DIRECTORS AND OFFICERS INSURANCE EXPLAINED

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1 DIRECTORS AND OFFICERS INSURANCE EXPLAINED One insurance broker is advocating that Aboriginal communities purchase an insurance product that proclaims to include directors and officers liability ( D&O ) insurance as a part of a commercial general liability ( CGL ) insurance policy while cautioning that, since such an approach may not provide coverage on a basis as broad as a D&O insurance policy, each band or community should conduct their own review and make their own decision about the adequacy of the CGL option. Since an insurance analysis can be a technical and complex process, especially when comparing D&O versus CGL, AIS provides the following Question and Answer prepared by a law firm responding to questions very much on point with the purpose that it may be of some assistance in the evaluation process about the merits of obtaining stand-alone D&O versus a CGL endorsement. A common question that arises regarding D&O is when an insurance agent has recommended to the board that they keep D&O coverage separate from general liability coverage. Some commercial general liability policies include D&O, and many clients wonder if there is a standard approach or policy for that type of scenario. In most cases, the Directors & Officers (D&O) liability should be written separate from the Commercial General Liability policy explains a prominent insurance lawyer. The reason being is that generally when the D&O is included with the General Liability, it will not provide as broad of coverage. For instance, a standalone D&O policy has a much broader definition of who is an insured. It will generally include not only the entity, but any directors, trustees, officers, employees, committee members, volunteers, as well as persons who were or shall be elected. When coverage is included within the General Liability policy, coverage is limited to the current directors and officers, as well as all persons who are or will become directors. Generally, there will be no coverage for a director or officer who has exited the board and is named in a lawsuit for something that happened while they were on the board. This alone should be a reason to obtain a standalone or monoline D&O policy. But to take it a step further, when the D&O coverage is included within the General Liability policy, coverage would be excluded for any of the following: failure to maintain or obtain adequate insurance, discrimination, wrongful termination, non-monetary damage lawsuits, breach of contract and personal injury lawsuits such as libel, slander or defamation of character. In addition, coverage is usually not extended to cover the property management firm if the building has one. The standalone policies will generally provide a defense and penalties in most cases for all of the above situations. The standalone D&O policy is going to cost more, but when it comes to D&O insurance, you get what you pay for. Providing assistance for the evaluation process regarding the merits of obtaining a stand alone D&O vs CGL Endorsement. CONTACT US TOLL FREE: HAMILTON: [email protected] Insight. Experience. Commitment. 1

2 DIRECTORS LIABILITY EXPLAINED DEFINITION OF A DIRECTOR A director is an individual who is a member of a governing board of an organization. This organization can be unincorporated and thus have no legal status, or it can be incorporated as a corporation under federal or provincial statutes. This corporation can be for-profit, organized to pursue commercial objectives, or it can be non-profit, organized to fulfill benevolent or charitable purposes. Organizations come in a variety of types and sizes, under a variety of names. A non-profit organization can be referred to as a club, association, society, corporation, league, or committee. If the organization is incorporated, the directors will be formally appointed under a statutory procedure, and the names of the directors will be registered with a public agency. The incorporation of a society under a federal or provincial statute establishes the organization as a legal entity (an artificial person ) that exists independently as separate and distinct from its members. This legal entity can: Own property in its own name Acquire rights, obligations and responsibilities Enter into contracts and agreements Sue and be sued as if it was a real person DEFINITION OF A BOARD OF DIRECTORS Most organizations are governed by either an administrative and/or hands-on board or a policy-governing board. In most cases these boards are more commonly known as a board of directors, a board of governors or a board of trustees. The primary responsibility of this board is to provide leadership and direction to the organization, and to govern its affairs on behalf of members (or shareholders, in the case of companies). Directors are usually elected or appointed to their positions on the board. Directors may also be officers, where an officer fulfills certain corporate roles and functions, such as those duties of a president, treasurer or secretary of the organization. Officers can also be senior staff persons, and in rare circumstances, staff persons can also be directors. LEGAL DUTIES OF DIRECTORS In Canada, directors statutory liabilities are extensive and include joint and several liability to employees for unpaid wages and for certain unpaid taxes. In addition to imposing a duty of loyalty and good faith, Canadian corporate statutes require directors to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, meaning that a director s conduct will be measured against an objective standard. Directors can be sued personally in tort for their conduct as directors even when they have acted in good faith and within