Directors & Officers Insurance Issues Seminar

Transcription

1 Directors & Officers Insurance Issues Seminar Bob Cooper & Ariel DeJong, McCarthy Tétrault LLP Catherine Richmond & Murn Meyrick, Willis Canada Inc. January 23, 2007 McCarthy Tétrault LLP P.O. Box 10424, Pacific Centre Suite Dunsmuir Street Vancouver BC V7Y 1K2 Canada Willis Canada Inc. Suite West Pender Street Vancouver BC V6E 2M6 Canada

2 Directors & Officers Issues Seminar Contents A B C D E F Agenda Emerging Issues in Directors and Officers Liability Fine-Tuning Protection to Serve Corporate and Individual Priorities Insured v. Insured Exclusion Directors and Officers Liability and Its Impact on Insurance Coverage Speaker Profiles

3 AGENDA Directors & Officers Liability and Insurance Issues Tuesday, January 23, :30-6:30 p.m. 4:30 Welcome Ariel DeJong McCarthy Tétrault) 4:35 The Impact of Secondary Market Liability on Directors and Officers Criminal and quasi-criminal liability as well as implications for D&O insurance policies will be discussed. 4:55 Navigating the D&O Insurance Market Be an educated buyer in today s rapidly evolving market: obtain the broadest coverage with a policy structure which satisfies both the board s and management s priorities. Bob Cooper (McCarthy Tétrault) Catherine Richmond (Willis Canada Inc.) 5:15 "Insured v. Insured" Exclusion: Avoiding Potential Pitfalls This presentation will focus on what it is, why it is included in D&O policies, potential problems which can arise based on the wording and possible solutions. 5:25 The Impact of Litigation Trends on Coverage Directors and Officers need to understand and have available the tools with which to respond to the impact of the growing liability exposures on their D&O insurance. Ariel DeJong (McCarthy Tétrault) Murn Meyrick (Willis Canada Inc.) 5:45 Cocktail Reception

4 Directors & Officers Insurance Issues Seminar McCarthy Tétrault LLP & Willis Canada January 23, 2006 Emerging Issues in Directors and Officers Liability Secondary Market Liability Regulatory Prosecution Bob Cooper 1

5 Secondary Market Liability What is secondary market liability? 4 Creates a statutory cause of action for investors who purchase or sell in the secondary market Creates strict liability for issuers (and their officers and directors) who breach continuous disclosure obligations No need for investors to prove knowledge, intention or gross misconduct for misrepresentations in core documents such as AIF or MD&A Eliminates significant obstacle to class certification by not requiring reliance by secondary market purchasers on misrepresentations or omissions 2

6 Who is affected? 5 Applies to issuers, directors and officers, and influential persons and experts of responsible issuers Will apply to BC companies who are reporting issuers in Ontario, Alberta and Manitoba or have a real and substantial connection to those provinces Influential Person: Insider who is not a director or senior officer Control shareholder (20% or more of voting shares) Experts: Accountants Auditors Lawyers Geologists Financial Analysts Other qualified professionals making statements in their professional capacity What does it mean? 6 No change to law requiring continuous (Financials, MD & A, AIF) and timely disclosure (material changes) Adds civil liability if there is a failure to meet these requirements and the issuer otherwise releases a misrepresentation or is not timely with disclosure Increased exposure to shareholder class action litigation Heightened concern for corporate and personal liability; financial and reputational risk 3

7 What are you liable for? 7 For a misrepresentation contained in a documents, directors at the time the document was released and officers who authorized, permitted or acquiesced in the release are liable For a misrepresentation made in a public oral statement or for failure to make timely disclosure, directors and officers who authorized, permitted and acquiesced in making the statement or in failing to make timely disclosure are liable Are there defences? 8 Defendants must prove a reasonable investigation Factors include: Nature of issuer Adequacy of systems in place for disclosure Reasonableness of relying on system Reasonableness of relying on officers/employees Role and responsibility of the person making the misrepresenation 4

