Today’s reality is that companies of any size can find themselves at risk of a lawsuit at any time. If you are the director or officer of a Canadian company, you are likely well aware that the decisions you make as a board member can come back to haunt you and your organization. A seemingly small decision can have long-term ramifications.
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Whether an organization is publicly traded, a non-profit or a small private company, the management decisions made by its board can put a bottom line at risk. The legal cost for your company to defend its directors or officers against a lawsuit will inevitably be substantial.
Unmet Expectations: A Directors and Officers Insurance Claim
The perceived failure of one party to disclose key information in a business transaction can lead to a costly lawsuit. Chubb Insurance Company of Canada shares the following example of how their directors and officers liability coverage is supporting an insured company.
“Bob’s Hotel Management Company Ltd. (“Bob’s Hotel”) was retained by XYZ Property Development Ltd. (“XYZ”) to provide hotel management services for a hotel project that was being developed by XYZ.
As part of the service agreement, Bob’s Hotel was also responsible for preparing disclosure documents which included budget, expense and return information to entice the investment community to invest in this new development project. Based on this document, shareholders invested in XYZ’s project. Unfortunately, as development progressed, unforeseen costs were incurred and expected returns were not met.
This led investors to commence a class action suit against XYZ. The investors alleged that they were enticed to invest in the project by disclosure statements provided to them by XYZ. When promised investment returns were not met, the plaintiffs alleged that XYZ had made misrepresentations and had breached the terms and conditions of the investment purchase agreements. XYZ then turned around and commenced a third party claim against Bob’s Hotel and its officers alleging that the information contained in the disclosure statement was prepared by Bob’s Hotel and that as the hotel management company it was responsible for setting budgets and controlling expenses.
Thus, XYZ’s allegations were that Bob’s Hotel and its officers were negligent in the preparation of parts of the disclosure statement, misrepresented financial information and mismanaged the hotel project. Chubb is providing coverage for the officers of Bob’s Hotel’s.” 1
Protect Your Business Leaders With Directors and Officers Insurance
While a commercial general liability insurance (CGL) policy provides coverage for claims 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.
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An ALIGNED advocate can help you evaluate your risks and select coverage that will respond in the event of a directors and officers insurance claim.
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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Sources: 1 Chubb’s D&O Liability Insurance – Providing Certainty for Canadian Private Companies IBC