Mitchell Sandham at RGD DesignThinkers Conference

November 7, 2011

Mitchell Sandham attended the DesignThinkers conference last week to discuss the insurance program in place for RGD members.  We had a lot of visitors during the conference and the program is being well received.  It is one of the premier events for graphic designers in Canada.  Contact Ryan Mitchell at Mitchell Sandham Insurance Brokers for more information regarding Professional Liability/Errors & Omissions Liability, Commercial General Liability and Property Insurance at rmitchell@mitchellsandham.com or (416)862-5620.


CFPOA (Bribery) Enforcement Action on the Rise

July 8, 2011

 

Risk Management will be a particular challenge based on the “ground level” exposures and the difficulty identifying and controlling risk that is created by a vast number of activities conducted by a large number of people with significant geographic and supervisory separation.

Therefore, based on single aggregate limits, and considerable number of parties and matters insured under a typical D&O insurance policy, a full understanding of how and where limits are sharing should be a top priority for D&O buyers.

In past blog posts I have been critical of Canadian regulation and enforcement of Bribery. But, I can now suggest there has been an extraordinary increase in Canadian corporate bribery enforcement. I am not suggesting the alarm bells should be raised, as the number of cases has gone from one to two (two to three if you include individuals), and I am sure that 99.something % of Canadians (and nearing that number of politicians) could not tell you what CFPOA stands for. This is not as easily said of FCPA. The Foreign Corrupt Practices Act, here, in the US has seen significant press over the last year. This should be no surprise, the US government provides a website listing enforcement actions in chronological order (there are 14 actions under ‘A’ alone), a dedicated email address for reporting violations, and transparency on settlements/judgments (which have been in the hundreds of millions of dollars.)

I wouldn’t be worried about wiretaps and agents posing as foreign government officials……, if your organization does absolutely no business (purchasing or selling, travel or expenses) outside of Canada. We are not known for aggressively fighting white collar (I prefer the term “financial”) crime. However, if you do any business outside of Canada, perhaps some risk identification and loss control is a good idea.

CFPOA stands for The Corruption of Foreign Public Officials Act. It can be found on a Canadian government site, here, but there is no “enforcement” section, or any obvious “report bribery or corruption” contact information. I don’t even recommend a search of Canadian government information regarding corruption or bribery, as it is a time wasting and frustrating exercise in ineffective links and extraordinarily outdated reports. Prior to this very recent case, I could find reference to only two criminal prosecutions in Canada since the 1999 inception the act and the only one with a dollar figure was for $25,000.

In June, enforcement of bribery in Canada actually made publication. I would like to say that it made headlines, but the only page-one google hits for “bribery enforcement in Canada” were law firm briefs and low profile blogs.

The recent case is Niko Resources Ltd., here, which is based on bribery of a junior energy minister in Bangladesh. As per the Reuters report by Scott Haggett, “the charges stemmed from providing a car worth $191,000 and a $5,000 trip”, but the fine is $8,260,000 plus a victim surcharge of 15% for a total $9.5 million fine. This does not include legal costs and it does not contemplate the reputational damage to Niko, or their 3.2% fall in market cap of their shares (which equates to more than $120 million.) Class action securities claims have been started for less.

A CFPOA settlement in this range is material to even the biggest Canadian corporations and it obvious that the intent is to send a warning signal to all Canadian companies, directors and senior management (and to try to get the Government out of the news for being complete ineffective on bribery and corruption.)

Here is the corporate governance, risk management and insurance spin. For this we will have to look outside of Canada because, in the article here at Canadian Lawyer Magazine by Andi Balla, it has been expressed by the head of the RCMP unit in charge of investigation corruption of foreign officials that “Canadian legislation is very short and hard to interpret.”

Based on the US experience with FCPA, and the very recent UK Bribery Act, the issue of Bribery will receive increased focus as a material Corporate Governance, Risk Management and Compliance responsibility. Risk Management will be a particular challenge based on the “ground level” exposures and the difficulty identifying and controlling risk that is created by a vast number of activities conducted by a large number of people with significant geographic and supervisory separation.

Like most other corporate risks, good loss control will come from establishing, communicating, enforcing and monitoring policies and procedures. But identifying, qualifying and quantifying risk in order develop specific risk based policies and procedures is much easier (not to mention quicker) to say than do.

The U.K. Ministry of Justice, regarding the new U.K. Bribery Act (took effect July 1, 2011), here, has provided some Guidance, here, to their legislation. But enacting policies and procedures is further complicated by the vague language of the official guidance which uses phrases like “extremely unlikely to engage Section 1” (the section prohibiting Active and Passive bribery), and introduces the “reasonable person” test and “common sense approach”. One area that makes it difficult to define or identify risk is the “associated persons” language which is not easily defined and includes any person or entity who “performs services” for the company. Therefore, direct and even indirect contractors could create a risk of liability for the corporation.

