Protecting Boards of Directors From Claims
Being on the Board of Directors for a corporation involves the investment of personal time but can also carry the risk of personal liability. In for-profit corporations, it may be expected and even necessary that this personal liability exists. When you are on the board of a non-profit corporation, however, that risk may never cross your mind. Directors of non-profit corporations such as condominium corporations and community associations may still face personal liability for the actions and decisions of the board. These types of organizations often have difficulty filling the spaces on the board and this difficulty will only be magnified if personal liability of the board members goes unaddressed. People who have experience on other boards, and who therefore may be desirable candidates for vacant positions, may balk at the thought of acting on a board with no protection for them.
The directors and officers of a corporation drive the actions and overall management of a corporation. These individuals have an obligation to discharge their duties honestly, in good faith, and in the best interests of the corporation. They also may owe obligations to people or entities that interact with the corporation. The Courts have allowed a number of claims against directors and officers in their personal capacity for breaches of these obligations. Some of these have included claims of negligence, misrepresentation, nuisance, breach of fiduciary duties and even conspiracy. There may also be statutory obligations that extend liability of board actions to the personal liability of its directors and officers, such as the obligation to pay wages to employees.
As an individual director or officer, what can you do if you are personally claimed against for your actions and decisions made while a part of a corporation’s board? The first option is to seek indemnity from the corporation itself. In some cases, a corporation may have an obligation to indemnify its board against judgments and the costs incurred to defend claims against its directors and officers. In some cases, the potential for indemnity may be a discretionary decision of the corporation. Therefore, an individual may get no relief from the company. Further, even in the case of mandatory indemnification, an insolvent corporation will be unable to come to the aid of a director or officer who receives a claim against them.
If you suspect your Board is able or obligated to indemnify its directors, you may also want to determine when that indemnification will be provided. In many instances, a corporation will not indemnify its directors until the case is concluded. Therefore the upfront costs of defending the claim will lie with the director, if only temporarily. These costs can be huge and the timeframe required to reach a resolution long.
The second source of protection is insurance. Directors’ and Officers’ Insurance (“D&O”) protects board members against any liability incurred in their capacity as directors and officers. Saskatchewan legislation does not require such insurance coverage but the bylaws of the corporation may require it. Such coverage is intended to be supplementary to corporate indemnities.
D&O coverage varies and you should review your options or existing coverage carefully. There is usually coverage for legal liability resulting from claims made for a wrongful act for directors and officers not indemnified by the corporation. There can also be coverage that reimburses the corporation for any indemnity it paid out with respect to its directors and officers. As expected, the primary beneficiaries of D&O coverage are…D’s and O’s! However, the scope of who may be considered a director or officer (including considerations of timing of acting) may be interpreted in a variety of ways. When facing a claim it is important to talk to a lawyer or insurance broker to assess coverage. Typically, employees of a corporation who are not directors or officers are not covered unless the policy specifically extends to such persons.
The losses covered by such a policy usually include three types: damages, settlements, and the costs to defend a claim. Especially for non-profit corporations, the costs to defend a claim can be crippling. If there is an obligation for the corporation to indemnify its directors and officers throughout a claim, such insurance coverage can save a corporation from bankruptcy.
As with indemnities, the insurance provisions may or may not allow for the defence costs of a claim to be paid up front. In some policies, defence costs may not become payable until after a resolution. In other policies, there may be a clause requiring the defence costs to be paid up front. Obviously, this adds the most value to the insurance policy as the costs to defend a claim will exist whether or not the insured wins. However, insurance companies often protect themselves by requiring repayment of defence costs if the end result proves the insurer had no liability under the policy.
Being on a non-profit board may provide many perks, such as generating business connections, providing social networking opportunities and giving back to a community. But to feel at ease exercising those perks, both for-profit and non-profit corporations can benefit from adequate protection for board members. The interplay between corporate indemnity, general liability insurance, and D&O insurance can be complex, so any board turning its mind to such protection requirements would do well to speak with a lawyer and/or insurance broker to fully understand the options available.