8 What is a reasonable investigation? 9 At a practical level, a reasonable investigation will likely turn on: What internal analysis preceded the disclosure/omission to disclose? Were appropriate officers, managers involved? What outside advice was sought and was it followed? Was the disclosure/omission made hastily under time pressure? Were internal compliance standards/systems followed? Was all of the above documented so as to be provable in a meaningful way? What are the implications? 10 Increased risk of personal liability may make it difficult to recruit top flight directors Audit committees will require experienced directors and extraordinary time commitments Officers with direct preparation responsibility will face greater risk of liability and will need to document procedures followed Directors and officers may insist in written and more elaborate indemnity agreements Disclosure policies will be revamped to emphasize accuracy of public filings Earnings guidance may be less frequent 5

9 Will this open the floodgates? 11 Courts exercise a gatekeeper function Plaintiffs must demonstrate a reasonable possibility of success to proceed Damages are capped, absent a finding of fraud: For issuers or corporate influential person, damages cannot exceed the greater of 5% of market capitalization or $1 million For an officer, director or individual influential person, damages cannot exceed the greater of $25,000 or 50% of compensation received in the previous 12 months High barriers to entry present real risk to potential plaintiffs Only one action commenced in the first year (Imax) Regulatory Prosecution 6

10 What happened to Bill C45? 13 The Westray Act came into force in 2004 The Criminal Code now requires: Everyone who undertakes, or has the authority, to direct how another person does work or performs a task is under a legal duty to take reasonable steps to prevent bodily harm to that person, or any other person, arising from that work or task This, together with provisions that made it easier for corporations to be charged criminally, was predicted to dramatically increase the number of criminal prosecutions for OH&S matters However, charges have only been laid in two cases Is prosecution a risk? 14 Prosecution for regulatory offences in increasingly likely and organizations and individuals should not be complacent Senior officers, including directors and officers, are exposed to two types of prosecution regulatory and criminal There is an international trend which features the parallel existence of criminal law and OH&S regulation in protecting worker safety There is no clear line between the OH&S standard of negligence and criminal negligence 7

11 Is prosecution a risk? (cont d) 15 Parallel investigations by police and regulators are common in serious incidents or fatalities Organized labour and safety advocates apply coordinated pressure to lobby for prosecutions Many senior officers and organizations are not properly informed about their duties and do not place a priority on worker safety What steps should be taken? 16 Compliance with applicable OH&S legislation is essential to demonstrate that all reasonable steps are being taken to prevent injury Due diligence needs to include senior management oversight of safety systems and matters A real commitment to workplace safety must be made with an effective program that demonstrates clear communication throughout the organization There must be proactive accident response plans to manage the complexities of dealing with criminal and regulatory investigations 8

12 17 Bob Cooper Partner Litigation Department Tel:

13 Directors and Officers Liability Insurance: Fine-Tuning Protection to Serve Corporate and Individual Priorities McCarthy Tétrault LLP & Willis Canada Seminar January 23, 2007 Presented by: Catherine Richmond, Senior Vice President Executive Risk Practice Willis Canada Inc. Agenda Overview of Directors and Officers Liability Insurance Critical D&O Issues for 2006 Indemnity Rescission Bill 198 1

14 D&O Insurance Policy Overview D&O Insurance Policy E&O for running a company Who s insured: Directors, Officers Employees Entity - Securities, Oppression Spouses Employees Defined term: full-time, temporary, seasonal, parttime 2

15 The Three Sides of Directors & Officers Liability Side A covers individual directors and officers (and Trustees) for non-indemnifiable losses - those losses that the company cannot indemnify. No deductible Side B reimburses the company for payments it is required to make to individuals to cover the cost of claims, settlements and legal defense. Deductible. Side C reimburses the company for securities claims made against the corporate entity itself. Deductible. Sometimes includes pollution defense. Program Design BROAD FORM (DIC)* EXCESS A-SIDE COVERAGE Broad Form A-Side DIC* Coverage Drops down to primary if underlying insurance: wrongfully refuses to indemnify is financially unable to indemnify is rescinded is subject to bankruptcy/financial impairment Annual, Aggregate Limit Is non-rescindable for any reason *DIC = Difference In Conditions A-SIDE COVERAGE EXECUTIVES PERSONAL ASSETS PROTECTION B-SIDE COVERAGE CORPORATE BALANCE SHEET PROTECTION C-SIDE COVERAGE CORPORATE ENTITY PROTECTION (securities claims only) NO DEDUCTIBLE DEDUCTIBLE 3

