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The risks of a director in the new corporate Canada are high indeed (MBM October / November 1992), and they are making it harder than ever to recruit competent people for these positions.

Many companies turn first to offering good insurance, a working parachute to induce qualified people to accept the risks.

If risk cannot be eliminated, it can be minimized by insurance. A number of leading insurers offer products to meet the new demand.

In weighing choices available, a company normally wants a cost-effective product, but one that protects fully. It can be a pretty tall order because underwriters do not want open-ended responsibility.

To properly review what is good value from any policy, there are key issues to examine:

Who is covered ?

The policy should cover all present and past directors from any claim during the policy period. If it's really good, it should go on to allow a retiring director to buy extra coverage for two years at a reasonable premium.

Deductibles, co-insurance and limits

Some policies do not cover the first $50,000 or more of claims and others cover only 90 to 95 percent of the excess. The better ones cover the individual directors and officers for 100 percent with no deductible and include full costs of defence. Some establish low over-all limits.

These should bear some relation to the risk. A quick adequacy test would be a limit of at least 15 percent of payroll and 10 percent of sales to come close to the true exposure on vacation pay, deductions at source and GST/PST. [Note: in 1996, this would be 15% of sales as GST/PST is higher]

Changes in coverage

Many policies permit the company and the insurer to negotiate changes in coverage without informing the individual directors and officers. This can result in a serious impairment of protection, especially in difficult times. The good policies require advance notice and permit bailouts by the affected directors or officers.

Premium payment

All policies have premiums and permit the insurer to cancel for non-payment (usually when the directors need it most). Some policies require notice to the individual directors with the right to pay the premium, or a part of it, themselves. Recent comments have been made that for tax purposes, it would be prudent for directors to pay some of the premium (as apportioned by the insurer) for their coverage to avoid any-pay-out by the policy (e.g. for defence costs, etc.) being deemed a tax benefit to an officer or director by Revenue Canada. There are no cases on that point yet, but it would be prudent to clarify the situation in the policy.

Cancellation

Some policies permit the insurer to cancel the policy, even during the term, with or without notice to the individual directors or officers. The better policies are not cancellable during the term and in all cases require notice to each director or officer involved.

Exclusions of coverage

Almost all policies exclude some risks from insurance, such as environment, taxes, penalties, physical injury, libel and slander, pension or benefits compliance and securities compliance. The better policies do not exclude these items or restrict the exclusion to the "inside" directors. To determine the impact of these exclusions, a director has to evaluate whether other insurance policies of the company cover these matters, as well as the realistic exposure of the company to these types of risks.

Claims procedure

Many policies are precise on who can give notice of claims and how. Some permit the insurer to raise defences of late or inadequate notice even against directors who had no knowledge of the matter giving rise to the claim.

The better policies permit notice by any director and require notice only by those with knowledge of the claim or the circumstances behind the claim. Some policies also permit notices to be given of potential claims to avoid timing problems when an actual claim may not be received during the policy period, but when this "actual" claim is received, the policy might have expired and not have been renewed.

Defence of claims

All policies in Quebec include the obligation to defend and the costs of defence (although these costs may or may not be included in the policy monetary limit). A few permit independent counsel for the directors or permit their involvement, and this can make a difference. Some allow the insurance company to settle even without the consent of a director, although he may be obliged to pay the deductible or co-insurance.

Over-all, the answer to getting the best value from directors and officers liability insurance is complex. Eyes must be open.

A defensive posture is the best in these circumstances as a policy is only used when all else has failed. Like a parachute, good material and design can make all the difference for a safe landing.