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Directors and officers insurance

D&O coverage is necessary for both Non-Profit and Private organizations administered by a board of directors.  The people serving can be held responsible for their individual actions and decisions as well as the corporation’s actions. . Organizations usually purchase D&O insurance on behalf of their board members. 

A lawsuit against a board member could stem from various circumstances like a breach of fiduciary duties, misrepresentation of assets to stakeholders, or failure to comply with rules regarding workplace safety. Directors and officers coverage protects the individual assets of directors and officers if employees, merchants, or investors file a legal claim against them. 

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Who should get directors and officers insurance?

As a director or an officer, you are individually accountable for the board’s decisions. If you decide to spend capital and then lose that investment, a lawsuit may be the result. Even if you voted against spending the money, if the board had consensus, you might still be held personally responsible. 

As a business, protecting your assets is a vital consideration and adding D&O insurance protection to your already existing coverage is a smart choice to protect your company. 

While it is not compulsory to have a D&O insurance plan, the number of lawsuits against boards of directors has risen over the last several years. Some external factors are increasing the need for D&O insurance among top-level staff such as:

  • Heightened focus on individual actions: Employees of the company or non-profit administered by the board of directors are increasingly holding respective officers accountable for perceived misconduct. 
  • Interested investors following business development: Investors wield financial power, and more are taking an active role in learning how boards of directors are spending money. When a company does not deliver on promises made, investors are ready to challenge individual decisions, and file lawsuits for damages. 
  • Global economic impact of the COVID-19 pandemic: An unprecedented global health event like this saw boards of directors and chief executive officers making decisions that may never have been considered before. As health and safety of employees and the public was (or wasn’t) prioritized, the risk of potential lawsuits increased.  
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What directors and officers insurance can do for you

If you are a member of the board of directors of a business or organization, you need board of directors insurance coverage. Usually, D&O insurance policies have three main coverages:

  • Side A insurance protects directors and officers when the organization declines or is financially incapable of paying for indemnification. A company might not pay for losses if they have declared bankruptcy or suffered other substantial upheaval. Side A coverage covers each officer since it is that person’s assets at risk.
  • Side B works precisely opposite from Side A. Insurance coverage shields the losses of directors and officers when the company does confer indemnification. For instance, Side B policies reimburse organizations for legal costs. In short, the company holds Side B insurance, and it is the business’s assets that are at risk in a lawsuit. 
  • Side C coverage extends insurance protections to the corporate entity itself.

 

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What D&O insurance covers

D&O insurance coverage can protect both directors and organizations if a lawsuit alleges a breach of fiduciary duty. These insurance policies can financially reimburse settlement agreements and/or legal defense costs resulting from covered claims. 

According to the Insurance Bureau of Canada, directors and officers of an organization have three distinct duties: 

  1. Duty of Diligence: to act in good faith with the organization’s best interests squarely leading all decision-making.  
  2. Duty of Loyalty: to set organizational affairs before individual gain.
  3. Duty of Obedience: to adhere to the spirit and scope of the organization’s bylaws.

If a director, CEO, COO, or CFO, violates any of these duties, the company and the individual could be subject to a lawsuit. Fortunately, D&O insurance policies provide financial coverage for legal expenses when claims regarding breach of duty are alleged. 

Common lawsuits where D&O insurance works best relate to misapplications of funds, misrepresentations of assets, breach of fiduciary duty, and a shortage of corporate governance. Regardless of who is suing the organization—from employees to investors and beyond - D&O insurance can provide appropriate coverage.

What D&O insurance does not cover

While many common issues are covered under directors’ insurance coverage, some problems are not covered. Directors and officers insurance plans are often flexible, meaning that companies and individuals will have some ability to negotiate what is and isn’t included. These negotiations occur during the purchasing process, so take care to fully understand all provisions of your insurance contract and ensure the coverage works for your organization’s needs. Working with our brokers will help you with this process.

Nevertheless, some legal problems are not covered under any officers’ insurance. For instance, lawsuits that may arise between directors and officers are usually not covered. In this insured versus insured dispute, insurance companies face too much loss, so a peer-to-peer lawsuit is often explicitly excluded from coverage.  

Fraud is another issue. Often, D&O insurance will cover the legal fees unless the director or officer is found guilty, then the insurance provider would seek reimbursement from the convicted party. 

Another issue that is not covered by D&O insurance is a violation of The Competition Act. Laws that protect and promote business competition are essential to promote fair competition within an industry. Currently, many companies are facing complicated antitrust suits from both regulators and private plaintiffs.

The cost of D&O insurance in Saskatchewan

The average cost of D&O insurance coverage varies depending on the level of risk a particular organization might face. Cost can also depend on what level of coverage a company would aim to provide for its officers.  The cost will vary from a few hundred dollars for a small Corporations to Ten’s of thousands for larger Corporations. 

Factors that affect the cost of directors and officers insurance in Saskatchewan

A variety of factors can contribute to the cost of D&O insurance. Insurers will review specific characteristics of an organization seeking coverage, like debt, assets, legal history, and industry challenges. 

Some insurance cost indicators are industry-specific, while others depend on the age of the organization, financial strength, or the number of employees.

Factors that increase the cost of D&O insurance

 Less established companies generate more liabilities for insurance providers due to less foreseen revenue streams and a lack of proven efficient administration. 

For insurers, one of the most regularly assessed factors in determining the cost of insurance is company size, determined by annual revenue, total funding, and the number of funding rounds. Finally, if your organization has a history of claims being filed against directors or officers, then your premium might be higher. 

Factors that decrease the cost of D&O insurance

Companies that have been operational for many years with well-established boards and business practices will usually receive a better insurance premium. Although, some circumstances can impact the age component, like mergers, acquisitions, or shareholding agreements. 

Similarly, consistent growth and healthy finances can lower your D&O insurance costs. Specifically, a business with solid financials working in an industry with a sure economic forecast will have lower premiums.

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Submitting a directors and officers claim with Knight Archer

Submitting a claim can be done by working with either your broker or directly with the insurance company. Most companies who sell insurance have automated systems for filing claims and submitting relevant evidence for your case. However, you may want to consult with your organization’s counsel to ensure proper reporting and compliance. 

Insurance companies aim to lower risk and to provide excellent service once a claim is filed. Working with an intermediary such as our brokers or directly with the insurance provider can help directors and officers move past any legal issues that might arise. 

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