Good Governance Guides

Good Governance Guide: No 2.5

Category: Orientation
Subject: Directors & Officers Liability – (not-for-profit organizations)
Source: Chartered Secretaries Canada

For virtually any organization, the cost of defending suits against its Directors and Officers can prove catastrophic. D & O Liability Insurance is designed to help protect both the assets of the organization and the personal assets of these individuals. D & O Liability Insurance helps protect the Directors and Officers of the organization against claims alleging:

• employee discrimination or unfair employment practices;
• wrongful termination;
• disposal of assets, without regard to the firm’s ability to pay for or secure the organization’s debts;
• wrongful denial or termination of credit to any customer or client;
• violation of a loan covenant;
• exorbitant payments or profit sharing contributions which were made by the organization; and
• improper loans made to Directors or Officers.

DUTIES OWED BY NONPROFIT D&O’s

1. DUTY OF LOYALTY
Directors and Officers are required to refrain from engaging in personal activities which would injure or take advantage of the organization; realizing secret profits or unfair gain through personal transactions; competing with the organization to its detriment; usurping a corporate opportunity; or realizing personal gain from the use of non-public information.

2. DUTY OF CARE
Directors and officers must act with the care that a reasonably prudent person in a similar position would use. They must avoid failing to inform themselves of all material information prior to making decisions. Further, they must monitor the affairs of the organizations. They must exercise prudent stewardship of the organization’s limited resources.

3. DUTY OF OBEDIENCE
Directors and Officers are required to perform their duties in accordance with applicable laws and the terms of the organization’s charter. They must abide by statutes affecting fund-raising, political and business activities. They must be vigilant about the organization’s tax-exempt status. They must avoid co-mingling of assets or operations with personal dealings of the D & O’s. Lastly, they must adhere to the stated purposes of the organization.

POTENTIAL CLAIMANTS

1. THE ORGANNIZATITON: claims against former D & O’s or by a member asserting a claim on behalf of the organization.

2. DIRECTORS: claims against fellow directors.

3. MEMBERS: claims against D & O’s to protect the members’ interest in seeing the purpose of the organization fulfilled.

4. BENEFICIARIES: claims by the recipients of the organization’s services.

5. DONORS: claims by those who donate money to the organization.

6. OUTSIDERS: claims by third parties who transact business with the organization.

7. ATTORNEY GENERAL: claims to uphold the law and to represent the interests of the public in assuring proper management.

PROTECTION FOR DIRECTORS & OFFICERS

1. INDEMNIFICATION BY THE ORGANIZATION
The by-laws of a non-profit corporation may provide for the indemnification of directors and officers for some, but not for all claims. Such indemnification is only good as the financial capabilities of the organization, and the willingness of the Board of Directors to authorize indemnification.

2. D & O INSURANCE
Insurance will respond to claims which are indemnified by the corporation, and those which are not. For non-profit corporations, D & O coverage should apply to the corporation and administrative staff, as well as the D & O’s. Deductibles per director should be held to a minimum with a low aggregate applicable to one occurrence. Participation in claims payment (usually 5%) can be avoided for an additional premium. Full prior acts coverage should be sought under the claims-made policy. D & O’s should be advised of the exclusion relating to failure to maintain proper insurance.

COVERAGE

Pays on behalf of the insured for loss (as defined in policy) which the insured shall become legally obligated to pay:

A. CORPORATE INDEMNIFICATION
Because of any civil claim or claims made against the Insured Directors or Officers and caused by any negligent act; any error; any omission; or breach of duty of Directors and Officers as defined within the policy, while acting in the capacity as such.

B. DIRECTORS & OFFICERS LIABILITY
As damages, because of any civil claim or claims made against the Insured and caused by any negligent act; any error; any omission; or breach of duty while acting solely in their capacities of Directors or Officers.