the scope of their duties and in the best interests of the corporation served. The liability risks facing directors can transcend the scope and availability of any applicable corporate indemnification such that broad-form stand-alone Directors and Officers Insurance should be viewed as a fundamental condition precedent to acceptance of the duties and burdens of directorships. The basic responsibility of directors is to represent the interest of the members in the directing the affairs of the organization and to do so within the law. In representing the members of the organization and acting as their trustee, directors have many duties including but not limited to: The Duty of Diligence - Directors and officers generally must act with the care that a reasonably prudent person in a similar position would use under similar circumstances. They must perform their duties in good faith and in a manner they reasonably believe to be in the best interest of the corporation. Prior to making a business decision, D&O s must inform themselves of all material information reason-ably available to them. Make Informed Decisions - This duty requires not only reasonable behavior with respect to matters submitted for approval, but also requires reasonable inquiry and monitoring of corporate affairs. Although directors and officers are not insurers of the integrity of their subordinates or of general organizational performance, they are required to implement reasonable programs to promote appropriate organizational conduct and to identify improper conduct. TYPES OF LIABILITY DIRECTORS CAN FACE A director who fails to fulfill his or her duties as outlined above may be liable. The term liability refers to the responsibility for the consequences of conduct that fails to meet a pre-determined legal standard. Usually, the term consequences refers to damage or loss experienced by someone, and being responsible for such consequences means having to pay financial compensation. Liability arises in the following four situations: Statute a law is broken. The consequences are payment of a fine, having restrictions placed on one s rights or privileges, or imprisonment. Contract a contract is breached or violated, where a contract is a legally enforceable promise between two or more parties. The consequences are correcting the breach through some form of performance or service, or financial compensation. Tort an act, or a failure to act, whether intentionally or unintentionally, causes injury or damage to another person. The consequences are payment of a remedy in the form of financial compensation. Wrongful Acts these are errors, omissions, actions or decisions that harm others, not through damaging their property or their physical person, but through interfering with their rights, opportunities or privileges. 2

3 GENERAL PRINCIPLES As mentioned above directors and officers are subject to three basic duties in performing their responsibilities. In addition, this section looks at the Business Judgment Rule which is an excellent test of an individual decision. This applies to directors of incorporated non-profits, when the party with a claim against that no profit is seeking to sue individual directors. If a decision can meet the criteria posed by the Business Judgment Rule, then you will have an excellent defense against a directors and officers claim. If you can show that the Business Judgment Rule applies to a decision, then the directors are presumed to have acted properly and to have satisfied the three basic duties (diligence, loyalty, obedience). The BJR recognizes that not all decisions of directors will result in benefit to the organization and that directors will be personally liable for loss to the organization only if the elements of the defense are not satisfied. To obtain the benefit of this important defense, directors must act in good faith and with a reasonable basis for believing that their conduct is in the lawful and legitimate furtherance of the organization s purposes and Five elements of the business judgement rule are generally recognized as: 1. Business Decision 2. Disinterestedness 3. Due Care 4. Good Faith 5. No Abuse of Discretion For larger societies this also includes the duty to implement reasonable programs. must exercise their honest business judgment after due consideration of what they reasonably believe to be the relevant factors. LIMITING LIABILITY Incorporation is the first step in limiting liability because it removes personal liability from directors, except for decisions made in bad faith. Indemnification is the next step, in which the organization agrees to indemnify its directors in the event that they are found personally liable. It is almost universal practice for non-profit organizations to indemnify their directors for liabilities that they might incur in carrying out their duties as a director. To indemnify means to put someone back in the same financial position as they were in before. An indemnified director would be compensated for legal fees, fines that were paid under a statute, a financial settlement that resulted from a lawsuit or any other legal obligation that a director required to fulfill. Of course, an indemnity is only as good as the organizations ability to back it. In cases where this is suspect, or the risk is intolerable, directors liability insurance is usually recommended. This is the third common step in limiting liability concerns. Policies to promote good conduct, and to identify and prevent improper conduct. In the United States, and increasingly in Canada, this duty of diligence may be higher for D&O s of charitable or other types of non-profit entities. The higher standard of care is similar to the high fiduciary duty owed by trustees to beneficiaries