16 Triggering the Policy Policy Construct: Claims Made 3 rd Party Liability Policy All Risks Claim alleging Wrongful Act resulting in Loss What is NOT covered by the policy Public Policy Exclusions: Conduct Exclusions: Fraud/Dishonesty Illegal Benefit Fines & Penalties Covered Elsewhere: Bodily Injury/Property Damage Exclusion Pollution Exclusion Pensions/ERISA Exclusion Professional Liability note securities carveout 4

17 What is NOT covered by the policy Narrow the Underwriting Exclusions: Major Shareholder Exclusion 10% Insured versus Insured Exclusion Pending and Prior Litigation Exclusion Pollution Securities Claims Exclusion - Secondary Market, 30 days notice Employment Practices Liability Critical D&O Insurance Purchasing Issues 5

18 Critical Purchasing Issues Purchasing Decision is changing Directors/Trustees involvement Potential conflict between management and insureds (cost v. coverage) Third Party Reviews Program Structure Who should be insured? Adequacy of Limits Side A DIC ( Difference in Conditions) Coverage Certainty Indemnification Fraud Coverage Certainty Indemnification Sources of indemnification may be more limited now than in the past due to: Insolvency Legally unable Incentives against indemnification- reduce limits available to innocents cooperation with criminal & regulatory investigators Plaintiff s strategies Indemnification availability has key implications for insurance program structure 6

19 Coverage Certainty Fraudulent Conduct Concern: increasing number of cases where officers admitting to participation in frauds, or overwhelming evidence of same. Implications: Denial of Claims Rescission of Coverage Threat of rescission used as a negotiating tool by insurer How can directors avoid rescission and denial of defence obligation? Full severability Fraud exclusion requires proven intentional conduct Consider Side A non-rescindable coverage Ensure broker has technical expertise and experience Bill 198 What are the implications? Litigation: Powerful tool for investors in the secondary market increased class actions Damage caps increased allegations of knowing disclosure violations? Cross border actions? Outside directors minefield? Not involved in day to day operations Underwriting: Does the company have policies and procedures for: disclosure? Release of public oral statements, forward looking statements? Does the company receive outside expert advice? 7

20 Bill 198 What are the implications? Coverage: Who should be insured? Separate policies for directors and officers by group? Limits? Insured versus Insured claims? Conflict amongst defendants? Need for separate counsel increased cost Catherine Richmond Senior Vice President, Executive Risk Practice (604)

21 Insured v. Insured Exclusion Ariel DeJong What Is It and Why Is It There 2 Side A, Side B and Side C coverage Excludes coverage for an action by one insured against another Important to know who is an insured past,present and future directors, officers, employees spouses Underwriting rationale is to prevent collusion Actual wording governs if clear not limited to collusive claims: Kohanski 1

22 Exceptions 3 Derivative actions brought by persons not insured who act without the solicitation, assistance or participation of any insured party Wrongful dismissal claims Claims for contribution or indemnity (if claim otherwise covered) Securities claims Problems 4 Statutory limits on indemnities for directors and officers CBCA and BCBCA Broad definition of insured can expand exclusion and narrow derivative action exception Claims by liquidators/trustees in bankruptcy/receivers: Markham and People s Changes in control of the corporation Gaps in coverage for directors and officers Joint claims by insureds and non-insureds 2