Other concerns with the U.K. guidance is that many terms are not defined. One such term is “close connection”, because this close connection to the U.K. could apply to the person committing the offence, or to place of incorporation, or to the location of the consenting senior officers. Another important term “carry on business”, because the parent company or even a subsidiary entity does not have to be incorporated in the U.K. in order to be responsible under the Act.

Directors of affected companies will to have look at the “relative ‘value’ of the spend” in every foreign business dealing and determine its ‘proximity’ to a pending business deal in order to identify activities that generate risk. They will then have to prioritize which activities could become the subject of scrutiny under the Act and direct resources accordingly.

The insurance response has yet to be determined. Some ideas are presented by Anjali Das, a partner in the Chicago office of the Wilson Elser law firm, are published in The D&O Diary Blog, here.

Insurance underwriters will eventually be requesting copies of Anti-Bribery policies and procedures, but that has not started (in Canada) and we hope to provide warning of any such change.

Directors, if not already, will soon be asking their General Counsel, CFO, Corporate Secretary, or whoever else is their go-to-person on personal liability and directors’ and officers’ liability insurance (D&O), about the potential response of their D&O policy to a CFPOA investigation. Since there are many dozens of different D&O policy wording and hundreds of endorsements in current use in Canada, there is no one-size-fits-all answer to this question. Your current in force policy wording needs to be reviewed. I suggest asking for an electronic searchable version from your insurance broker and searching for the term “fine”. If you are attempting to find the answer in paper form I recommend starting from the last endorsement and working backward. It is common for large publicly-traded companies to have more than 20 endorsements on their D&O policy, changing a good portion of the base policy wording. You will likely see a “fines and penalties” exclusion (unfortunately not in the exclusion section,) hidden in the definition of Loss. However, there may be a ‘carve-back’ (and exception to the exclusion) for defence costs.

Before you do anything regarding affirmative insurance coverage for an CFPOA action, an examination of priorities is warranted. Meaning, what do all of the Insureds, or at least Classes of Insureds, want the policy to do? I have not seen a CFPOA exclusion used in Canada, and Canadian underwriters are not likely to take a knee-jerk reaction to the Niko CFPOA enforcement action. I have also not seen any specific CFPOA endorsements in the Canadian marketplace, but I am sure they are in the works. But, the “broadening” of coverage to include Loss based on CFPOA actions may not be in the best interest of all Insureds. There is usually only one limit of liability available and it is shared by every director, officer, employee and the corporate entity (including every subsidiary) for every individual allegation, investigation and lawsuit. Also, it is common that in the middle of a potentially large group of claims (or circumstances which could lead to a claim) policy limits are not renewed (refreshed) at the expiry of the policy and therefore the one limit of liability may be the only limit available for all of these parties and matters for many years.

Therefore, based on single aggregate limits, and considerable number of parties and matters insured under a typical D&O insurance policy, a full understanding of how and where limits are sharing should be a top priority for D&O buyers.

I try not to subject my readers to 2,000 words in a post, but this does not give the corporate governance, risk management and insurance spin the detail it deserves. Therefore, if you would like more details in these areas, or if you would like help understanding your D&O policy and its potential triggers (positive and negative) regarding CFPOA enforcement, notice obligations or risk of limit exhaustion, please don’t hesitate to call me directly.

Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at https://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


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.   

 


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 gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at https://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Skip Arbitration, Go Straight to Class Action

April 12, 2011

The Supreme Court of Canada has released a new decision in Seidel v. TELUS Communications, here, that will be followed closely by Canadian class action plaintiff lawyers. If you don’t want to read the whole case, Osler has released a paper, here, by Jennifer Dolman and Matthew Thompson, discussing the decision, some of the SCC precedent cases like Dell v Union des consommateurs, here, and Rogers v Muroff, here, the conflicting precedent, the narrow 5-4 decision and dissenting opinion with the court,  and the impact. The most interesting quote from this article “be prepared for an increased number of claims proceeding to the court system.” Interestingly, this paper makes a specific reference to franchisors and generous interpretation of the Arthur Wishart (Franchise Disclosure) Act, 2000 favouring franchisees.

This Supreme Court decision will put smiles on the faces of plaintiff and defence lawyers, but it will also help identify existing and new risks that must be managed by corporations, their management, directors, shareholders, and their insurers. 

