D&O Insurance . . . Are You Covered?

Topic: Human Interest

Geoffrey J. Gouinlock CFA

August 21, 2016

Image used with permission: iStock/Sophie James


Print & Share

Print

D&O Insurance . . . Are You Covered?

We are lucky at Nexus to have clients that have a wealth of business and life experience. For many in their late 50s and early 60s, their careers begin to “wind down” and they actively begin to seek out “board work”. The motivations for such are varied. Many tell us that such work keeps their minds sharp, or satisfies a belief in giving back to their community.

For some, professional board work may also be a desirable way to supplement retirement income. No matter what the motivation, it is clear that this is a broadening trend and that proper consideration of all that is involved is best taken into account before one gets too far down the road and makes commitments that would be hard to go back on.

With all the benefits that working on a board brings, it unfortunately creates a burden of responsibility and potential legal liability that must also be considered and should not be taken lightly.  The only way to be properly risk-proofed against the liability that is assumed when serving on a board is through comprehensive Directors and Officers (D&O) insurance. While most organizations carry D&O insurance, the vast majority of board members have little understanding if it provides sufficient coverage. If people think of it at all, it is often only as an afterthought. Undoubtedly, most of us take far too much reassurance from being told it’s in place without really understanding what it does and doesn’t cover.

So it was with this in mind that I recently sat down with a friend and client, Kip Van Kempen. Kip has made a career in the Property and Casualty insurance business and is a specialist in D&O insurance.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

GG: Kip, D&O insurance is a bit of an arcane niche of your industry. How did you come to think it required a lot of extra attention?

KVK:  I’ve reached a stage where I was beginning to wind down my involvement in the business and so I signed up for the ICD Directors Education Program at Rotman. I guess like a lot of people, I was hoping to burnish my resume and find some board work to keep me engaged in the business world as I stepped away from my own practice.  Amongst a wealth of material we covered, I came to the conclusion that the governance responsibility of the modern director, and for which they could well be held to account, increasingly includes a widening set of risks. Claims relating to privacy and cyber crime, wrongful dismissal and workplace discrimination were increasingly reaching into the boardroom. There is every likelihood, that corporations, and charities in particular, have fallen behind in their coverage. As a result, there’s a very real chance that a board member, who was in every respect well-meaning, attentive and responsible, could find themselves with serious financial exposure.

GG: So serving on the board of a local charity might set me up for substantial liability?

KVK: Of course. Small charities have fewer resources to settle claims. Yet their exposure to risk, say if someone hacked and misused their database, is very real. Look the risks are higher for a large publicly listed company, but they are not unmeasurable for even the smallest charity. Without knowing the specific details myself, just imagine how you would have felt earlier this year if you served as a director of Goodwill Industries as it slid into bankruptcy? I’m guessing those directors became interested in the D&O coverage pretty quickly.

GG: At just a basic level, if I attend the meetings, read my board papers, ask questions and put forth a professional effort, will that protect me? Or put another way, do I have to be negligent in order for someone to come after me?

KVK:  As a director, you’re not expected to have all the answers, but you are expected to ask the right questions. At Rotman they say, “Put your nose in, but keep your fingers out.” In other words inquire, but don’t meddle.” Yet even if a director does all this, there’s still potential liability if practices and policies set down by the board are not properly adhered to. Rememberthe law doesn’t distinguish between a corporation or a non-profit. You have the same responsibilities with both.

GG: Well, in a jam, if I carry personal liability insurance, won’t that cover me?

KVK:  It is the rare homeowners policy that covers you. Generally they exclude liability arising from “Board” work.  Insist that your board carry adequate D&O insurance.

GG: Ok, what if one is lucky enough to land a plum corporate directorship of a public company. Surely, the D&O coverage is going to be sufficient, no?

KVK: I think that’s probably the case.  But remember, public company directorships have the highest exposure and directors are commonly targets of shareholder lawsuits when share prices fall. In most instances the intention of a well-run company should be to have adequate D&O coverage. But there are opportunities for mistakes to be made. I just think it best that an individual be satisfied with knowing that the coverage is sufficient. For instance, does the policy cover defense costs and, if it does, who selects counsel?  Most importantly, if one is invited into a turn-around situation where the business risks are high, make certain the D&O policy adequately provide for claims, taxes and other liabilities that could easily arise. Even when businesses are winding down, claims can surface many years later. A good policy contains protection for claims that arise for some extended period after the incident that gives rise to the claim occurred.

GG: Well, coming up to speed in this area is kind of chilling my interest in doing this sort of work.

KVK: It should and it shouldn’t be.  Good policies will provide you with the protection you need.  But you need to have your eyes open and not succumb to the flattering invitation of joining a board without doing some homework. There are a lot of nuances to these policies and you should ask that the organization you are joining have its policy reviewed and explained to you and other board members before you say yes.  We have a standard list of questions that we review when examining these policies and we’d gladly provide second opinions to any organization that was wondering if they were properly covered.

GG: Any last advice?

KVK:  Sure, especially for your clients. Never sit on a board, even of a small non-profit, if there is no D&O insurance in place. Simply put, you have way too much to lose.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Donor Advised Funds: An Overview

Topic:
Foundations & Endowments
Excerpt:
As we approach the end of the calendar year, taxes and charitable giving inevitably surface as ”things to do” in peoples’ minds. Here, we’d like to

More Like This...

See another Human Interest blog post that may be of interest to you.

COVID: An Uneven – and Unequal – Recovery

Topic:
Human Interest
Excerpt:
Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve ball

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Walking Through Time: The History of Nexus

Topic:
Inside Nexus
Excerpt:
Bob Topp’s death last month triggered my memory “replay” button, likely as it did for many of us, whether as a long-time Nexus client, employee, or

More Like This...

See another Investments blog post that may be of interest to you.

Q&A From Our Quarterly Investment Review

Topic:
Investments
Excerpt:
Your Nexus investment team participates in many meetings where a company’s CEO or CFO presents to a group of investors. These meetings often have a

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

The Great Transition – A Tax Efficient Withdrawal Strategy

Topic:
Tax Planning
Excerpt:
The change from “saver” to “spender” is what I call the great retirement transition. Figuring out how to draw on your retirement savings to meet your

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Living to 100… Is 100 the New 80?

Topic:
Wealth Planning
Excerpt:
It’s a common saying that there are two certainties in life, death and taxes. While we have a pretty good idea when we get taxed, which feels like all

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Donor Advised Funds: An Overview

Topic:
Foundations & Endowments
Excerpt:
As we approach the end of the calendar year, taxes and charitable giving inevitably surface as ”things to do” in peoples’ minds. Here, we’d like to

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

COVID: An Uneven – and Unequal – Recovery

Topic:
Human Interest
Excerpt:
Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve ball

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Walking Through Time: The History of Nexus

Topic:
Inside Nexus
Excerpt:
Bob Topp’s death last month triggered my memory “replay” button, likely as it did for many of us, whether as a long-time Nexus client, employee, or

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

The Future of Money: a Digital Currency Primer

Topic:
Investments
Excerpt:
As a bottom-up investment management firm, we spend a lot of time looking at specific companies. But keeping an eye on evolving industry trends can be

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

The Great Transition – A Tax Efficient Withdrawal Strategy

Topic:
Tax Planning
Excerpt:
The change from “saver” to “spender” is what I call the great retirement transition. Figuring out how to draw on your retirement savings to meet your

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

Living to 100… Is 100 the New 80?

Topic:
Wealth Planning
Excerpt:
It’s a common saying that there are two certainties in life, death and taxes. While we have a pretty good idea when we get taxed, which feels like all