23 Potential Solutions 5 Exception for claims by liquidator/trustee in bankruptcy/receiver Exception for change of control of company Expand derivative exception to require assistance of more than one insured Limit application of the exclusion to individual insureds while acting within their capacity as directors, officers or employees Get exception to exclusion for non-collusive claims Potential Solutions 6 Stand alone, enhanced or broad form excess drop down difference in conditions Side A Non-rescindable, non-cancellable and fully funded run-off Side A Deal with allocation issue for covered and uncovered claims where claims by both insureds and non-insured 3

24 Final Comments 7 Read the exclusion and policy language carefully wording varies widely If possible address gaps in coverage and ensure coverage for gaps Determine your risk strategy and tolerance Be aware and make informed decisions 8 Ariel DeJong Partner Litigation Department Tel: adejong@mccarthy.ca 4

25 0 Directors & Officers Liability and its impact on Insurance Coverage McCarthy Tetrault LLP & Willis Canada Seminar January 23, 2007 Presented by: Murn Meyrick, Senior Vice President Executive Risk Practice Willis Canada Inc. Impact of litigation: Underwriters Reaction & Tools 1 Book of business: assessment of rate, retentions, limits, reserves. Is book profitable? Underwriting of risk: Application Warranties Disclosure Corporate governance Policy: Specific account - Endorsements - exclusions Across the book of business involved process D&O policy is static product functioning in a dynamic environment 1

26 Impact of litigation: Insureds Reaction & Tools 2 Don t ignore!! Educate yourself about trends Identify where you stand in peer review Start early in renewal process Differentiate your risk - corporate governance Coverage review - educate yourself! Changes in purchasing decision: Directors involvement Outside consultants Bifurcation of purchasing decision Impact of litigation: Claims management 3 Increased sophistication & organization of plaintiffs counsel, including U.S. alliances Increased awareness of & attentiveness to coverage & claims handling Increased third party involvement (audit, coverage & monitoring counsel) Greater coverage disputes- rescission threat; nonrescindable endorsements Competing interests amongst insureds - severability; first past the post; limits preservation Excess layer involvement 2

27 A few current examples 4 Executive compensation - stock option backdating & springloading Income trusts - increased exposure on trustees Institutional investors - pension plans, hedge funds increasing ownership and pushing aggressively for their agenda X-border implications - extradition; self-incrimination Criminal & Regulatory investigations/prosecutions The new executive world? 5 Enron Canada CEO, David Delainey, sentenced to 2.5 years, Sept

28 Negotiating the D&O Policy 6 Great environment for customizing: New entrants Insurers willing to trade coverage to maintain price Insurers willing to differentiate by product offering not price New products - eg, Side A DIC (Difference in Conditions), Income Trust, Mutual Fund - Independent Review Committee Buyers more sensitive to coverage over price D&O policy no longer a commodity Final Message 7 Start the process early Determine your risk philosophy and prioritize Differentiate your risk to underwriters This isn t an auto policy - terms vary greatly EDUCATE & NEGOTIATE 4

29 McCarthy Tétrault LLP An Ontario Limited Liability Partnership Lawyer Profile ROBERT COOPER TITLE Partner OFFICE Vancouver DIRECT LINE LAW SCHOOL Osgoode Hall Law School, LLB, 1982 BAR ADMISSIONS British Columbia, 1984 Biography Robert Cooper is a partner in the Vancouver office practising in the Litigation Group. He practises as general counsel, primarily in commercial, criminal and securities litigation. Mr. Cooper is experienced in complex litigation and public law. He advises individuals and corporations on securities matters relating to corporate governance, shareholder disputes, discipline and regulatory offences. He frequently appears on criminal and regulatory matters relating to fraud, employee misconduct and corporate liability. Mr. Cooper participates as a guest instructor at trial advocacy programs for the Advocates Society and Continuing Legal Education Society. He speaks frequently as a guest lecturer on securities litigation. Mr. Cooper received his BA in 1979 from Queen's University and his LLB in 1982 from Osgoode Hall Law School. He was called to the British Columbia bar in 1984.

