Canadian Underwriter

D&O and E&O: How much is enough?


June 29, 2011   by Greg Shields


Print this page

A few important lessons can be learned from the recent court decision involving Castor Holdings Ltd., including the “long-tail” nature of professional liability and directors’ and officers’ liability lawsuits. Castor will probably be best remembered for being “the longest running judicial saga in the legal history of Quebec and Canada,” as stated by Quebec Superior Court justice Marie St-Pierre.

However, at more than 16 years the chapter may be over, but the novel has just begun. The rough-notes on the case (at 753 pages, this article cannot do justice to the issues) are: a real estate company with many large and small investors went bankrupt in 1992; investors went after directors and management of Castor as well as Castor’s auditor Coopers & Lybrand (C&L) and 192 of its Canadian partners (click here); this specific underlying case is the Estate of Peter Widdrington v. Wightman et al (click here), a test case for common issues in 28 other cases brought by 40 different plaintiffs seeking over a billion in costs and damages from C&L for alleged auditor negligence.

This level of detail is all that is necessary for this small lesson on adequacy of insurance policy limits. Under most D&O and E&O policies (conveniently ignoring the elephant in the room being the jurisdiction of the case and defence costs being outside the limit of liability in Quebec), defence costs, investigation costs, damages, and judgments and settlements for all parties for the entire life of the claim share the one limit of liability. Also, all unrelated claims in the same policy period share this same limit of liability.

And finally, there are very few policies in Canada that include an automatic or optional “refreshed limit” provision. Many insurance companies will not renew a policy in the middle of a large or complex claim, and the best they will offer is an extension of the policy.

The decision in Wightman was $2,672,960 in damages, plus interest and court costs estimated in the tens of millions. This does not include the defendant’s (aka “The Insured” if there is or was an insurance policy triggered by this claim) defence costs incurred over 17 years, or the plaintiff’s legal and investigation costs (we do live in a “loser pays” system). And this is only the test case where the original demand was $2.7 million.

The long and short of it is that D&O and E&O products are extremely complicated, and made even more so by the hundreds of variations of this coverage available in Canada. Benchmarking is available in many forms but such information may be misleading based on inconsistencies in coverage and exposures that make up this data. An internal analysis of risks and potential loss would produce a much more realistic figure.

There is no short answer to “how much D&O insurance is enough?” Instead, brokers should work with their customers to determine risks, priorities, loss control, and insurance coverage alternatives.

Greg Shields is a D&O, professional 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. More detail regarding adequacy of limit can be found on the Mitchell Sandham blog at http://mitchellsandham.wordpress.com/

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.

This story was originally published by Canadian Insurance Top Broker.