Directors and officers FAQs

As a Director how well are you protected?

You have worked hard to build your wealth and be respected well enough to join a board of directors. However are you well protected from the risks faced by Canadian directors?

In recent years the chances of being sued, the cost of defending claims, the ease of class actions, and the size of settlements have all soared. This is true in Canada and not just in the United States.

The risk is not rare. Every decade directors of Canadian listed companies have a 52% chance of being sued. Changes to Canadian securities regulations in 2006 will soon make it even easier for shareholders to sue. How confident are you that the company’s indemnities and insurance are providing you enough protection?

BishopPhillips offers a high value overview of your company’s indemnity and insurance program for D&O liabilities. For a moderate cost you will get an independent overview with recommendations on how to better protect board members. We do not sell insurance and are completely independent from underwriters. We provide unbiased views on managing risk.

Did you know that there is no such thing as a “standard” D&O policy?

Most prospective directors fail to check whether the D&O insurance they are offered will adequately protect them against large judgments and defense costs. When asked why some assume that all D&O policies are alike and they assume that the CEO, who is covered by the same D&O policy, will make certain that the policy provides first-class protection. Unfortunately neither assumption is safe.

First, all policies are not alike. All companies selling policies in Canada use different polices with a huge disparity in exclusions, extra cover and definitions.

Second, CEOs rarely get involved in evaluating the quality of their D&O policies. They rely upon a non-legal employee or upon corporate counsel who negotiates one D&O policy a year. (The mismatch in experience between an individual who negotiates one D&O policy a year and an insurance underwriter who does this every day can produce very harsh results for insured.)

Did you know that Canadian directors are twice as likely as US directors to find that the insurer denies coverage of a claim?

In a 2004 14% of Canadian companies reported this problem versus only 7% in the US.

I read about CIBC and TD settlements for Enron claims. Isn’t this a problem that just affects very large companies in Canada?

According to AIG (in 2004) only 1 in 18 companies facing a class action law suit was a Fortune 500 company. The overwhelming majority are companies with sales of less than $100 million.

We have very few shareholders and they are very unlikely to sue us.

Even if true over half of claims against directors are not from shareholders.

About 25% of claims are by employees for wrongful termination or discrimination and 20% arise from customers who allege dishonesty or fraud. It’s not just cranky retail investors instigating class actions. Increasingly, large pension funds are joining with attorneys to try to recover monies lost as a result of alleged corporate misconduct. Ontario Public Service Employees Union pension fund has been the lead plaintiff in several class-action suits.

Did you know that if you are wealthier than other directors on the Board you have a greater risk of loss?

If the company and directors are insured under the same policy there is a greater chance that the insurance will be exhausted by claims on the company or that in a bankruptcy the insurer cannot pay directors defense costs. In these circumstances plaintiff will seek to recover from directors with deeper pockets.

Reducing Corporate Risks While Saving Costs

Companies can reduce their legal and regulatory risks while at the same time saving money on insurance and legal costs. Effectively this amounts to more protection at lower cost. [BPC Canada] consults on business and legal risk management.

What does all of this cost?

Direct comparisons of insurance premiums are difficult—policies can be tailored, and premiums are based on such factors as revenues, market cap, location and risk profile.

Rates go up and down dramatically in cycles

Increases you read about vary greatly according to perceived risk

After Enron had increased the number of class actions, Canada’s tech companies faced increased D&O premiums of 62% in one year. In contrast Leon’s Furniture Ltd. (TSX: LNF) had only a 2.2% increase.

In 2002 Leon’s paid $23,000 for $10 million coverage. An average TSX was paying about $4,400 to buy $1 million in insurance. Calgary-based Suncor Energy (TSX: SU) paid a mere $136 per million, BMO paid only 3,300 per million and RIM paid 24,000 per million.