Directors and Officers Insurance in Canada - PDF by iuu21408


More Info
									Directors’ & Officers’
Insurance Issues
Bob Cooper & Ariel DeJong, McCarthy Tétrault LLP
Catherine Richmond & Murn Meyrick, Willis Canada Inc.

January 23, 2007

McCarthy Tétrault LLP                       Willis Canada Inc.
P.O. Box 10424, Pacific Centre                      Suite 1500
Suite 1300 – 777 Dunsmuir Street      1095 West Pender Street
Vancouver BC V7Y 1K2                    Vancouver BC V6E 2M6
Canada                                                 Canada                        
                                               Directors’ & Officers’ Issues Seminar


A   Agenda

B   Emerging Issues in Directors’ and Officers’ Liability

C   Fine-Tuning Protection to Serve Corporate and Individual Priorities

D   Insured v. Insured Exclusion

E   Directors’ and Officers’ Liability and Its Impact on Insurance Coverage

F   Speaker Profiles
Directors’ & Officers’ Liability and Insurance Issues
                        Tuesday, January 23, 2007
                             4:30-6:30 p.m.

4:30   Welcome                                             Ariel DeJong
                                                           McCarthy Tétrault)
       The Impact of Secondary Market Liability on
       Directors and Officers
                                                           Bob Cooper
       Criminal and quasi-criminal liability as well as
                                                           (McCarthy Tétrault)
       implications for D&O insurance policies will be
4:55   Navigating the D&O Insurance Market
       Be an educated buyer in today’s rapidly evolving
                                                           Catherine Richmond
       market: obtain the broadest coverage with a
                                                           (Willis Canada Inc.)
       policy structure which satisfies both the board’s
       and management’s priorities.

5:15   "Insured v. Insured" Exclusion: Avoiding Potential
       This presentation will focus on what it is, why it is Ariel DeJong
       included in D&O policies, potential problems which (McCarthy Tétrault)
       can arise based on the wording and possible

5:25   The Impact of Litigation Trends on Coverage
       Directors and Officers need to understand and
                                                           Murn Meyrick
       have available the tools with which to respond to
                                                           (Willis Canada Inc.)
       the impact of the growing liability exposures on
       their D&O insurance.

5:45   Cocktail Reception
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

           Secondary Market Liability


What is secondary market liability?
• 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


Who is affected?
• 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


What does it mean?
• No change to law requiring continuous (Financials,
  MD & A, AIF) and timely disclosure (material
• 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
• Heightened concern for corporate and personal
  liability; financial and reputational risk


What are you liable for?
• 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?
• Defendants must prove a “reasonable
• 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

What is a “reasonable investigation”?

• At a practical level, a “reasonable
  investigation” will likely turn on:
      • What internal analysis preceded the disclosure/omission to
      • Were appropriate officers, managers involved?
      • What outside advice was sought and was it followed?
      • Was the disclosure/omission made hastily under time
      • 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?
• 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


Will this open the floodgates?
• 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
• Only one action commenced in the first year (Imax)

            Regulatory Prosecution


What happened to Bill C45?
• 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?
• 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


Is prosecution a risk?            (cont’d)
• 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?
• 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


    Bob Cooper
Litigation Department
  Tel: 604-643-7960

          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.


• Overview of Directors and Officers Liability

• Critical D&O Issues for 2006
   • Indemnity

   • Rescission

   • Bill 198

 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, part-

 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

 • 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 A-Side DIC* Coverage
                                                • Drops down to primary if underlying insurance:
     BROAD FORM                                    •   wrongfully refuses to indemnify
         (DIC)*                                    •   is financially unable to indemnify
EXCESS A-SIDE COVERAGE                             •   is rescinded
                                                   •   is subject to bankruptcy/financial impairment

                                                • Is non-rescindable for any reason
                                                                      *DIC = Difference In Conditions

                         Annual, Aggregate Limit


      EXECUTIVES’             CORPORATE                          CORPORATE
    PERSONAL ASSETS          BALANCE SHEET                          ENTITY
      PROTECTION              PROTECTION                        PROTECTION
                                                            (securities claims only)

   NO DEDUCTIBLE                             DEDUCTIBLE

Triggering the Policy

• Policy Construct:
   • Claims Made
   • 3rd Party Liability Policy
   • All Risks

• “Claim” alleging “Wrongful Act” resulting in

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

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

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

Sources of indemnification may be more limited now than in
the past due to:
       Legally unable
       Incentives against indemnification- reduce limits available to
       “cooperation” with criminal & regulatory investigators
       Plaintiff’s strategies

Indemnification availability has key implications for insurance
  program structure

   Coverage Certainty

Fraudulent Conduct
Concern: increasing number of cases where officers’ admitting to
participation in frauds, or overwhelming evidence of same.

