D&O Insurance . . . Are You Covered?

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.

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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. Remember, the 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.