of the trust they administer. The justification for this higher standard is the perception that the non-profit D&O s are entrusted with assets and responsibilities for the benefit of people who have little or no input into the selection of the D&O s. THE DUTY OF LOYALTY This is the duty to place the interests of the organization first, and to not use one s position as a director to further private interests. This duty requires directors and officers to refrain from engaging in personal activities which would injure or take advantage of the organization. They are prohibited from using their position of trust and confidence to further their private interests. This duty requires an undivided and unselfish loyalty to the organization and demands that there be no conflict between one s duty to the organization and self-interest. Examples of prohibited conduct in this regard include: D&O s may not realize secret profits or unfair gain through personal transactions with or on behalf of the Organization. D&O s may not compete with the organization to its detriment. D&O s may not usurp an opportunity of the organization. D&O s may not realize personal gain from the use of material, non-public information. D&O s should avoid even the appearance of a conflict of interest. THE DUTY OF OBEDIENCE This is the duty to act within the scope of the governing policies of the organization. Directors and officers are required to perform their duties in accordance with applicable statutes and the terms of the organization s bylaws and constitution, and can be personally liable if they authorize an act which is beyond a society s powers. This is a particularly acute issue for older societies, which tend to have very restricted purposes, and for charities, which are prohibited by law from undertaking any significant degree of advocacy work or political organizing an unincorporated organization is not a society in the sense that it has no separate legal entity and has no legal status apart from that of its members. For example, an unincorporated entity cannot: Enter into contracts of its own. What that means is that the directors or officers who execute the contract on behalf of the organization might be held to that contract in their personal capacities. Be sued as an organization. However directors either collectively or individually, can be sued by a third party. DISINTERESTEDNESS The BJR protects directors who are disinterested and independent with respect to the challenged action. For this purpose, disinterested directors are those who neither appear on both sides of the transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which inures to the corporation or all the stockholders generally. 3

4 DUE CARE The BJR protects directors if they reached an informed decision after making a reasonable effort to ascertain and consider all relevant information reasonably available to them and after reasonably deliberating the decision. GOOD FAITH The BJR protects directors if they acted with a good faith belief that their business decision was in the best interests of the corporation. The protection will not apply if the directors acted solely or primarily to preserve their positions or otherwise to benefit themselves. NO ABUSE OF DISCRETION The BJR protects directors against honest errors of judgment, but does not provide protection for decisions that cannot be supported by some rational basis and are egregious on their face. EVIDENCE This leads to the final question, which is, can a Board prove that it exercised due care, and acted in good faith. Evidence can come from anywhere, including viva voce testimony of board members, but the best protection against unwarranted attacks is to have good minutes. Proper minutes will not simply be a list of who moved what and whether motions passed or not. They should also contain a short précis of what points were raised, and what rationale the Board had for making its decision. Not only are these sorts of minutes invaluable for future boards who might want to know why a decision was made, but they are also considered very authoritatively by the courts, and will close the door on speculation that is sometimes brought out to attack the motives for a board decision. 4

5 TYPES OF ORGANIZATIONS THAT SHOULD NOT OPEN WITHOUT DIRECTORS AND OFFICERS INSURANCE Legal claims against the management of a company are not restricted to high-flying executives. In fact, allegations of wrongful conduct have become so frequent that many experienced leaders will not serve on a board of directors without insurance protection. Originally developed to protect the executives of public companies, D&O has not only become a regular part of corporate risk management, but also an essential coverage for any organisation with a formal leadership structure. Outlined below are five types of organisations that should not operate without the protection of directors and officers liability insurance: PUBLIC COMPANIES Public companies are an integral part of the economy, accumulating vast amounts of capital to operate coordinated, large-scale and sophisticated businesses. They have complex management structures comprising of a board of directors and internal executives who are responsible for the operation and financial performance of the company, as well as complying with the requirements of regulatory authorities. Public companies spend a lot of time and energy on sourcing professional legal advice and ensuring that adequate reporting procedures are in place for directors and officers. Nevertheless, executives can make mistakes, fail to comply, or simply make decisions for which others do not agree. As a result, the directors and officers of public companies, especially those listed on the stock exchange, have