While more and more business and even not-for-profit directors and officers believe that they can do without liability insurance, here are two key reasons why they should be much more cautious.
Although directors and officers act in the name of the company, they are not protected from lawsuits against them personally. Several laws, starting with the Civil Code of Quebec, protect their personal liability by way of exception to the principle of liability limited to the company: failure to act with prudence or in the interest of the company, abuse of rights, contravention of a rule of public order, concealment of fraud by acting through the company, etc.
The director of a company also faces financial consequences if the company goes bankrupt: he is personally responsible for unpaid salaries, taxes or other deductions at source that have not been remitted to the Ministère du Revenu. This eventuality is, to say the least, not negligible.
Another myth that needs to be dispelled is that there is such a thing as commercial general liability insurance, which covers the business, its employees, directors and officers. A good advisor will warn you that this coverage applies only to property damage or bodily injury resulting from an accident. Directors’ and officers’ insurance (commonly referred to as D&O) is therefore essential for other pecuniary damages such as financial loss that do not result from an accident, for example a fire or an explosion.
Take these three examples: lost profits for an executive following a termination, lost income resulting from unfair competition, financial losses resulting from misrepresentations in the sale of a business. These are all claims that require D&O protection.