Why You Need D&O Insurance for Private Companies

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Who are Directors and Officers?  

As a private company, especially a smaller or family-run private company, you may feel that D&O insurance for private companies isn’t necessary for your company. The reality is that claims of negligence, recklessness, wrongful dismissal, harassment, discrimination, misrepresentation and other wrongful acts can be made not only by stakeholders of larger private companies, but by employees, customers or competitors of private companies of all sizes. These claims can lead to costly legal costs and/or investigation expenses whether they have merit or not. Directors’ and officers’ insurance for private companies can provide coverage for those costs.

These are the basic definitions of directors and officers as defined by the Government of Canada:

“Directors are responsible for supervising the activities of the corporation and for making decisions regarding those activities. Officers are responsible for the day-to-day operation of the corporation.

Your corporation’s board of directors

Your corporation must have at least one director. The number of directors is specified in your articles of incorporation. Shareholders elect directors at the shareholders’ meeting by a majority of votes. An individual can be the sole shareholder, director and officer of a corporation.”

How Can Directors and Officers Protect Themselves From Liability?

Directors of a private company can protect themselves by making informed decisions and staying informed on how those decisions are being implemented and their outcomes. 

In their “Guide to Directors and Officers for Private Companies”, Toronto law firm Houser Henry & Syron LLP makes the following recommendations for directors and officers of private companies to stay engaged and avoid liability:

  1. Understand and regularly review the corporation’s articles and by-laws.
  2. Define the corporation’s mission and strategic vision.
  3. Maintain the corporation’s personal indemnification agreements to ensure they are kept up to date.
  4. Confirm that the corporation’s Directors’ and Officers’ coverage is sufficient.
  5. Consult with lawyers, accountants and other professionals to understand relevant laws.
  6. Obtain written professional opinions from experts when the board or management is expected to act on their advice.
  7. Plan for the succession of the Board.
  8. Make sure that effective managers are in place to supervise activities, assess the corporation’s performance and ensure that its activities are lawful.
  9. Request and review all meeting materials beforehand, attend all meetings and take detailed notes.
  10. Review those notes and confirm that decisions made by the directors are fully explained and that disclosures and directors’ votes are accurately recorded.
  11. “Consider his or her duties when making decisions. This includes voting against any payment if there is any question of insolvency or breach of employment law, enquiring about payments which need to be made on your behalf and removing oneself from the decision-making process when a conflict arises.”

To the last point, the article also states that:

“The Ontario Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA) state that private company directors may be liable if they approve the following transactions while the corporation is insolvent, or if it would become insolvent after any of the following:

  • Acquires its own shares or warrants (subject to exceptions);
  • Repays loans;
  • Redeems shares;
  • Pays a commission on the purchase of corporation shares;
  • Pays a dividend; or
  • Pays under an indemnity contrary to the statute.

If such action(s) occur, then those company directors who voted for the action(s) will be jointly and severally liable for amounts paid and not otherwise recovered by the corporation.”

Officers of private companies are not generally involved in meetings and votes with the same level of formality as a board of directors, however, officers can take similar steps when performing their duties as well to help them avoid liability.

D&O Insurance for Private Companies – Why You Need it

These are some of the benefits of having D&O insurance for private companies: 

  • Indemnifies privately held companies and/or involved directors and officers for legal expenses and investigation costs as long as the action that prompted the accusation falls under the D&O policy’s definition of a wrongful act.
  • D&O insurance policies for private companies can also provide financial stability during litigation or investigations that often come during times of transition such as mergers and acquisitions, IPOs and successions. 
  • D&O liability insurance for private companies provides protection for the personal assets of directors and officers which makes having comprehensive D&O coverage for private companies a must to attract and retain top directors and officers.
  • Shareholders and investors often sue for misrepresentation or inaccurate financial reporting made in private placement materials.
  • With D&O coverage for private companies, management can concentrate on performing their duties and not having to worry about long, drawn-out litigation.

Get ALIGNED With D&O Insurance for Private Companies

Make sure your privately held company and its managers and decision-makers are protected. We are your commercial insurance specialists who advocate to get you comprehensive D&O insurance for private companies at affordable rates. Contact an ALIGNED broker or get started by using our online tool.

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