DIRECTORS & OFFICERS LIABILITY INSURANCE

Many private companies assume their directors and officers do not risk liability exposure because there are no public shareholders. This is a flawed and potentially expensive assumption.

In fact, private companies share most of the same risks as public ones. Their directors and officers may be sued by governments, employees, customers, suppliers and partners, and for issues arising out of mergers and acquisitions. A director and officer of any company faces tremendous potential exposure.

That’s where directors and officers insurance comes in. A business buys this coverage to protect these key people from allegations and liability arising from wrongful acts or alleged wrongful acts.

What is Covered?

The most typical claim is in the area of statutory liability. For example, in Canada, directors can be held personally liable for unpaid wages and vacation pay, and for withholding taxes that become payable while they are in office. Liability is imposed without fault on any or all directors who can make the payment. This situation arises when appropriate payments are not made or when the company becomes financially insolvent – and liability can be imposed up to two years after directors cease to hold office.

Another big area of coverage centres on employment practices and claims that arise from them. The majority of claims come from wrongful employee termination, discrimination and harassment, and humiliation.

Why do I need it?

Directors and officers insurance can go a long way toward covering this potential exposure. But most insurance companies will want to see a policies and procedures manual in place – the best defence with regards to employment practices. The manual should describe what your business will not tolerate. If policies are not documented, it is very difficult for the company to defend itself. This manual needs to be a living document that is always current and legally correct, and it should accurately outline the company’s practices. The key is full, timely and honest disclosure, and complete documentation.

If the company has minority shareholders, directors can also be sued for lack of full and timely disclosure and for general breach of fiduciary duty. If you have minority shareholders and you act to convey assets away from them, you can be held liable as a director.

Directors and officers insurance cover actual or alleged unintentional acts arising from a lack of good judgement, poor management, lack of skill or ability, or an absence of due diligence. It deals with the results of failure to act, failure to supervise and conflict of interest.

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