If you still don’t want to read the case or paper, here is my short summary:

Plaintiff (P) entered into a consumer contract for cellular service and later alleged false representation in how the defendant (D) calculated air time for billing. The contract included “private and confidential” mediation and arbitration and waiver of right to commence or participate in a class action. P sought certification of a class action; D was denied its application for a stay on proceedings by the trial judge but Court of Appeal stayed P’s action and sent the case to arbitration. P appealed and The Supreme Court of Canada (SCC) lifted the stay of the class action but only in relation to claims regarding Section 172 of the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2 (the BPCPA), saying this legislation “should be interpreted generously in favour of consumers”, supporting a “public interest plaintiff” and encouraging “private enforcement in the public interest” through a “well-publicized court action to promote adherence to consumer standards.”

The conflict seems obvious. The SCC suggested they did not negate their decisions in Dell, Rogers and others, which supported arbitration as a means to avoid lawsuits. In par 41 of the decision they explain by suggesting “the outcome turned on the terms of the Quebec legislation” and “contained no provision similar to s. 172 of the BPCPA.”

This court was specifically looking for “public denunciation” and notoriety that could not have been achieved through private and confidential arbitration.

The risk management spin:

If you have used or expect to use arbitration clauses to quash any rebellion by clients, you better hope you are not subject to any legislation where indirect statutory interpretation could suggest that such legislation was “enacted to encourage private enforcement in the public interest” and intended to “shine a spotlight on allegations of shabby corporate conduct.”

Good luck avoiding such legislation, because this case dealt  directly with section 172 of the BPCPA, but cited cases reference the Copyright Act, the Labour Code, the Insurance Act, and others.

Continue to use the arbitration and mediation provisions (as well as “hold-harmless” and “limitation of liability” clauses) in your customer agreements, but also invest in a corporate communication system (CRM) that will help identify and classify customer claims on a real time basis. Also create policies and procedures to deal with individual consumers before they become sufficiently upset to take their complaints to the social networks. Today, versus even two years ago, consumers have exponentially greater ability to reach similarly-minded individuals, and class-action remedy is far more popular. Data-mining in twitter, facebook, myspace, and the broader blog-world is a reality, so use it to your advantage, because it is impossible to determine which complaints will go viral, and no containment strategy can move as fast as a viral complaint.

As for insurance, don’t rely on anything you currently have, unless you have recently “stress-tested” your program for this exact risk exposure.

If the consumer lawsuit names individual directors and officers, the D&O policy might respond to the defence costs of the individuals, excess of the corporate retention (if the corporation is financially and legally able to indemnify the individuals.) But it won’t likely respond to the costs of the corporate entity because a consumer complaint would not be classified as a “securities claim”, which is where most “entity coverage” under a D&O policy can be found. Some private company management liability policies provide entity coverage that is not limited to a securities claim, but the exclusions (which are also hidden in the definition of Loss) typically exclude “fines or penalties”, costs of remedial relief, or any circumstance or situation existing prior to the inception of the policy, and many others.

If a lawsuit of this nature actually gets through the definitions and exclusions in the policy, most D&O and Management Liability policies require that an individual director or officer be continuously named in the case in order for the policy to respond. And the double edge sword to this case is that if the lawsuit is covered by the policy, there is only one policy limit of liability, and exhaustion of that limit based on loss of the corporation entity, could ultimately be to the detriment of individual directors and officers for their downstream personal liability.

The Commercial General Liability policy would not typically respond to claims brought with regards to consumer protection from a consumer contract or agreement because there is no underlying “bodily injury” or “property damage” to trigger the policy.

A Professional Liability policy (aka Errors and Omissions (E&O)) might respond, but there is no standard or regulated wording in this product, so the policy will have to be examined closely. Also, E&O is more commonly purchased in the commercial products industry (where arbitration provisions are more likely to survive), and less often purchased in the retail consumer products industry.

There comments are not meant as fear-mongering. The reality is that the SCC did not allow all of the P’s allegations to go through to private litigation, and the decision is not a certification of a class proceeding. However, whenever a SCC decision goes in favour of an individual P seeking class action status and remedy that includes disgorging of profits, it presents financial and reputational risk exposures that cannot be ignored by any company of any size.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com  

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making 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 gshields@mitchellsandham.com.


Graphic Designers Conference

January 6, 2011

Mitchell Sandham attends DesignThinkers 2010 Conference

Mitchell Sandham Insurance Brokers attends DesignThinkers 2010 Conference put on by RGD (Registered Graphic Designers) Ontario.  Our insurance program for RGD Ontario members was well received!  We specialize in Errors & Omissions liability and Commercial General Liability for graphic designers.  For more information pertaining to insurance for graphic designers please contact Ryan Mitchell at (416)862-5620 or rmitchell@mitchellsandham.com


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, gshields@mitchellsandham.com

 CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making 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 gshields@mitchellsandham.com.