overall compliance evaluation and ultimately reduce the fine or penalty and other loss from an FCPA / CFPOA / UK Bribery Enforcement Action. However, a message is not enough, there must be Evidence of Action. Compliance has to be an integrated business force, not an outside nuisance.

Greg Shields is a Directors’ and Officers’ Liability, 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


Bribery and the Board in the Insurance Broker Business

August 1, 2011


Between the FCPA, UK Bribery Act and the CFPOA there are many new cases in the bribery landscape. However, there is a very recent case involving a multinational insurance brokerage. This case is not categorized as a direct bribery issue, but rather a failure to prevent bribery. The Financial Services Authority (FSA) announced last week, here, that it fined Willis Limited 6.9 million pounds for “failings in its anti-bribery and corruption systems and controls” which “created an unacceptable risk that payments by Willis Limited to overseas third parties could be used for corrupt purposes.”

This case changes the game before most people have even started to learn the rules. It is still very common for corporate leaders to respond to news of bribery enforcement by saying “everyone is doing it” and “that is just how we do business in (insert industry)(insert city).” Most internal and third party professionals will be quick to point out that such realities are not an acceptable defence to regulatory enforcement. However, those defences are still being attempted, and the result is industry based systemic risk as regulators then say “ok, where else and who else” and start flipping over rocks in other regions or at industry competitors. Therefore, don’t be surprised to see similar settlements in insurance brokerage industry.

The rules of the game are that directors and senior management need to turn their minds to controls and procedures to prevent this (recently) unacceptable behaviour. In the Willis case, it seems that the organization, unlike many other organizations, did in fact create and implement “appropriate anti-bribery and corruption systems and controls”, but the FSA has suggested with this fine that the existence of controls is not enough and they are required to “ensure that those systems and controls are adequately implemented and monitored”, at the grassroots level.

The time period of the payments in question was January 2005 to December 2009, which means that there is a long tail of liability involved with FSA bribery enforcement actions and therefore organizations and their governing minds had better respond quickly to create and/or increase their controls and control enforcement and monitoring.

The Willis case, and the recent Canadian CFPOA case against Niko Resources, here, might suggest that international bribery enforcement is not a game, because the value of the fines are many multiples of the alleged inappropriate payments in question (at least those values that were disclosed.) In the Niko case the payments in question were less than C$200,000, but the fine was C$9.6 million (the actual value of Niko’s business dealings in “high risk jurisdictions” were not disclosed.) In the Willis case, the total value of transactions over the five year period was 27 million pounds, with the suspicions payments totalling $227,000, and the fine being 6.895 million pounds (after a 30% discount for cooperation and early settlement.)

Here is the loss control opportunity presented by this case to directors, officers, management and employees of corporations doing business overseas (I know this is easier said than done, this is a just a blog):

  • Identify all payments to foreign third parties (especially in “high risk jurisdictions” – if it helps to narrow things down (kidding) the Niko case involved Bangladesh, the Willis case involved Egypt and Russia),
  • Establish and record the commercial rationale for all payments to foreign third parties – this needs to be done to the minute degree of demonstrating “in each case why it was necessary… to use an Overseas Third Party (OTP) to win business and what services (the company) would receive from that OTP in return for a share of its commission”
  • Understand that foreign official is a much broader group than you might think (other bribery cases have set the precedent that doctors and other medical staff in most countries are considered foreign officials, World Bank and IMF staff are foreign officials), 
  • Realize other enforcement examples are not just a learning opportunity but an obligation; the acting director of enforcement and financial crime in the Willis case specifically said this case was “particularly disappointing as we have repeatedly communicated with the industry on this issue”, 
  • Provide formal training to staff to recognize an affected payment and to record in detail (more than a brief description) the reasons and resulting services surrounding the payment. This is the only way to demonstrate adequate monitoring and effectiveness of anti-bribery systems and controls, 
  • Ensure adequate due diligence on OTP to assess how the OTP is connected to the organization’s client, the foreign official and any other involved third party, 
  • Recognize that you are responsible for indirect bribery or alleged bribery of a foreign official, not just for direct bribery. This means you are responsible for the actions of any Third Party that could be in a position of making improper payments to help your organization win or retain business from overseas clients or prospective clients, 
  • Ensure that this due diligence is applied to each and every time a payment is made to a Third Party, not just the inception of business with that Third Party.

There is a very strong argument that the Willis case is not a bribery case, it is a books and records case, but FSA does not seem to care about the distinction. The case has been lumped in with the recent UK Bribery Act / FCPA / CFPOA bribery enforcement actions, so it is getting media attention that it may or may not deserve.

Is this a good example of directors’ and officers’ liability? No, not directly. There was no mention of negligence by an individually named director or officer. But many bribery enforcement actions have spawned downstream criminal, civil and securities liability lawsuits, so if directors and officers do not learn and react to the public pain suffered by other entities, they have a good chance of facing personal liability.