      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
   • Underwriting:
      • Does the company have policies and procedures for:
          • Release of public oral statements, forward looking
      • Does the company receive outside expert advice?

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) 605-5611

         Insured v. Insured Exclusion

          Ariel DeJong


What Is It and Why Is It There

 • 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



• 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


• 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


Potential Solutions
• Exception for claims by liquidator/trustee in
• 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


Potential Solutions
• 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


Final Comments
• 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


                Ariel DeJong
          Litigation Department
             Tel: 604-643-7107


    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

• 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

 Impact of litigation: Insureds’ Reaction & Tools

• 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

 • 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; non-
   rescindable endorsements
 • Competing interests amongst insureds - severability; first
   past the post; limits preservation
 • Excess layer involvement

A few current examples

• Executive compensation - stock option backdating &
• Income trusts - increased exposure on trustees
• Institutional investors - pension plans, hedge funds
  increasing ownership and pushing aggressively for their
• X-border implications - extradition; self-incrimination
• Criminal & Regulatory investigations/prosecutions

The new executive world…?

        Enron Canada CEO, David Delainey, sentenced to 2.5 years, Sept. 2006

Negotiating the D&O Policy

• 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

• Start the process early
• Determine your risk philosophy and prioritize
• Differentiate your risk to underwriters
• This isn’t an auto policy - terms vary greatly


McCarthy Tétrault LLP
An Ontario Limited Liability Partnership

                                                                                  Lawyer Profile
                                                                                            ROBERT COOPER

                                           TITLE     OFFICE                     LAW SCHOOL
                                           Partner   Vancouver                  Osgoode Hall Law School,
                                                                                LLB, 1982
                                                     DIRECT LINE
                                                     604-643-7960               BAR ADMISSIONS
                                                                                British Columbia, 1984

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

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.
McCarthy Tétrault LLP
An Ontario Limited Liability Partnership

                                                                                    Lawyer Profile
                                                                                                   ARIEL DEJONG

                                           TITLE       OFFICE                     LAW SCHOOL
                                           Partner     Vancouver                  University of British Columbia,
                                                                                  LLB, 1988
                                                       DIRECT LINE
                                                       604-643-7107               BAR ADMISSIONS
                                                                                  British Columbia, 1989

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

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 1989. 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.
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

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 1985. 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.
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

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.
VANCOUVER                                                                                VANCOUVER
Suite 1500, 1095 West Pender Street                                    P.O. Box 10424, Pacific Centre
Vancouver, British Columbia V6E 2M6                                   Suite 1300, 777 Dunsmuir Street
Tel: 604/683-6831 Fax: 604/683-5746                                            Vancouver BC V7Y 1K2
                                                                Tel: 604-643-7100 Fax: 604-643-7900
Suite 1120, 605 - 5th Avenue SW                                                             CALGARY
Calgary, Alberta T2P 3H5                                             Suite 3300, 421 - 7th Avenue SW
Tel: +1 403/263-6117 Fax: +1 403/266-6559                                        Calgary AB T2P 4K9
                                                                Tel: 403-260-3500 Fax: 403-260-3501
1601 Scotia 2, Scotia Place, 10060 Jasper Avenue                                          TORONTO
Edmonton, Alberta T5J 3R8                                                         Box 48, Suite 4700
Tel: +1 780/428-6431 Fax: +1 780/424-0974                              Toronto Dominion Bank Tower
                                                                                Toronto ON M5K 1E6
TORONTO                                                         Tel: 416-362-1812 Fax: 416-868-0673
Suite 1200, 145 King Street West
Toronto, Ontario M5H 1J8                                                                     OTTAWA
Tel: +1 416 368 9641 Fax: +1 416 869 1649                                              The Chambers
                                                                           Suite 1400, 40 Elgin Street
MONTRÉAL                                                                          Ottawa ON K1P 5K6
Suite 1400, 1130 Sherbrooke St., West                           Tel: 613-238-2000 Fax: 613-563-9386
Montreal, Quebec H3A 2M8
Tel: +1 514/842-8922 Fax: +1 514/844-8022                                                MONTRÉAL
                                                                                          Suite 2500
                                                                 1000 De La Gauchetière Street West
                                                                              Montréal, QC H3B 0A2
                                                                Tel: 514-397-4100 Fax: 514-875-6246

                                                                               Le Complexe St-Amable
                                                                1150, rue de Claire-Fontaine, 7e étage
                                                                                  Québec QC G1R 5G4
                                                                 Tel: 418-521-3000 Fax: 418-521-3099

                                                                         UNITED KINGDOM & EUROPE
                                                                               5 Old Bailey, 2nd Floor
                                                                           London, England EC4M 7BA
                                                   Tel: +44(0) 20 7489 5700 Fax: +44 (0) 20 7489 5777

To top