a high level of exposure to claims of wrongful conduct by shareholders, regulatory authorities and other significant stakeholders. These risks are amplified for companies operating in multinational environments, as executives are expected to maintain a high degree of performance and compliance each jurisdiction even though the responsibilities of directors and officers may vary significantly. D&O coverage for a public company is considered a necessity, as it would be unreasonable to expect a corporate executive to operate without protection, as the exposure to personal loss is too great. PRIVATE COMPANIES Private companies operate in an ever-changing economic environment where they must quickly adapt to marketplace trends if they wish to succeed. The directors and officers who manage these businesses are typically more involved with the day-to-day operations than their public counterparts, leaving them exposed to additional risks from both internal and external sources. Private companies are closely monitored by government regulators, and management can be held personally accountable for their actions by key stakeholders such as shareholders, employees, customers and suppliers. Executives may not always have access to the professional advice required to comply with their legal obligations in every situation, resulting in errors and allegations of wrongful conduct. The directors and officers of private companies often have a significant shareholding in the businesses they control. Any litigation brought against them as individuals can impact their personal net wealth and the financial health of the business. With D&O coverage in effect, directors and officers can focus on running a company knowing that they will be covered in the event of a claim. NON-PROFIT AND CHARITABLE ORGANISATIONS Non-profit organisations are created to meet a variety of community needs, and require the same leadership as any commercial or corporate operation. The directors and officers of these organisations are often sourced from industry, and bring with them years of business and management experience. However, even with a skilled and experienced team at the forefront, a non-profit can encounter unanticipated risks that are best mitigated with insurance. Nonprofits often have limited access to resources, therefore investment and expenditure must be carefully considered. Balancing the requirements of the community and the expectations of donors who provide funding can be a difficult. As non-profit organisations grow, the actions of management are more closely scrutinized by stakeholders, and they can encounter a range of employment liability issues resulting from the use of volunteer and part-time staff. The leaders who choose to serve on the boards of non-profit organisations require the assurance that their personal assets will be protected if an allegation is made against them. SMALL AND MEDIUM ENTERPRISES (SME S) Small and medium businesses make a significant contribution to the economy. However, despite their relative size, they are not without their exposures to directors and officers. The owners and operators of SME s work hard to provide products and services to their customers, and take a hands on approach to many aspects of their business. 5

6 With so much to do, managers have a limited amount of time to devote to legal compliance and are not always equipped with the specialist knowledge to avoid sticky situations. In many cases they are often not aware that a problem even exists until notice of a claim literally arrives at the door. SME s are typically exposed to claims regarding employment practices, workplace health & safety, and issues involving financial mismanagement. Lawsuits and investigations can be a lengthy process, and the costs of defending a large claim can easily result in losses greater than the net worth of the business. D&O provides a management with support when responding to allegations of wrongful conduct, and can be the difference between overcoming a legal challenge, and the proprietors losing their personal assets. STARTUPS Startup companies are at the leading edge of product innovation and creativity. They present an entrepreneurial spirit and the competitive ambition it takes to turn a conceptual idea into commercial reality. Startups are a high risk, high reward operation, and to succeed they require the guidance of experienced and well-networked executives. Management is exposed to similar risks of any other private company, and if anything, startups are more vulnerable to legal claims during their early stage of development. Founding partners are often optimistic about their business concept, but at times can underestimate the consequences of their actions. They have obligations to financiers, employees and regulatory authorities, and can encounter intellectual property issues when working with developing technology. In the event of a claim against management, notwithstanding the existence of a director indemnity agreement, a cash constrained startup may lack the financial capacity to protect its executives. For this reason D&O is an essential coverage not only to protect the personal liability of management, but also to protect the financial viability of the startup. The founders of these businesses are responsible for every aspect of launching a venture, from sourcing investment funding, to recruiting talented employees and delivering the final product to market. 6

