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


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

Mitchell Sandham Featured in Canadian Insurance Top Broker Magazine!

July 8, 2011


Mitchell Sandham is excited to have an article featured in Canadian Insurance Top Broker Magazine, called “D&O and E&O: How much is enough?” by Greg Shields.  Please click here to access the article.   


Legal Developments and Emerging Risks in the D&O Market

February 28, 2011

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

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

Please hit this link to go to the article without delay.

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

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