LOCAL CORPORATE DIRECTORS should ensure that they not only have directors’ and officers’ liability insurance, but that their policies contain a run-off provision.
Richard Powers, academic director of the Directors Education Program (Canada) made this recommendation last Wednesday during a workshop hosted by Certified Management Accountants (CMA).
Directors’ and officers’ liability insurance is payable to the directors and officers of a company to cover damages or defence costs in the event they suffer such losses as a result of a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers.
A run-off provision covers them for a period of time after they no longer sit on the board.
Speaking at the Hilton Barbados on the topic Corporate Governance: A Global Perspective To Best Practices, Powers urged board members to consider “what happens if someone sues the organization after you’ve left the board but they are referring to an incident [that took place] while you were on the board”.
“What you want is a run-off provision. Without the run-off provision you are personally liable. You may have done nothing wrong but you’re going to have to fund the defence costs,” he said.
Powers told the directors due diligence, indemnity and a proper insurance policy were critical in protecting against liability.
He therefore suggested that they choose a reputable insurance company that has experience with directors’ and officers’ liability insurance.
The University of Toronto professor noted that while historically the law courts focused on the end result of board decisions, today the focus is on process and critical analysis.
Some of the questions which he said would arise were: “Did the board understand the issues? How much time did they spend? Was the time proportionate to the issues’ importance? Did they seek advice?” (NB)