My advice, be careful about extending your D&O insurance policy to FCPA / UK Bribery / CFPOA enforcement action if you don’t fully understand how your policy is exposed to Entity Coverage or other risk of erosion or exhaustion of its limits of liability. There is no regulation or oversight of D&O policy wordings or pricing in Canada, so your assumption of the level of “personal loss” coverage in your D&O policy might be incorrect. Without early investigation you might not find that out until it is too late.

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, 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

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

Pension Plan Risk: Conversion of Defined Contribution Plan to Defined Benefit Plan

July 19, 2011


The trigger for this post was the G&M Article by Janet McFarland, here, July 18, 2011, titled  “The hidden costs of switching to a cheaper pension plan”.

Janet raises some good points that might not be considered by companies considering closing access to their Defined Benefit Plan and offering only a Defined Contribution Plan to new hires. First, even if you convert today, you could still be managing that DB in 90 years, which means managing two plans. Second, without the employee retention benefits of a DB plan employees might be more willing to move to a competitor. Third, economic downturn will mean lower pension savings for older workers, so they will delay retirement in a period you are looking to trim staff by attrition. Fourth, education costs rise because employees retain the risk of poor investment strategy and the onus is the employer to provide multiple investment options, to explain those options, and to choose the investment management firm. And Fifth, investment management fees may increase, even if the majority of the management fee is being transferred to the employee.

Other risks of a pension plan conversion are disrupted production as employees dispute pension changes.  Pension conversion and has contributed to lengthy strikes. There is also an increased risk for lawsuits based on allegations of improper training, poor selection of investment management and investment options. This risk is double-edged because providing too much information and choice can confuse the plan members.

This risk is known as Fiduciary Liability, because the trustees, board members, employees, administrators, investment committee members, employee representatives, employer representatives and advisors are all consider fiduciaries of the various pension and benefit plans, and they all are subject to lawsuits. The risk of such lawsuits increases during periods of economic downturn, merger, acquisition or divestiture of companies and winding down of plans (including how deficits are funding or surpluses disbursed.)

Fiduciary liability, and lawsuits against plan fiduciaries may include the following allegations:

  1. Failure to advise members of plan amendments with reasonable warning,
  2. Inaccurate or misleading statements, and even if the errors was honest, the allegation will be failure to take appropriate corrective action,
  3. Conflict of interest in investments or investment management choices,
  4. Failure to adequately disclose fees and other related costs,

Fiduciary liability insurance policies are available in two forms, single-employer/sponsor plans and multi-employer plans (labour management plans). The most common fiduciary liability insurance policies respond to cover the individual persons fiduciaries for their defence costs, but also the plan sponsor for loss incurred indemnifying the individual persons, as well the plan itself for asset loss based on the fiduciary’s negligence. Some fiduciary liability policies only cover the personal loss of individual insured persons, and do not respond to the loss of the sponsor or the plan, but these are far less common.

When determining limits of liability for a fiduciary liability insurance policy the Insureds should consider the following:

  1. The limit of liability is an aggregate limit for each and every claim and each and every insured (all insured persons, sponsors, plans, and past, present or future fiduciary (which is not a defined term)), including damages, judgments settlements, costs, defence costs, attorneys’ fees and experts’ fees, investigation costs,
  2. Defence and investigation costs can be very expensive due to the high costs of actuaries, accounts and lawyers specialized in this unique field, and the extraordinary amount of data and paper they have to examine,
  3. The long duration of investigation, defence and settlement, where the aggregate limit of the policy may be stretched over many years and not “replenished” at the expiry of the policy,
  4. The high likelihood of class action proceedings,
  5. The “long-tail” nature of risk based on potential for years or even tens of years between an alleged “wrongful act” and the resulting claim,
  6. The significant value of assets involved in the company’s benefit program

Insurance coverage terms and conditions are complex, and there is no regulation of policy wordings in Canada, so your insurance broker should be truly independent, experienced with policy negotiation and claims, and have access to many insurance companies with experience in fiduciary liability coverage and claims. Your independent broker should be able to explain to your satisfaction and comfort the following:

  1. Limit management,
  2. Risk of limit erosion or exhaustion, and limit sharing,
  3. Continuity of coverage in all of its facets,
  4. Severability of application and exclusions,
  5. Claim trigger, and the positives and negatives of “broad” definition of claim,
  6. Advancement of limits,
  7. Non-Indemnified vs Indemnified Loss,
  8. Discovery and Extended Reporting Provisions,
  9. Insurer structure, strengths and weaknesses,

Other risk management issues that should be considered by all fiduciaries of pension and benefits plans include:

  1. Insurance maintained by third party service providers including fund managers,
  2. Crime/Fidelity insurance for the plans,
  3. Crisis management plans for the sponsor(s) and the plans,
  4. Access to independent legal, financial, economic, actuarial and insurance advice.

