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 1300 – 777 Dunsmuir Street
Vancouver BC V7Y 1K2
Canada
www.mccarthy.ca
Willis Canada Inc.
Suite 1500
1095 West Pender Street
Vancouver BC V6E 2M6
Canada
www.willis.ca
Directors’ & Officers’ Issues Seminar
Contents
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
AGENDA
Directors’ & Officers’ Liability and Insurance Issues
Tuesday, January 23, 2007
4:30-6:30 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.
Bob Cooper
(McCarthy Tétrault)
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.
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.
Ariel DeJong
(McCarthy Tétrault)
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.
Murn Meyrick
(Willis Canada Inc.)
McCarthy Tétrault LLP & Willis Canada January 23, 2006
Directors & Officers
Insurance Issues Seminar
Secondary Market Liability Regulatory Prosecution Bob Cooper
Emerging Issues in Directors and
Officers Liability
Secondary Market Liability
4
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 capacity
6
What does it mean?
• 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
7
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
8
Are there defences?
• 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
What is a “reasonable investigation”?
• 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?
10
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
11
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
plaintiffs
• Only one action commenced in the first year (Imax)
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
14
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
15
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
16
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
Partner
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.
Agenda
• Overview of Directors and Officers Liability
Insurance
• 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-time
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 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
•Is non-rescindable for any reason *DIC = Difference In Conditions
BROAD FORM (DIC)* EXCESS A-SIDE COVERAGE
A-SIDE COVERAGE EXECUTIVES’ PERSONAL ASSETS PROTECTION B-SIDE COVERAGE CORPORATE BALANCE SHEET PROTECTION C-SIDE COVERAGE CORPORATE ENTITY PROTECTION
(securities claims only)
Triggering the Policy
• Policy Construct:
• Claims Made
• 3
rdParty 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
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
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
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?
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
Catherine.Richmond@willis.com
Insured v. Insured Exclusion
Ariel DeJong
2
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
Exceptions
• 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
4
Problems
• 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
5
Potential Solutions
• 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
6
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
8
Ariel DeJong
Partner
Litigation Department
Tel: 604-643-7107
adejong@mccarthy.ca
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.
1
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
2
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
3
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
4
A few current examples
•
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
5
6
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
7
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
Partner
OFFICEVancouver
DIRECT LINE
604-643-7960
rcooper@mccarthy.ca
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.
An Ontario Limited Liability Partnership
Lawyer Profile
ARIEL DEJONG
TITLE
Partner
OFFICEVancouver
DIRECT LINE
604-643-7107
adejong@mccarthy.ca
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 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
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 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
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.
VANCOUVER
Suite 1500, 1095 West Pender Street Vancouver, British Columbia V6E 2M6 Tel: 604/683-6831 Fax: 604/683-5746 CALGARY Suite 1120, 605 - 5th Avenue SW Calgary, Alberta T2P 3H5 Tel: +1 403/263-6117 Fax: +1 403/266-6559 EDMONTON
1601 Scotia 2, Scotia Place, 10060 Jasper Avenue Edmonton, Alberta T5J 3R8
Tel: +1 780/428-6431 Fax: +1 780/424-0974
TORONTO
Suite 1200, 145 King Street West Toronto, Ontario M5H 1J8
Tel: +1 416 368 9641 Fax: +1 416 869 1649
MONTRÉAL
Suite 1400, 1130 Sherbrooke St., West Montreal, Quebec H3A 2M8
Tel: +1 514/842-8922 Fax: +1 514/844-8022
VANCOUVER
P.O. Box 10424, Pacific Centre Suite 1300, 777 Dunsmuir Street Vancouver BC V7Y 1K2 Tel: 604-643-7100 Fax: 604-643-7900 CALGARY Suite 3300, 421 - 7th Avenue SW Calgary AB T2P 4K9 Tel: 403-260-3500 Fax: 403-260-3501 TORONTO Box 48, Suite 4700 Toronto Dominion Bank Tower
Toronto ON M5K 1E6 Tel: 416-362-1812 Fax: 416-868-0673
OTTAWA
The Chambers Suite 1400, 40 Elgin Street Ottawa ON K1P 5K6 Tel: 613-238-2000 Fax: 613-563-9386
MONTRÉAL
Suite 2500 1000 De La Gauchetière Street West Montréal, QC H3B 0A2 Tel: 514-397-4100 Fax: 514-875-6246
QUÉBEC
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
