A Real Canadian Bankruptcy Claim Explained
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Bankruptcy or the threat of it is sure to lead to many sleepless nights for any business leader. According to Industry Canada’s most recent statistics, “Business insolvencies for the 12-month period ending May 31, 2015, decreased by 1.3 percent compared with the 12-month period ending May 31, 2014.
The three sectors that registered the biggest decrease in the number of insolvencies were other services (except public administration); construction; and agriculture, forestry, fishing and hunting. Transportation and warehousing; accommodation and food services; and information and cultural industries experienced the biggest increase in insolvencies.” 1
When a bankruptcy and insolvency act does happen, external and internal parties will often look for someone to blame. In the event that company directors and officers are named in a lawsuit, comprehensive directors and officers insurance is essential.
Misrepresentation And A Bankruptcy Claim
Chubb Insurance Company of Canada shares the following example of how their directors and officers (D&O) liability coverage is supporting an insured company.
“Company X becomes insolvent and falls into bankruptcy. Claims are commenced by various unsecured creditors against the company’s directors and officers alleging that they made misrepresentations regarding the company’s creditworthiness and its ability to pay contracts. Proof of claim totaling $18.5 million are commenced throughout Canada and the U.S. One U.S. claim is settled for $826,000.
The claims in Canada continue to be litigated. As the litigation proceeds, the directors of the company begin to bring proof of claim against each other alleging some had knowledge of the misrepresentations. Recently one action has been reconstituted as a derivative action which will effectively re-start the litigation process.
Chubb is defending the company’s directors and officers. The total cost of the litigation to date is approximately $400,000 in Canada and $800,000 in the U.S. However, with the recent derivative action, the litigation process has now re-started. The costs associated with this are currently undeterminable.
In general, this is the most common type of claim against private company directors and officers – the company becomes insolvent and the unsecured creditors sue the Directors & Officers alleging that they have misrepresented the status of the company in order to continue to gain credit. Further, in the case of licensed insolvency trustee, the Directors & Officers are also going to have personal exposure for all of the statutory liabilities that can arise including sales tax, vacation pay, unpaid wages and possible pension contributions.” 2
D&O Insurance Will Protect Your Leaders
While a commercial general liability insurance (CGL) policy provides coverage for proof of claim arising from property damage and bodily injury, directors and officers liability insurance specifically provides coverage for a “wrongful act,” such as an actual or alleged error, omission, misleading statement, neglect or breach of duty.
Related Matters: 11 Risk Management Opportunities for Directors and Officers
An ALIGNED advocate can help you select coverage that will respond in the event of a bankruptcy claim against your company’s directors and officers. To learn more about D&O insurance, talk to one of our advocates today about how we can help you secure the best products, services and solutions for your business.
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