Directors and officers liability

Directors and officers liability

In business, directors and officers have a duty to exercise due diligence and are required to act in good faith in their management and oversight of operations. But they are at risk of being sued for misconduct in the exercise of their duties and being held personally liable.

In these cases, it is the directors & officers liability insurance that intervenes to defend them.

Directors and officers liability insurance

Directors and officers (D&O) liability insurance gives decision makers in any type of organization the protection they need to meet their professional responsibilities. It provides a safety net for the managers concerned and can prevent the seizure of their personal assets.

It covers the acts or omissions defined in the contract and generally includes protection against negligent acts, professional misconduct, breaches of duty, etc.

The D&O liability insurance policy generally offers the following three guarantees:

  • Guarantee "A": Direct compensation of directors and officers

This coverage protects the personal property of directors and officers.

  • Guarantee “B”: Reimbursement of the company's amounts paid as indemnities to directors or officers

It reimburses the company for its obligation to compensate its directors and officers. This part of the insurance policy is usually subject to a deductible or self-insured retention (self-insurance mechanism of the company that assumes the losses of certain risks).

  • Guarantee "C": Lawsuits brought against the company directly

Also known as "entity hedging," it protects the company from its own losses when it is sued jointly with directors and officers.

Important obligations

Directors and officers have a duty to exercise due diligence in overseeing the management of the organization that they serve. This involves 3 basic duties:

  • Duty of Diligence (duty of care): Act reasonably, in good faith and in the organization's best interest.
  • Duty of Loyalty: Place the interest of the organization before your own.
  • Duty of Obedience: Act within the scope of applicable bylaws.

Being held accountable and the consequences

A manager of a company or an organization can be held liable for his own property, which can lead to the payment of significant sums or even to personal bankruptcy.

If the allegations prove to be unfounded, they may nevertheless result in defence costs to be paid personally by the manager, both civilly and criminally.

Some examples:

  • Failure to act as stated under a statute

For example, if a statute requires directors to file a report or maintain certain records, and these reports or records are not maintained, the director may be liable for an offence under that statute.

  • Non-compliance of the organization with a statute

For example, directors may be liable for financial losses, wrongful dismissal, employee discrimination or failure to remediate environmental damage.

Be aware that...

  • Ignorance is not a defence.
  • Resignation is not necessarily a defence.
  • Company indemnity may not be enough.

Check with your insurance representative or risk manager to learn more about this coverage or check if your directors & officers liability insurance fully meets your needs.

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