30 McCarthy Tétrault LLP An Ontario Limited Liability Partnership Lawyer Profile ARIEL DEJONG TITLE Partner OFFICE Vancouver DIRECT LINE LAW SCHOOL University of British Columbia, LLB, 1988 BAR ADMISSIONS British Columbia, 1989 Biography Ariel DeJong is a partner in our Litigation Group and Insurance Group in Vancouver. Mr. DeJong's practice focuses on insurance coverage issues, construction litigation, corporate and commercial disputes and education law. He has argued cases at all levels of the courts of British Columbia and has been involved in numerous mediations and arbitrations. Private sector clients include those in the manufacturing, real estate development, energy, fish farming, education, processing, professional engineering services and technology industries. He is currently involved in a wide range of insurance coverage files and construction and professional liability litigation. Mr. DeJong has also acted for numerous independent schools, churches and other charitable organizations. Mr. DeJong is a member of: BCRIMA, the British Columbia Risk and Insurance Managers Association; the Insurance Coverage Litigation Committee of the Tort Trial and Insurance Practice section of the American Bar Association; and the Insurance and Construction Law sections of the Canadian Bar Association. Mr. DeJong currently serves on the Board of Directors of the Federation of Independent School Associations for British Columbia and has served in that capacity since He is also a director of the Elim Housing Society which provides housing to seniors. He served for six years on the Board of Governors of the King s University College located in Edmonton, Alberta and for three years as a Director of the Surrey Christian School Association. He is a member of the Fleetwood Christian Reformed Church. Mr. DeJong received his BA in 1985 from Calvin College and his LLB in 1988 from the University of British Columbia. He was called to the British Columbia bar in 1989.

31 Murn Meyrick Senior Vice President, Executive Risks Practice Group Murn Meyrick joined Willis in 2005 and is currently Senior Vice President Executive Risks providing consultative support and claims advocacy for the Executive Risks Practice. She is a national resource for Willis Canada, based out of Toronto. Formerly a Senior Claims Attorney with Chubb Insurance Company of Canada, Murn brings over 20 years of litigation experience. She has handled complex litigation and insurance coverage disputes in both Canada and the U.S. Murn is responsible for litigation and regulatory client support including corporate governance, directors liability, employment, media and pension liability issues. Murn also provides business risk assessment and management consultative support, and claims advocacy. Prior to Chubb, Murn served as Litigation Counsel for Zurich Canada and Dutton, Brock, LLP where her practice was primarily focusing on insurance issues with an emphasis on professional negligence, personal injury, product liability, coverage, and general commercial claims. Murn earned her LLB from the University of Toronto Law School in Murn has extensive experience in negotiation and mediation, with her training including the Advanced Harvard Mediation Workshop. A frequent speaker, Murn has presented at many conferences including, The Canadian Institute, Professional Liability Underwriters Society, International Pension and Employee Benefits Law Association, The Pacific Business and Law Institute and the Canadian Bar Association.

32 Catherine Richmond, LLB, CRM Senior Vice President, Western Region Executive Risk Practice Leader Catherine joined a national insurance broker in 1995 to create its National Directors and Officers Liability Practice. She recently joined Willis Canada to lead its Western Region Executive Risk Practice. She has consulted to many of Canada's largest companies on complex D&O issues surrounding corporate governance, hostile takeovers, acquisitions, shareholder class actions, insolvencies and insurance placement. Catherine has consulted with senior management and boards of directors on these issues and has spoken at numerous seminars including those presented by the Canadian Institute, CRIMS, ORIMS, BCRIMA, Directors Roundtable and the Canadian Bar Associations of Ontario and New Brunswick. Prior to her work in insurance, Catherine practised law. She received her undergraduate Honours B.A. in Psychology from Queen's University, followed by a law degree at the University of Ottawa. She is called to the Bars of both Ontario and British Columbia, in which she maintains non-practising memberships and is a member of the Canadian Bar Association and the Professional Liability Underwriters Society. Catherine is a Director on the Advisory Board of the Risk and Insurance Program at the Haskayne School of Business, University of Calgary.

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