Chartered accountants encourage directors to be aware of D&O policy conditions at all times

Canadian corporate directors should be well aware of the terms and conditions of their directors’ and officers’ (D&O) insurance policies long before the policies are triggered, the Canadian Institute of Chartered Accountants (CICA) says.
“Board members are well advised to take an active interest in their indemnification and insurance arrangements, rather than relying solely on the operating management to ensure they have state-of-the-art protection,” said Richard Berrow, a partner of Fasken Martineau DuMoulin LLP.
Berrow has prepared a special document for the CICA entitled ’20 Questions Directors Should Ask about Directors’ and Officers’ Liability Indemnification and Insurance.’
Part of a larger series, the document can be found in the risk management and governance section of the CICA Web site at: www.cica.ca/rmgb.
The document notes most directors will look to the corporation to protect them by reimbursing or paying the cost of their defence and any judgments against them. But there are legal limits to which companies can indemnify directors, notes Berrow, whose first question is: Can sitting directors be held liable for approving the payment of an inappropriate indemnity?
“Yes,” Berrow replies. “They [sitting board directors] are not entitled to exercise their business judgment to pay an indemnity to a director who did not meet the [statutory] conduct threshold.”
In fact, Berrow goes on to say, the “sitting directors might be held liable to the corporation if they pay an indemnity that, while not prohibited, is not in the best interests of the corporation at the time of payment.”
The best way to protect against this exposure, Berrow says, is to have a by-law, or “better still, a contract in place to make indemnification mandatory wherever it is permitted by the statute.”