Greg Shields is a D&O, Professional 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. And more details of risk and loss control can be found on the Mitchell Sandham blog at

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

What is the Direction of Canadian Corporate Fraud?

June 23, 2011


Interesting article on Corporate Fraud and Executive Compensation available, here, at Marketwatch.

I will let you read it, but the Greg’s notes on it, 1) “97% of companies on the S&P 500 Index pay incentive compensation to executives even when the company is underperforming its peers”, and 2) “FBI Director Robert Mueller recently told Congress that the FBI had 667 ongoing probes into corporate fraud and 1,700 open cases of securities fraud.”

In case the authors are correct in their observation that crime is not down we are just numb to it, why don’t we do a quick “lest we forget” and recount: Bernard Madoff, Jeffrey Skilling, Kenneth Lay, Dennis Kozlowski, John Rigas, Joe Nacchio, James McDermott Jr., Sam Waksal, Sam Israel, Bernie Ebbers (see the Time article, here, called Top 10 Crooked CEOs).

Now, just in case you are like many Canadians who have allowed themself to be lulled into a false sense of security, based on a lack of fraud enforcement in Canada and extraordinarly little media coverage attention to corporate fraud and a Canadian moral superiority complex, here is the Canadian content.

Please keep in mind that thanks to the absence of criminal enforcement in Canada, some of these cases should be classified as securities concerns and not allegations of fraud against any individuals. Based on the low level of media coverage, you may never have heard about these incidents – Barry Landen (here, Penna estate fraud, not huge, but very sad), Peter Sbaraglia and Robert Mander (here, accused by OSC of $40 million fraud), Milowe Brost and Gary Sorenson (here, Brost was jailed this year for forgery, but accused with Sorenson of a Ponzi scheme which could reach $400 million), Wolfgang Stolzenberg (here, accused of a $1 billion fraud in the Castors Holdings case), Ronald Weinberg, Hasanain Panju, and Lino Pasquale Matteo and John Xanthoudakis (here, facing 36 charges including fraud and publishing a false prospectus in the Cinar case, with Xanthoudakis also being part of Norshield (here, $215 million alleged fraud) and Matteo also part of Mount Real (here), Earl Jones (here, surrendered and pleaded guilty (so I don’t know how quick I would be to count that as a win for our justice system) to two fraud charges related to a $50 million Ponzi scheme that ran from 1982 to 2009),  Ian Thow (here, originally accused of a $32 million Ponzi fraud but pleaded guilty on amounts totaling $8 million and sentenced to 9 years). There are many more, but I have run out of time, and hopefully opened a few eyes.

I have decided to avoid pure Canadian class actions securities claims due to the risk of suggesting fraud in any of these cases, and/or the risk of reprisal for any such inference. But I can assure you that we have had more than our share of securities related games played in Canada resulting in massive losses suffered by Canadian investors.

Now the risk management spin. There are many ways for investors, fund managers, investment advisors, directors and officers to protect yourself.

  1. If things are going absolutely great and you have no complaints or concerns about your current position: pull your head out of the sand and start your own investigation immediately. Take two, three, four hours, pull out a recent prospectus, annual report or one of those intentionally complicated sell sheets, and read the fine print, notes and management assumptions. If it does not make any sense, read it again. If it still doesn’t make any sense, start asking questions and preface each question with “pretend you are answering this question like I am your mother or your five year old” (keep in mind that some of the people above did actually defraud their mother);
  2. If a few things are bugging you but you can’t put your finger on it, see point 1 above.
  3. If you have not invested or accepted the board position, see the points above;
  4. Request evidence of Fidelity/Crime insurance. You can’t rely on this in place of the points above, but at least you will get some comfort that the company and the individuals have been vetted by a large financial institution who shares a financial exposure to the company. Then take the evidence of insurance, Google the name of the insurer, call the company from the info online, not the one on the evidence of insurance, and confirm the company and policy actually exist. This four minutes will be more due diligence than most stakeholders perform, and it will improve your comfort level with your risk;
  5. Repeat point 4 for Directors’ and Officers’ liability insurance (D&O) and Professional Liability insurance (E&O). Many, but not all, fraudsters avoid any additional audit, review or questions, (unfortunately they don’t seem to be subject to much of that from regulators, auditors, lawyers, suppliers or investors), so they reject any suggestion of insurance coverage as a waste of money;
  6. Find the references to a contract, sales agreement, independent third party review, or other “feel good statement” attributed to any third party in any company document, pick two (or if you are really diligent, three) and take four minutes to Google the name, call the company or person from the online information, and confirm the details of the pronouncement;
  7. Read the Ian Thow link above and the victim statements detailed in the sentencing decision, and be thankful they allowed their tragic and embarrassing stories to be publicized so that we can learn without having to suffer more loss that we already have (yes, every mutual fund holder, pensioner, bank client and insurance buyer pays a significant amount for fraud losses every year.) It could be the most valuable 20 minutes of your life.

