Canadian Underwriter

Lawyers on boutique D&O: Don’t just take your broker’s word for it

February 16, 2022   by David Gambrill

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For boutique D&O coverages, a law firm says companies should be bringing in a lawyer to look at the contract coverage and not just rely on the opinion of the insurance broker about coverage.

This is particularly true in business verticals where manuscript (i.e. customized) D&O policies are more common. For example, rapidly emerging sectors such as cannabis, space travel, cryptocurrency, NFTs (non-fungible tokens, or digital assets) and e-sports are all areas in which board directors have notably faced shareholder claims, regulatory actions, product liability issues and fraud.

“New industries require non-standard insurance agreements,” according to the Feb. 15 edition of the law firm McMillan’s 2022 Litigation and Capital Markets Bulletin. “Most insurance policies are drafted by insurers and follow a standard form…The Supreme Court of Canada has developed interpretative principles that apply to standard form insurance contracts.

“New industries like cannabis or cryptocurrency, however, present new risks, which are not necessarily encapsulated by standard-form policies. When an insurer and insured negotiate custom exclusions and carve-outs into a policy, courts employ a different interpretative approach.”

When interpreting the wording in standard-form insurance contracts, McMillan states, the court assumes an imbalanced power relationship between the insurance company, which knows all about the terms of the contract, and the insureds, most of whom don’t know about insurance. As a result, any disputes around ambiguities in the contracts are generally resolved in favour of the insureds.

But if the policy is not standard-form, but rather customized to the needs of the insureds, the courts assume the insureds have the same sophisticated understanding of the contract terms as the insurance companies, the law firm suggests.

“Companies operating in evolving industries, like cannabis or cryptocurrency, will be negotiating insurance agreements that include bespoke contractual language and endorsements to cover new areas of risk,” the bulletin reads. “The policies that evidence these agreements are not standard-form in nature and are termed ‘manuscript policies….’

“Courts will…interpret manuscript policies as they do other commercial agreements between sophisticated parties: by seeking the meaning of provisions in terms of the parties’ reasonable intentions.”

Brokers have a duty to provide clients information about available coverage and advice about which forms of coverage a client requires in order to meet their needs, the law firm notes. “In practice, however, prudent companies should be engaging a broker and legal counsel to negotiate insurance agreements as a team.” That’s because while brokers know about the coverage, lawyers know about legal contract wording.

“Brokers are not qualified…to draft legal agreements and may not keep abreast of developments on the finer, but critical, points of insurance law, the bulletin reads. “This is where legal counsel comes in.

“Lawyers can review insurance agreements holistically, and spot vulnerabilities and gaps in coverage. Companies, and the boards that direct them, should exercise caution in making assumptions about the type and sufficiency of coverage they require based solely upon broker advice.”


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