Asked to be on a Board of Directors?

What are the next steps?

  1. Personal contractual indemnification from the corporation (don’t just rely on the bylaws),
     
  2. Determine biggest risk from the operations and make sure they are adequately insured and other risk management tools are in place and active for these exposures,
     
  3. Request a copy of the Directors’ and Officers’ Liability insurance policy (which should include the application for that insurance because the answers are imputed to you) and ask the senior management team to explain the level of “ENTITY COVERAGE” and other limit sharing (aka “limit exhausting”) terms and conditions present in the policy (answer should not be a short one),

    a. Directors’ and Officers’ Liability Insurance (D&O) coverage is defined by its exclusions,

    b. Exclusions will likely include BI/PD (Bodily Injury and Property Damage exclusion), and   therefore, if the company is a drug or medical products designer/manufacturer/distributor, the biggest exposure to the organization is likely a Product Liability Class Action (go to the Siskinds class action site, here, and start reading), and most of this exposure will not be covered by a D&O policy,

    c. Exclusions will likely include Professional Liability (E&O exclusions), and therefore, one of the primary operating risk of every design, software, technology, and professional service company will not be covered by a D&O policy,

    d. Review the specific preamble of the key exclusions in the D&O policy and look to see if they start with “…based upon, arising out of, or any way involving…”, go back to the risk management and insurance protection for key operating exposures; and then consider Side-A DIC, with specific limit not exposure to management,
     
  4. Keep copies of the Indemnity Agreement and the D&O policy in your home;
     
  5. Determine level of risk (claim, litigation, potential litigation, investigations, financial loss, etc.); this consideration should include but not be limited to:

    a. Ownership (public (if so, where), private, government (this one is getting more risky) inside vs outside shareholders – they all create different levels of risk, but there is no definite answer is which is more risky, it depends on the examination of all criteria together,

    b. Jurisdiction of ownership (all levels of it), management, board, executives, and operations (all of them, including sister corporations and non-arms-length companies),

    c. Industry sector – some industries are bigger targets (Technology, Resource, Medical, Financial), but unfortunately, plaintiff lawyers and regulators change targets regularly, so no industry should let their guard down,

    d. Statutory obligations (wages, taxes, etc.),
    e. Financial ability to withstand financial loss, and still finally indemnify you for your loss,

    f. Experience of principals,

    g. Willingness of principals and senior management to voluntarily disclose potential conflicts of interest,

    h. Claim/Litigation history of principals and senior management,

I do not advise that you immediately approach an insurance broker for quotations for coverage. No broker should be allowed to approach any insurance company without the knowledge and consent of the management responsible for that purchase decision. There are thousands of brokers who will suggest they have adequate experience, in D&O insurance and your industry, and the market relationships necessary to serve your business. Unfortunately, they are not all correct. Multiple brokers will “block” markets from other from being accessed by the other brokers. And this strategy will leave you on your own to understand the difference between competing quotes. The problem is that there is no standard or regulated policy contract, and if you not in the business of understanding and negotiating coverage your primary decision may be based (to the detriment of all individual insureds) on price.

There may be zero to 20 insurance companies who are available and appropriate for your consideration. If these companies are approached by more than one insurance broker the insurance underwriters will categorize your company as an inexperienced, low success-rate, short term, premium based buyer. With this mindset underwriters are more likely to, 1) decline to quote, 2) put your submission at the bottom of the pile, 3) carve-out important coverage in order to reduce premium, 4) back-out of final quote at the last minute, and/or 5) cancel, non-renew or change coverage in the future.

Senior management and the board should work together to determine priorities for D&O coverage. This should include the guidance of an experienced, involved and truly independent insurance broker who has access to the insurance carriers best suited to your business.

You may want to consider Independent Director Liability or Personal Director Liability coverage. These products are available to individual directors, but they are not widely purchased so there is little knowledge or interest in them. They are a great risk management tool for directors, but it is rare that an individual director is willing to pay out of pocket for the coverage. And when a director approaches the management of their existing or prospective corporation to help pay for this coverage, management is hesitant to take on this cost in addition to the corporation’s D&O policy.

However, the process involved in the submission for individual or personal director insurance is a valuable risk management tool, because it motivates you to consider many of the risks and risk mitigation tools mentioned above, and provides you with a third party industry review of your existing or prospective corporate board.

Being asked to take a position is an honor, but also a very serious request. Experienced, independent and active boards are important to the success of the country and the world at large. So, if you know you can add great value to the company, don’t shy away because of the risk. Risk is always present, but with identification and mitigation the risk will be outweighed by the reward.

Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com, 416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


 

Posted: 5/18/2012 2:44:41 PM by MSI
Filed under: a, and, asked, Canada, corporate, D&O, dando, director, directors’, E&O, eando, governance, in, insurance, liability, new, officers’, to


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