Lawyer Gives Prognosis For Risk Management Diligence

Canadian risk managers do practice what they preach—to a point. An informal poll of risk managers at last week’s RIMS Canada conference revealed that 66 per cent of those in attendance had effective management liability practices within their organization. But only half–50 per cent–had a renewal process that was as thorough and rigorous as recommended by the session panelists.

Where can risk managers go further in limiting liability? Eric Dolden, senior partner with Vancouver law firm Dolden Wallace Folick, says they often neglect to consult all of their organization’s managers when gathering facts or circumstances that could give rise to a claim – especially those at the lower levels. And, he notes, they don’t always “delineat[e] whether the ‘bright line’ test for disclosure on the application for insurance required facts or circumstances that ‘may’ give rise to a claim as opposed to facts or circumstances that are ‘likely’ to give rise to a claim.”

“In other words, failing to recognize that the level of disclosure in the context of ‘may’ is greater than if the application uses the word ‘likely’.”

Dolden referred to a U.S. court case, Schoon v. Troy, which recently affirmed that organizations and directors have the power to alter or vary the bylaw that regulates indemnification of directors “and thus does not ‘guarantee’ that in an event of a claim, the rules of engagement are necessarily the same as when that person assumed a position on the board of directors.

“In Schoon, the bylaw had historically provided that ‘former’ directors should be reimbursed for defence costs and when the ‘new board’ assumed control they varied the bylaw to delete any obligation to reimburse for ‘former’ directors, thus leaving the recently departed board member without recourse,” he explained.

“This decision underscores the need for a contractual indemnity agreement entered into by the board member with the company that makes reimbursement inviolate,” he said, adding that the contract would be subject to any legislative constraints on indemnification. The board can vary the bylaw but the board member, with a contractual indemnity agreement, can sue to recover the benefits explicitly provided for in the contractual indemnity agreement. “If, however, the company is insolvent and cannot … honour these obligations, the Board members have recourse, to the “A” side reimbursement on the D & O policy.”

Dolden  pointed out that an increasing number of public companies are turning to dedicated Side A Difference in Conditions policies to provide another excess layer and some degree of protection in areas where the D & O policy may have an exclusion.

Dolden offered Canadian Insurance readers the following future risk management trends to watch for:

• Greater use of dedicated Side A coverage to offset the reimbursement obligations that arise by virtue of entity coverage for securities claims
• A continuing debate as to whether Side A coverage should be only for “independent” directors or include directors who are part of inside management
• Greater restrictions on the right of an insurer to void for pre-policy misrepresentation
• A broadening of supplemental coverages within the confines of a D & O policy including pollution coverage, employment practices coverage for directors and management, and some “sliver” of a fiduciary coverage for pension plans 
• An increase in the number and severity of Canadian securities claims as shareholders better understand how they can use the statutory causes of action in the provincial Securities Acts in combination with Canadian class action litigation
• An increased number of investigations by provincial Securities Commissions and judicial initiatives by minority shareholders to probe into issues such as “back dated” share options, executive “parachute” packages, etc. 
• A willingness by excess insurers to permit the insured, in certain circumstances, to pay the balance of an underlying layer in order to permit a “triggering” of the next successive excess layer.