With prosecutions being rare and convictions (without a guilty plea) being almost non-existent, one can only surmise the actual number for frauds that are currently being perpetrated in Canada.

So what is the direction of Canadian corporate (aka, white collar, or financial) fraud? It doesn’t matter, there is plenty of it right now to warrant concern and the 4 hours and 44 minutes of time suggested above.

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,  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

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

Funding Plaintiff Securities Class Actions in Canada

April 20, 2011

The race to US style litigation just went from go-cart speeds to F1.

Prompted by contingency fees, promoted by the plaintiff bar, a little nitrous oxide boost by Bill 198 and recent class action certification decisions, and now we are rounding the corner to see the checkered flag.

In Dugal v. Manulife Financial Corp, here, a funding agreement has been (conditionally) approved by Justice Strathy of the Ontario Superior Court. The interesting thing is the entity funding a portion of plaintiff costs is an unrelated third party Irish corporation that is advancing up to $50,000 for plaintiff disbursements and “will indemnify the plaintiffs against their exposure to the defendants’ costs, in return for a seven percent (7%) share of the proceeds of any recovery in the litigation”

Perhaps the people behind this are investors and players recently forced out of the online poker business, here, and are looking for their next big gamble.

But this is an underwriteable gamble, so I guess we can be expecting ‘prospectus’ type documents on prospective plaintiff securities class actions. Actually, this not too far fetched. I remember receiving an insurance submission, back in the 90’s, for D&O coverage for a new entity that was proposing a public offering of common shares where the proceeds would be used to fund plaintiff class action suits. This entity did not end up pursing the offering (or even the business plan) that I know of, and I have no knowledge of any similar public or private entities in Canada. It is well known that US plaintiff counsel with shop their potential claims to other plaintiff law firms and ‘syndicate’ the deal, but I don’t know if that deal sharing exists among Canadian law firms. Justice Strathy’s decision (par. 29) says “indemnities given by class counsel are commonplace” and provides two Supreme Court decisions. But, lawyers tend to be fairly conservative so they are likely much more selective than private litigation funding entities. Also, indemnities from plaintiff class counsel may jeopardize their independence.

Class action funding by private ventures could be profitable, because the main competitor is the Law Society Amendment Act’s Class Proceedings Fund. As per par 31 of the decision, “The Fund was established by the Law Society Amendment Act (Class Proceedings Funding), 1992, S.O. 1992, c. 7. The Fund was given initial seed money in the form of a $500,000 grant from the Law Foundation of Ontario. The CPC receives a levy in the amount of 10% on any awards or settlements in funded proceedings, together with repayment of any funded disbursements. Its annual report indicates that from its inception to June 2010 it had awarded funding to class proceedings in the amount of $6.8 million, it had paid costs awards in favour of defendants in the amount of $1.9 million and it had received $18.6 million in revenues from its entitlement to 10% of settlements or judgments. At June 30, 2010 its account stood at a balance of $11.3 million. From 1992 until June 30, 2010 the CPC received 96 applications for funding. Of those applications, 52 had been approved for funding, 28 had been denied or deferred and 16 had been withdrawn or are currently in abeyance.”

The corporate Defendant is obviously very well connected in Canada, but the court decision suggests that none of the 25 largest pension fund/investment fund investors in Canada, nor any of the individual investors notified of the proposed funding agreement, came to the defence of the Defendant or objected to the funding agreement. This is a big surprise to me because the concept of outside funding of class action claims is still relatively new to Canada, and this court decision sets a very significant precedent. Class action securities claims are a balancing act for investors because, on one hand, they (at least the small individual retail investor) need class support for any realistic opportunity to seek damages, but, on the other hand, the publicity of a class action securities litigation can cause a significant stock price drop to their underlying investment and create a major distraction for directors, officers (their D&O insurers), management, employees, customers and analysts of their portfolio companies. I also thought that institutional investors would oppose anything that supports class action securities claims, because they have the means to pursue individual securities claim and don’t need to rely on class proceedings. But, since a large local pension plan is a lead plaintiff in this action, and no other fund manager objected to proceedings, my assumptions must be wrong. 

The  underlying allegations (see the decision on the application to amend the statement of claim, here, under “The Nature of the Action” 6-10, and here) include : “misrepresentations concerning the defendant’s risk management practices in its public disclosure documents”, “artificially inflating the values of its stock.”  The alleged culprits were the seg funds and variable annuities, which the plaintiff alleges were not sufficiently hedged against financial meltdown of the fourth quarter of 2008 despite claims of rigorous enterprise-wide risk management systems, and therefore caused a $5 billion increase in reserves for future payments and a significant stock drop in the defendant’s shares.

There were a bunch of other allegations, and the plaintiff named individual directors and officers as defendants, but this blog post is about the funding, not the “tapping of D&O insurance limits”, (which I will be sure to blog about if the action is certified as a class proceeding in September.)

