Do Private Companies Need Directors Insurance In Canada?

Do Private Companies Need Directors Insurance In Canada?

Businesses have never been more transparent and accountable for their actions than they are today and as a result people are increasingly and rightfully asking do private companies need directors insurance in Canada?  The short answer to the question “do private companies need directors insurance in Canada?” is yes for a number of reasons which we’ll explain more fully.  However, it should also be noted that there are many different types and sizes of private companies and not all private companies need directors insurance in Canada, but the expert business insurance brokers at ALIGNED Insurance can help you and/or your board answer the question do private companies need directors insurance in Canada after reviewing the specific organizational structure and financial position of your organization.

More Reasons Why Privately-Held Companies’ Need Directors Insurance

Directors and officers of privately-held corporations in Canada face significant potential liability. While the financial exposure to shareholders may be less than that of directors in larger publicly-held corporations, the risks remain substantial. Provincial liability limitation statutes and corporate indemnification can offer some reassurance, but they do not provide complete immunity or absolute protection against liability.

Provincial Liability Limitation Statutes: While most provinces have enacted statutes aimed at reducing certain types of D&O liability exposure, these measures fall short of providing absolute protection for directors and offer minimal safeguards for officers of privately-held corporations. These statutes do not shield against liabilities under federal statutes and are often limited to claims by the corporation and its shareholders, excluding claims by employees and other third parties. Additionally, the protection is typically contingent upon directors acting in “good faith” and does not cover breaches of the duty of loyalty. Even if a claim lacks merit under these statutes, directors and officers may still face substantial defense costs.

Indemnification from the Corporation: While statutes may allow privately-held corporations to indemnify their directors and officers against losses, these measures often fall short of providing adequate financial protection. Many smaller privately-held corporations lack the resources to fund such indemnification. Defense costs in D&O claims can easily reach six figures, with settlements or judgments often matching or exceeding that amount. Furthermore, indemnification against claims under the anti-fraud provisions of securities laws may be barred by public policy or federal preemption doctrines. Additionally, many provincial statutes do not authorize indemnification for settlements or judgments in suits brought by or on behalf of the corporation, including derivative suits.

Public policy may also restrict indemnification under other federal statutes, such as antitrust laws, where personal liability is intended to serve as a deterrent. Additionally, indemnification is only permitted if specific standards outlined in the applicable indemnification statute are met, and a determination is made by the designated person or body. Furthermore, the corporation’s articles of incorporation can be amended to reduce or eliminate indemnification for directors and officers, especially following a change in ownership.

Other Reasons Why Private Companies Need Directors Insurance In Canada

• Pays for legal expenses.  Provided the allegation is sufficient to trigger the wrongful act and claim definitions in a directors policy a private company directors insurance policy can and will pay for the legal expenses of directors, officers and employees.
• Financial stability. Often claims against directors are unexpected and/or unanticipated and typically happen when an organization is not in a strong financial position.  Private companies often need the funds made available by directors insurance in Canada to just keep a company from insolvency and help it battle through a rough patch.
• Attraction and retention of top director talent.  If you have a board of directors and are looking for talented professionals to join your board like those that carry the ICD professional designation from the Institute of Corporate Directors having private company directors insurance is almost always a must have.
• Protection from stakeholders.  In business things don’t always work out according to the plan(s) and if things go sideways stakeholders might bring suit against the directors and/or officers alleging breach of duty etc. which a private company directors insurance policy will defend and pay out on as/if necessary.

To Discuss Do Private Companies Need Directors Insurance In Canada? Further Or For A Directors Insurance Quote Connect With One Of Our Canadian Business Insurance Brokers Today at 1-866-287-0448

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