7 INSURING CLAUSES The insuring clauses specify the degree of coverage afforded by the policy, and outline the promise by the insurer to indemnify the policyholder from losses arising from an insurable event or circumstance. A standard D&O policy generally has two primary operating clauses, with the option of electing a third: DIRECTORS & OFFICERS LIABILITY (SIDE-A) Directors & officers coverage, commonly known as Side A, protects directors and officers from claims made personally against them, when the company cannot provide indemnify. COMPANY REIMBURSEMENT (SIDE-B) Company reimbursement coverage, often referred to as Side B, reimburses the company for expenses incurred in indemnifing its directors and officers from claims made personally against them. ENTITY SECURITIES COVERAGE (SIDE-C) Despite being traditionally established for the benefit of executives, D&O policies have evolved over time to provide some cover for the ompany. Entity securities coverage, or Side C, protects the company when a claim is made directly against the entity as a result of the offer, sale or purchase of company s securities. EXTENSIONS TO COVERAGE Policy extensions effectively broaden the policy s coverage, providing additional benefit and protection for the policyholder. Many extensions are automatically included, while some such as employment practices liability are optional. The AIS D&O policy extends to cover subsidiaries who aren t automatically covered, directors and officers which do not form part of the D&O of the First Nation will not be covered. POLICY EXCLUSIONS D&O policies contain a range of exclusions to limit the insurer s exposure to undesirable claims. The risk of covering a particular event may be too great or against the intention of the policy, i.e. an insurer will not cover an executive for deliberate illegal conduct. the requirements and claims processes relevant to an executive seeking indemnity under the policy. WHAT IS A WRONGFUL ACT? Directors and officers liability insurance has become an essential coverage for the management of a company, ensuring that they remain protected from legal claims made personally against them. The truth is that directors and officers have a difficult job, and sometimes they make mistakes or make decisions that do not please everyone. D&O has been developed to protect management from these issues, however it is generally not intended to cover deliberate dishonest and fraudulent conduct. Specifically, executives are covered for any wrongful act that is committed by them in the performance of their official duties. When a policy includes entity securities or employment practices liability cover, the company will also be covered for its own wrongful acts. While each insurance policy has a slightly different definition of a wrongful act, it typically covers any actual or alleged act, including but not limited to: BREACH OF DUTY If a director or officer fails to comply with the requirements of their role within a company, this may be considered a breach of duty. This could include any situation where a director has not acted in the best interests of the company, or when management has not performed their duties with care and diligence. BREACH OF TRUST A breach of trust occurs when a director or officer fails to perform their fiduciary duty as a trustee of an organisation. Abuse of power, misappropriation or any other act by an executive that violates the confidence of shareholders can be considered a breach of trust, even if the consequences were unintended. KEY WORD DEFINITIONS The key terms used within a policy wording are defined to allow clear interpretation of the insurance coverage. Definitions are relied on by all parties of the contract to reduce the ambiguity of terms, and are often highlighted within the policy document for ease of reference. GENERAL POLICY AND CLAIMS CONDITIONS Policy conditions outline the intended operation of an insurance contract. It addresses the parameters of coverage, and identifies 7

8 NEGLECT If management does not competently perform their duties, or acts in a way that harms the performance of a company, they may be accused of neglect. Neglect can apply to various circumstances, from failing to seek professional advice when required, to not satisfying the duty of care owed to employees, customers and suppliers. ERROR An error can range from an unintentional mistake by an executive, through to decisions made with poor reasoning and carelessness. Improper decisions made in the day-to-day operations of a company or incorrect reporting and compliance by management can be viewed as erroneous behavior. MISSTATEMENT A misstatement is any statement that is incorrect or false. Whether deliberate or not, a misstatement is wrongful information presented as fact. Executives should keep in mind that liability remains following its correction. MISLEADING STATEMENT A statement is considered misleading if it creates a false impression, is uninformative, unclear or deceptive, even if the statement is true. Misleading statements involve a misrepresentation of information, by misleading, remaining silent or telling a part-truth to the parties who rely on the information. OMISSION An omission is when important information is left out or not presented, or when an action is not taken as required. An omission often refers to management failing to act in a situation that requires their attention, or omitting critical information from important documents or official statements. BREACH OF WARRANTY OF AUTHORITY A breach of warranty of authority is when an executive acts on behalf of an organisation when they are unauthorised to so. If a director or officer incorrectly enters into an agreement on behalf of a company they represent, this may constitute as a breach of warranty of authority. REASONS WHY EVERY COMPANY NEEDS DIRECTORS AND OFFICERS INSURANCE With the economic landscape becoming increasingly litigious over the past few years, directors and officers insurance has become an essential coverage for all companies, not only those who are publicly listed. Here