The proposed class – all purchasers of the defendant’s securities between January 26, 2004 and February 12, 2009.

The alleged damages – $2,500,000,000.

The best case scenario payday for the Irish plaintiff securities class action funder – $10,000,000. Yes the agreement is for 7% of the proceeds of any recovery (settlement or judgement less costs and expences), but the agreement capped it at $5 million if resolution is reached prior to pre-trial conference brief, and $10 million after that. Too bad for the Irish funder, because it could have been worth $187,500,000.

The risk to the funder, $50,000 towards the plaintiffs’ disbursements and the funder “will pay any adverse costs award made against the plaintiffs.” If this leaves you scratching your head, me to. If the Plaintiff loses and the Defendant is awarded costs (Loser Pays), the funder could be out millions, but their reward is only millions. Not a great return when there is little precedent in Canada regarding the outcome of actions brought under Bill 198 (Section 130 and 138 of the Securities Act – relatively new legislation regarding a cause of action for misrepresentation in the secondary market – as opposed to the former legislation requiring the misrepresentation be in the IPO prospectus document (not the secondary market documents) and only where the plaintiff can prove reliance.)  And, as I read the March 21, 2011 decision from Justice Strathy denying an important part of the Plaintiff’s Amended Pleading, it seems like a good chunk was taken out of their case. The decision suggests the original action only “sought leave to asset the cause of action for secondary market misrepresentation set out in s. 138.3 of the Securities Act”, but “there was no specific pleading of s. 130” and no mention the word “prospectus.” When the Plaintiff moved to amend the statement of claim and assert a cause of action for misrepresentation in ten prospectuses filed by the defendant, Justice Strathy agreed with the Defendant and denied that portion of the amendment based on missing the 180 limitation period under s. 130. They issues raised in determining the denial included, 1) the Plaintiff was sophisticated, 2) they had very experienced securities lawyers, 3) Feb 12, 2009 was the first major write-down announced by the Defendant, and that would be the date they should have known about all potential damages, 4) the original statement of claim was issued July 29, 2009 (167 days), 5) amended statement of claim was November 17, 2009 (278 days), but no mention of s. 130 or prospectuses, 6) motion for certification and for leave under 138.8(1) was on May 18, 2010 (460 days), and this included amendments “which contained, for the first time, specific allegation of prospectus misrepresentation under s 130 of the Securities Act”, 7)  s 130 and prospectus misrepresentation could not be inferred from the original statement of claim, and, 8) the extension of limitation allowed in McCann v. CP Ships “was decided more than a year before this action was commenced”  and involved the same counsel and therefore “it is inconceivable that counsel would have asserted a s. 130 claim without specifically pleading the section or referring to the prospectus containing the alleged misrepresentation.”

With the decision on the first amended statement of claim, released January 19, going in favour of the Plaintiff, and the limitation period and funding agreement decisions not released until March 21, 2011, it will be interesting to see what direction this case takes. If the limitation period decision is in fact bad for the case, the funding company would simply have to reject the court’s requirements, and walk away.

I wonder if third party litigation funding will actually reduce the contingency fees paid to plaintiff counsel, because they were not taking any risk of indemnifying their clients. This answer will come over time, as there are still many securities class action claims in the pipeline and certainly more to surface.

If you would like to “stress-test” your Directors’ and Officers’ liability policy (D&O) against this type of potential claim, or if you would like an independent third party review of your insurance policy, please don’t hesitate (I really mean, don’t hesitate, because policy negotiation can quickly become impossible if a potential claim surfaces against you or your entity) to contact me directly. Greg Shields, Partner, Mitchell Sandham Insurance Services,, 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

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,

 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

Outside Directorship Liability (ODL) Insurance in Canada

September 28, 2010


This is a type of insurance coverage in Canada that is rarely publicized and for which there is little precedent law. The reference to ‘coverage’ as opposed to ‘policy’ is because there is no common insurance policy or wording and no regulation of wording or premium rates for this area of risk.  This makes the consideration of Insurance, as a risk management vehicle, challenging, and it makes the buying decision and policy negotiation even more difficult. However, there is some new case law on the subject, which proves that D&O and ODL claims happen in Canada.

Below I will briefly summarize the newest case law on ODL and then provide more generic comments on options and concerns regarding ODL coverage.

New ODL Case Law:

The Ontario Court of Appeals recently came to a decision, here, where J. MacFarland J.A. writes for both E.A. Cronk J.A. and A. Karakatsanis J.A. on the issue of an ODL policy as a follow-form versus primary responding policy. The policy coverage being argued in this case would be the type of coverage available in option 3 below. This case is extremely important because it raises the issue of the Duty to Defend in any D&O policy. The case alone should heighten the concern of primary insurance buyers as to knowing how they want or expect their policy to respond, and how it is written to respond. It should also bring to the attention of ODL buyers and ODL insureds (not always the same people), that the wording of any and all underlying policies have a direct impact on the entities above them in the chain of loss.

