Specialty Risk and Insurance
Directors' and Officers' Liability
Generally speaking, the duty of a director is to be responsible for the management and governance of a corporation. These duties are prescribed under a wide array of statutes, which include the Business Corporations Act (Ontario). The statutory duties have been further defined and expanded by the common law.
Often the breach of such duties may result in quasi-criminal prosecution or civil liability. In fact, there are over 200 statutes that regulate a broad range of directors' and officers' liability including those associated with environmental protection, labour and employment, and taxation. Our lawyers make our clients aware of their numerous legal obligations, so as to protect them from unforeseen exposure to liabilities that could result in significant individual ramifications.
There are several common strategies used by corporations to assist directors and officers who have the potential to attract liability as a result of their roles. The first is the inclusion of an indemnification clause in the by-laws of the corporation. Additional or specific provisions in other agreements may be appropriate depending on the circumstances. It is of note that the effectiveness of any indemnification clause in providing protection to an individual, will of course be subject to the financial ability of the company to cover the expense. A consultation with one of our lawyers is the best way to ensure that you are fully protected.
The second approach commonly taken to limit liability is to have the corporation procure liability insurance for its directors and officers. In fact, it is recommended that directors and officers speak with an experienced commercial insurance broker to determine suitable coverage. If such insurance exists, directors and officers should review it carefully to understand what the policy covers and any exclusions that may be applicable. It may however also prove highly beneficial to have one of our lawyers review same so as to further prevent risk of individual exposure. In fact, often a combination of insurance and contractual indemnity is the most recommended and effective approach.
A director or officer may also wish to arrange their personal affairs in order to minimize their individual exposure. Such steps require careful and prudent planning well in advance. They must be carried out in compliance with the law and in the client's best interest.