are 11 reasons why every organization should have D&O: ATTRACT QUALITY DIRECTORS AND OFFICERS Companies actively seek the best management team to lead their business, however the market for sourcing quality directors and fficers is very competitive. Even with formal indemnity agreements in place, any experienced candidate will insist that the company obtain D&O cover prior to their commencement to ensure that their personal assets are not at risk. SATISFY THE REQUIREMENT OF INVESTORS Companies planning significant expansion sometimes require the financing assistance of venture capital and other forms of private equity. These external sources of funding take significant risk in their investment, often taking substantial ownership and interest in the performance of the company. Financiers may require a degree of security over their investment in the form of D&O insurance to provide them with a right of recourse against executives should they not operate in the best interests of shareholders. PROTECT THE COMPANY BALANCE SHEET When management seeks indemnity from the company in D&O related claims, the company can incur significant losses in defending them, severely impacting the financial performance of the business. Company reimbursement (Side B) provisions under D&O insurance, effectively refunds the claim costs incurred by the business, protecting the company s financial health from potentially catastrophic losses. FORMALISE THE RISK MANAGEMENT PROCESS Businesses who operate without a dedicated risk and compliance department, are typically reactive to the legal issues and exposures faced by management on a daily basis. The claims made reporting conditions of D&O insurance formalises the process of notifying insurers of potential legal exposures, thereby creating a proactive and effective approach to claims management. PROTECT THE ASSETS OF DIRECTORS & OFFICERS An indemnification agreement is intended to limit an executive s personal liability from their performance as director or officer. Unfortunately, these agreements do not always respond as required, leaving the management of a company exposed. 8

9 The directors and officers (Side A) provision of D&O insurance protects the personal assets of executives when a company is unwilling, unable or legally prohibited from providing indemnity. ESTABLISH A RELATIONSHIP WITH INSURERS As a private company matures into a successful business, management may see an opportunity to go public, requiring &O coverage for the risks associated with an initial public offering (IPO). Executives who have an existing relationship with insurers and a history of purchasing D&O have a distinct advantage in sourcing the cover required to adequately protect the company and its management team. ACCESS COMPETENT LEGAL ADVICE For many firms, D&O related claims are not an everyday occurrence and the issues involved can be complex. If a company is not already seeking legal advice, they can request that an insurer appoint panel legal representation. Lawyers appointed by an insurer will typically have a deep understanding of D&O litigation, and have experience in guiding a company and its management through the process of defending a claim. ALLOW MANAGEMENT TO PERFORM AT THEIR BEST With the welfare of so many stakeholders resting in the hands of company management, it is not surprising that executives can become preoccupied with the potential consequences of their decisions. While remaining accountable for their actions, D&O insurance allows management to focus their attention on making the best possible decisions for a company, instead of being overwhelmed by the exposures of their role. OTHER INSURANCE CLASSES WILL NOT COVER D&O EXPOSURES Understanding the application of each policy can be challenging for management, especially for those businesses who maintain insurance programs with multiple lines of coverage. The exposures covered by D&O are not covered by any other class of insurance. A company s general liability, professional indemnity and ancillary lines of insurance have their purpose, however the only policy that is specifically dedicated to protecting management is D&O. MITIGATE THE COMPANY S EXPOSURE TO FINANCIAL LOSS The severity of litigation bought against directors and officers can vary from a small one off allegation by an employee, to a large class action claim by shareholders. Without appropriate insurance in place, companies are at risk of suffering a catastrophic financial loss. D&O provides a company with the ability to mitigate its management related exposures by electing the maximum loss it is prepared to sustain in the event of a claim also referred to as a deductible. LOCAL COVERAGE FOR LOCAL EXECUTIVES Large companies operating in multi-national environments often arrange a master D&O policy to provide worldwide coverage for the executives of international subsidiaries. However, a master policy may not always provide adequate protection for local directors and officers, or comply with local regulations. Therefore, a locally admitted D&O policy can provide a superior insurance solution for local subsidiaries of global companies. 9