The case involves a failed Canadian financial institution and a D&O lawsuit naming, in addition to many others, two prominent Toronto lawyers (important to note for limits and costs management, the two separately retained counsel) in their capacity as directors of the failed financial institution. There was a primary D&O policy ($10 million) in place for the financial institution written by a very large D&O insurer in Canada, and the law firm had an ODL policy ($5 million) written by Lloyd’s. The lawsuit claimed $40 million in damages. An application was brought by the lawyers to determine which insurer was required to pay their defence costs, but it is interesting to note that “At the time of their application, the claim had settled – payment having been made by (the primary insurer) – and their defence costs paid by their law firm.” Therefore, with the law firm paying their lawyers’ defence costs, it is my assumption the primary policy of the underlying Outside Entity, together with any indemnification from the Outside Entity itself, did not cover all of the defence costs, and the ODL carrier did not pay or want to pay those costs.

The primary insurance policy did not contain the insurer’s ‘duty to defend’, but included clauses allowing the insureds “under certain conditions (to) tender the defence of a claim”, and advance defence costs “prior to the final disposition of a claim.” Like many primary policies there was a generic ‘excess of any other valid insurance’ clause. There was a similar generic ‘excess’ clause in the ODL policy, and the ODL policy stated “it shall follow all terms… of the Underlying Insurance.” Therefore, the ODL insurer argued that its policy was ‘follow-form’ and should follow the Primary policy and not provide a Duty to Defend. However, the court made specific reference to Nicholls v. American Home, here, in its distinction between an insurer’s broad, but not unlimited, duty to defend and an insurer’s more restricted duty to indemnify.  The court found that, 1) there was broad duty to defend language in many parts of the ODL policy, including the defence section, 2) there were a number of references to how the ODL policy would respond with a primary-type defence, 3) the follow-form language, if applied, would only apply to indemnification coverage not defence, 4)  the ODL policy included language that would be unnecessary if it was in fact their intent to follow-form, and 5) the ODL policy included language that would be contrary to their follow-form intent if the underlying policy did provide a duty to defend. 

Therefore, the Court of Appeal for Ontario dismissed the ODL carrier’s appeal and upheld the lower courts position that the ODL carrier had a duty to defend, even when the primary carrier did not.

The implication of this case, if it is not appealed and overturned by the Supreme Court, is that loss costs for a ODL claim may now be higher than originally considered by ODL carriers and higher prices or more restrictive wording should be expected.

An interesting note, the Court of Appeal went out of its way to state as being incorrect a position where the lower court suggested that the ODL’s policy costs were outside the limits even though that point was not argued before the lower court.

ODL Coverage Options and Concerns:

I should establish the use of the term ODL, as there is confusion between products addressing the unique risks of the ‘outside’ or ‘independent’ non-executive members of a board of directors, and products addressing the risk of any director, officer, or even employee, of a specific company, who holds a board position (the Outside Director or Outside Directorship) on any other company (the Outside Entity). This latter risk is the one more commonly associated with the term ODL in Canada. With the coverage provided by ODL, the Outside Entities have to be determined, either by specific ‘scheduling’ of each and every entity by name in an endorsement to the policy, or by a ‘broad form’ or ‘blanket’ inclusion of coverage for all entities who fit a common definition (best example of a broad form list is all non-profit or not-for-profit entities.) ODL coverage can be purchased, by a specific company, 1) as an extension to their directors’ and officers’ liability policy (D&O), 2) on a standalone policy basis, or 3) by subscribing on behalf of their employees to an industry based ‘program’ coverage. No matter what the form of coverage, it is commonly written as an ‘Excess Policy’, but usually an ‘Indirect Excess Policy’ because the underlying insurance policies are rarely specifically identified. The policy is also a multiple excess policy, because it traditionally only responds excess of the indemnification, deductible and insurance policy limits of the Outside Entity and, in some cases, of the company.

The first option is fairly simple – just request (of your broker) that your company’s D&O policy be extended to include any director, officer, or employee who sits on the board of an outside entity. If the answer is easy, be very careful because it is not and should not be an easy process. Most insurers will provide blanket coverage to all directors, officers and employees who sit on the board of any non-profit Outside Entity (aka ‘blanket entity’), at the knowledge or written consent of the company. Some insurers will even provide that blanket coverage to any ‘for profit’ Outside Entity, others will request a very short application and only provide the for-profit extension to specific individuals and their specific outside entity on a  scheduled basis. Either way, any such extension creates a significant risk of eroding or exhausting the limit of liability of the company’s D&O policy, because there is only one limit of liability available and there is rarely the option to reinstate that limit if it is exhausted by any type of loss. Even if the extension is requested by the board of directors, the onus will be on management to identify and manage the additional risk to the board members. Any extension of their policy may be a relatively easy concept, until a claim is actually made. That is when the conflicts starts, and fingers are pointed at each other and at management. The best protection is paper work and (evidence of) communication.

