Private Company Directors Insurance
Q. Do Private Companies Need Private Company Directors Insurance?
A. Absolutely. The Directors & Officers of privately held companies, regardless of size, are threatened by many of the same liability and criminal exposures that public companies face and are share the same level of duty to the organization they are part of.
Risks Facing Private Company Directors
Understanding the Risks: Many believe that directors and officers of private companies face less risk of personal liability compared to those in public companies. However, this is not true. Directors and officers in private companies can be at greater risk due to the unique nature of these organizations
Sources of Liability:
- Employees: The most significant source of liability. Claims can arise from hiring, disciplinary actions, and terminations.
- Third Parties: Claims can come from customers, creditors, competitors, and regulators.
- Shareholders: Even in private companies, minority shareholders can file claims if they feel their interests are not being considered
Legal Duties:
- Duty of Loyalty: Directors and officers must act in the best interest of the company and avoid conflicts of interest.
- Duty of Care: They must make informed decisions and act with the care that a reasonably prudent person would use.
- Duty of Obedience: They must follow all applicable laws and the company’s charter
Need for Insurance: Laws and indemnification from the company provide some protection, but they are not enough. D&O liability insurance offers additional protection, covering most non-indemnifiable exposures
Directors & Officers of Private Companies Have A Duty:
Performing Director or Officer responsibilities, a breach of the following which can lead to corporate and/or personal liability:
- Fiduciary Duty (duty of loyalty to the company); and
- Duty of Care.
- Duty of Obedience
- Duty of Loyalty
In Canada directors and officers of private companies are subject to more than 100 provincial and federal statutes imposing other personal liabilities upon directors and officers most of which are outlined in provincial and/or federal business corporation acts.
“Every director and officer of a corporation in exercising his
powers and discharging his duties shall,
(a) act honestly and in good faith with a view to the best
interests of the Corporation” (i.e. Business Corporations
Act (Ontario) (“OBCA”), section 134(1), Canada Business
Corporations Act (“CBCA”), section 122(1)).
Examples of breach of this duty can lead to stakeholders bring suit against the corporation and/or the board and/or individual directors, officers and employees.
Real Canadian Private Company Claims Examples
Real Canadian examples of breaches which resulted in allegations of wrongful acts and which have been covered as claims by private company directors insurance include:
- Realizing secret profits or unfair gain through personal
transactions with or on behalf of the corporation; - Conflicts of interest;
- Competing with the corporation to its detriment;
- Realizing personal gain from the use of material, non-public
corporate information (insider trading); and - Taking personal advantage of a corporate opportunity
Why D&O Liability Insurance is Essential for Canadian Directors of Private Companies
Directors and Officers (D&O) liability insurance offers crucial protection for directors and officers against exposures that are not covered by indemnification or provincial liability-limiting statutes.
Even if your private company currently feels that D&O insurance is unnecessary, it’s wise to consider purchasing it if there’s any chance of a future public offering of debt or equity securities. Establishing a relationship with a D&O insurer well before a public offering is crucial. Waiting until the offering is imminent can make it challenging to secure coverage, and if available, it will likely be more expensive and come with less favorable terms.
To learn more about ALIGNED, our commitment to providing insurance expertise to private companies and the best insurance products or solutions, talk to one of our advocates today. We can help you secure the best products, services and solutions for your business.
| ALIGNED Across Canada 100% Canadian owned, ALIGNED is a premiere insurance brokerage that serves thousands clients across the country. ALIGNED’s offices in Toronto, Calgary and Vancouver are supported by a national operations centre in Cambridge, Ontario. Uniquely within the industry, ALIGNED creates, negotiates and delivers the best business insurance and risk management strategies/solutions to organizations like yours. |
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