10 EMPLOYMENT PRACTICES LIABILTY: PROTECTING A COMPANY FROM CLAIMS BY EMPLOYEES A company and its executives face employment related exposures on a daily basis. Modern employees are becoming increasingly aware of their rights within the workplace and have easy access to legal advice. Even with formal employment policies and procedures in place, employers often find that disgruntled staff will choose to litigate if they feel they have received unjust treatment. Failure to employ or promote Negative performance evaluation, disciplinary action, demotion or reassignment Breach of any oral or written employment contract, unfair contract False or misleading representations in relation to the terms of employment Violation of any employment legislation The subsequent claim defence and settlement costs can be considerable, and have a significant impact on the financial health of a company. THE RISKS ASSOCIATED WITH EMPLOYING STAFF Employment exposures exist during a staff member s period of employment, following their termination, or even before they ve been hired. A legal claim can be bought by an individual employee, groups of employees engaging in class action, or by employment representatives such as trade unions. Common claims made by employees in the workplace can include allegations of: Wrongful dismissal or constructive termination Sexual harassment, unlawful discrimination or bullying Invasion of privacy Defamation Infliction of emotional distress or mental anguish Deprivation of career opportunity PROTECTING THE COMPANY FROM EMPLOYMENT CLAIMS While D&O policies provide some indirect protection to a company through its reimbursement provisions, a company is generally not covered for its own employment liability. Employment Practices Liability Insurance, also known as EPI, provides a company with protection if it is listed as a defendant in an action, in Addition to the directors and officers involved. EPI coverage can often be added as an extension to a company s existing D&O policy, however as this effectively increases the risk borne by the insurer, an extra premium is generally charged. 10

11 COMMON SOURCES OF CLAIMS AGAINST DIRECTORS AND OFFICERS The modern business environment has evolved into a legal minefield for the directors and officers of a company. The decisions made by management can impact stakeholders in different ways, and as a result executives can be personally exposed to claims from a range of sources. Here are 8 common sources of claims against directors and officers: THE COMPANY Management can be exposed to claims from the very company they represent. If a company goes into liquidation, its directors may be investigated and held personally liable if they have breached their fiduciary duty or traded while insolvent. Mergers or acquisitions resulting in a change in management can rovide the new board with an opportunity to pursue past executives, if they are found to have committed wrongful acts in their dealings with the company. Some situations permit shareholders to bring derivative lawsuits against management on the company s behalf. These proceedings allow shareholders to step into the shoes of the company and hold executives responsible for their actions. SHAREHOLDERS Shareholders often hold executives liable for errors in financial reporting or when a company has not perform as expected. Management also face significant exposure when they enter into transactions that are not perceived to be in the best interest of the company and its investors. Other claims examples include breaches of directors duties, mismanagement, misappropriation and allegations of misleading, deceptive or inaccurate disclosure. EMPLOYEES The relationships between managers and employees can be challenging at the best of times, so it is unsurprising that legal claims often arise from disgruntled staff. Exposures exist for executives when hiring and firing staff, as well as situations where they have failed to provide a safe working environment, free of ill treatment. CREDITORS If debts are left unpaid when a company goes into liquidation, directors can be held liable for insolvent trading. Directors have a responsibility to keep informed about the debt incurred by a company and its ability to remain solvent. If this duty has been ignored or errors have been made, creditors can pursue directors personally to recover any outstanding funds. CUSTOMERS Company executives can face legal claims arising from the everyday business services they provide to their customers. A company s customers and the consumer groups who represent them have been known to make claims of misleading conduct and allege breaches of fair trading laws. Claims can also arise from contract disputes, the quality of business services provided, or allegations that fraudulent or dishonest acts have taken place. COMPETITORS Industry competitors can litigate against directors and officers if they feel that wrongful conduct has been committed to their detriment. Claims can vary from breaches of intellectual property and misappropriation of trade secrets, to allegations of collusion and anti-competitive behaviour. Directors can be also held accountable for actions that are perceived as defamatory or misleading, with claimants seeking financial compensation for their loss. GOVERNMENT & REGULATORY AUTHORITIES Directors and officers have duties and obligations which arise from a range of government and industry specific legislation. Actual or alleged breaches of these laws are thoroughly investigated by regulatory authorities, with any subsequent prosecution resulting in severe penalties for offending executives. Management must comply with a long list of legislation including corporation and securities law, fair trading, anti-discrimination, environmental regulation, occupation health and safety, and taxation law, to name a few. Legal suits by employees can include allegations of defamation, wrongful dismissal, constructive termination, as well as sexual harassment and discrimination. This document contains general descriptions only. The terms and conditions of an actually issued policy of insurance shall be paramount to the general descriptions. This document does not constitute an offer of insurance. Aboriginal Insurance Services and its professional staff are appropriately licensed to offer and to underwrite the insurance products described. 11