The second option for coverage is ODL on a standalone basis. This comes at the cost of additional annual premium, but the benefit is a separate limit of liability dedicated to the risk of claims resulting form directors, officers and employees holding board positions on Outside Entities. Another benefit is the obvious paper trail of risk management, communication and decision making that is commonly missing in the ‘extension of coverage’ route. However, like every other insurance policy, the coverage is in the details. The standalone policy may offer blanket (persons) and blanket (outside entities) coverage, but it is more likely to offer blanket/blanket non-profit, and blanket/scheduled for-profit coverage (any individual but specifically scheduled entities.) This coverage option is commonly dismissed because of the extra cost, the low know frequency or severity of ODL based claims, a reliance on the Outside Entity having its own primary D&O policy, and because of the more onerous underwriting requirements and paperwork that is placed on company management. It is rare that the reason for not buying the coverage is because a detailed analysis of the risk has revealed a probable maximum loss that is willingly retained (self-insured) by the corporation and by the corporation’s individual directors, officers and employees.

The third option for ODL coverage is when a company subscribes to an ODL program that may be offered to the members of professional organizations. Here the company commonly pays the ODL program insurance premiums on behalf of certain individuals (directors, officers, employees, partners or affiliated individuals), who are members of that organization. There are not many of these professional ODL programs available in Canada, and they target professions like lawyers, accountants, actuaries, etc., who are motivated by their employers and by their clients to hold such board positions. The annual premium costs for this coverage, once multiplied by each member, can be material to the organization. And the underwriting or submission requirements can be extremely onerous. The benefit is that there is a dedicated limit of liability available to each member and therefore arguably a lesser risk of exhaustion of limits of liability of the company’s D&O program. The concern again is that coverage is in the details, and these details may change from one year to the next. The actual coverage available from these programs requires a detailed analysis and full understanding of the policy contract, and, like other claims-made liability insurance policies, the policy contract includes all applications for insurance (including aggressive and passive warranty statements), applications submission materials (which may include any publicly available information even if it was not actually attached to the application), exclusions and endorsements, and client actions required in that contract. The analysis should specifically address any possible sharing of limits between insureds within the same entity or even with insureds who are employed by another company. There may also be a primary limit ‘pool’ for any and all claims in a given period, which may or may not include adequate excess limits or reinsurance for the risk retained.

A key red flag for any of the ODL coverage options should be the ease of negotiation. The easier and cheaper it is the less value it probably has. Coverage details should include:

  1. Is the coverage considered Excess or Primary?
  2. What amounts must be paid (limits / deductible / indemnification), and by who (Outside Entity / Company / Individual Insured Persons) before the ODL coverage will respond?
  3. If excess, is it a ‘follow-form’ policy or a non-follow-form wording?
  4. Is recognition of the Outside Entity based on ‘knowledge and written consent of the board of directors of the company’, or it is an indefinable and non-measureable term ‘known to the company’?
  5. Is coverage blanket/blanket for non-profit entities and for-profit entities?
  6. Is there an exclusion for publicly listed securities, and if so, is this term defined and does it extend to all activities related to a public listing including the road-show and meetings contemplating the listing?
  7. Does the coverage change the definition of Insured in the policy and, therefore, further expand exclusionary wording like the Insured vs. Insured exclusion?
  8. Is there a ‘prior acts’ exclusion or ‘prior and pending litigation’ exclusion in the coverage?
  9. Is an application required for each outside entity and does it include a ‘warranty statement’?
  10. Is there full severability of application and exclusions?
  11. Is there an assumed minimum for the underlying insurance limit of liability?
  12. Does the ODL coverage require all underlying limits be exhausted by ‘payment of Losses’?
  13. Have all possible Outside Entities been identified?
  14. Have underlying insurance policies been identified?
  15. Has the company taken steps to evaluate the risk and risk mitigation efforts of each Outside Entity?
  16. Has the Outside Director requested the by-laws and an individual contractual indemnity from the Outside Entity and from their company?

There is no standard wording in the marketplace, and in many cases there is no explicit ODL coverage at all. ODL coverage can come in the form of the three options above, or it can be embedded into the base D&O Policy, Private Company D&O or Management Liability Policy or Non-Profit Policy. Without an analysis of the coverage and review of the insured entity’s policies and procedures, the existing D&O policy could be subject to exhaustion from risk of an unknown party and even an unknown individual. A company’s attempt to deny making a claim under its D&O insurance policy for an ODL claim  (because the risk was not known to the board), may only result in a lawsuit against the board, which may be denied by the insurance carrier based on the Insured vs. Insured exclusion.

If the submission or underwriting process is viewed by company management, and by each affected person, as the perfect opportunity for risk management, it might make the risk identification and loss management activities slightly more palatable. The benefits are significant because the potential loss costs could be very high. The process of risk management, and more specifically the application for insurance coverage, has the additional benefit of bringing in experienced third parties (insurance companies and insurance broker) to help with the identification and evaluation of risk. 

Outside Directorship Liability is a confusing and often misunderstood corporate and personal risk. If you would like to discuss your current program or your risk management activities, please call. We provide consulting services for identifying and evaluating risk, insurance program evaluation, and claim coverage response.

Please feel free to call me to expand on any of these issues, or provide you with other documents or other pertinent case law. You can also use the word search function on this blog to find other relevant postings.

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

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626,


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,

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

Crime / Fidelity / Bond / 3D / Employee Theft / Financial Institution Bond / Fraud Insurance

July 9, 2010

Denial of Crime Coverage for Misrepresentation

Like most types of insurance coverage there can be many names within the same family of insurance policies. I will use them indiscriminately in this post, because it helps with Search Engine Optimization.

There are also a number of terms directly associated with the Bond, including but not limited to, ‘material non-disclosure’,  omission, concealment, misrepresentation, ‘incorrect statement of material fact’, and ‘false information’, and these terms are used with respect to the application for insurance that forms part of the 3D policy (Dishonesty, Disappearance, Destruction), and for the grounds for rescission of the Fidelity policy.

Denial of coverage by way of Cancellation ab initio (from the beginning) based on alleged misrepresentation in the application for Fraud insurance is far too common in Canada. There are many precedent setting cases and many more unknown situations not determined in court. The result can be catastrophic for the insured corporation, and for the individual directors and officers who had no knowledge of or involvement in the alleged misrepresentation.

Most Crime insurance applications require the signature of the Chairman and the CEO, or next highest person if the Chm and CEO are the same person. The concern here is that alleged misrep by the highest executives of the firm will at minimum fall within American jurisprudence which follows the “sole representative” doctrine, and therefore the knowledge of such will be imputed to the principal.

However, if the board of a corporation adopted the policy to select an independent committee to review the insurance application and have a fully independent director sign the application (in addition to the executive , because the underwriter might not accept an application signed only by a non-employee of the firm), it could improve the chances that a misrep by any of the signers would fall within the exception to the principal / agent rule because the fraud would have been perpetrated on the principal not on the Insurer (see. Bowstead on The Law of Agency, 15th ed. (Toronto: Carswell, 1985), p. 414, states that the presumption that knowledge will be passed on to the principal may be nullified by proof that the agent was defrauding the principal in that transaction.) They can assert that misrep by the executive in the application was the intent to further their fraud against the principal, especially in a regulated industry where the purchase of a bond is mandatory, not optional, and therefore more difficult for the insurer to suggest the misrep in the application for the FIB by the allegedly fraudulent executive was an obvious attempt to induce the insurer to provide a policy and perpetrate a fraud against the insurer.

There is also inconsistency between insurers with respect to the questions in their applications. Some applications do not specifically ask “are you aware of any claims or potential claims”,  but they will rely on the representations regarding ‘past losses’ (whether or not there was reimbursement), or previous cancellation of a Bond or denial of coverage. Therefore, the policy improvements or limitations may be found in the application.

Risk of rescission, cancellation, non-renewal or claim denial is present within any policy renewal, even if staying with the same insurer, because the application is completed each year. This risk increases if the buyer does not cover all their bases when changing insurance carriers, or when increasing the limits of liability. Some insurers will ask for an ‘increased limits warranty statement’ asking if the buyer knows of any situation which could lead to a claim under the proposed policy. Others will rely on the representations made in the renewal or new business application.

Current regulatory changes in Canada will significantly increase this risk because the Canadian Securities Administrators’ National Instrument 31-103 has come into effect, requiring many financial institutions (investment dealers, investment advisors and investment funds) to register or re-register, demanding new bond coverage in addition to working capital and other requirements. The result is companies buying new policies, where they never had before, or buying substantial increases in their limit (in some cases the $200,000 limit needs to be $10 million.)

The big concern is that poor explanation or negotiation of the new policies or new limits will not be known until a loss is discovered and a claim is made. Only at this point will you realize that your $5,000 premium savings cost you $5 million in insurance coverage.

For risk management techniques, loss control tools, and coverage enhancements, please feel free to call me directly.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 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 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

Happy Fraud Awareness Month

March 17, 2010

The Canadian Government has a website dedicated to the topic (see here) and the loss control advice is directed to individuals and companies. The Canadian Securities Administrators also offer information for awareness and avoiding fraud (see here) with much of this material directed at individuals. Some of it may seem like common sense, but my experience is that most successful scams are simple. So it can’t hurt to take a look. One thing I did find interesting is that none of the material that I reviewed focused on fraud schemes by employees. As this is a leading cause of loss to companies large and small (one statistic I can’t immediately locate said that the leading cause of small and mid-sized business failure in Canada involved some form of employee theft) the need for proper risk management in the area of crime/fidelity/employee theft should be paramount. If you would like to discuss risk management, loss control or fidelity insurance, please call.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626