Risk & Business Magazine Cal LeGrow Spring 2016 | Page 31

Bulletproofing your Business Risk
Managing Risks for Directors and Officers

BY: BILL DALTON, CAIB CIP CRM, VICE-PRESIDENT, CAL LEGROW COMMERCIAL

E

very decision a company’s directors
and officers make has the potential
to be scrutinized by clients, employees,
shareholders and other directors and
officers. These stakeholders may file a
lawsuit if they believe a decision adversely
affects their best interests. And the
stakes are high—directors and officers
risk losing their personal assets if they’re
ever involved in a lawsuit for a decision
made in the course of performing their
regular duties.
As a business owner, it’s important for
you to have the proper risk management
in place so you can attract talented
directors and officers to your company.
Here are three things to consider
regarding the current risk management
strategy at your company.

Corporate Structure
Prior to hiring a new director or officer,
review your corporate structure to make
sure your practices are sound and secure.
You should focus your review on:
• Employee orientation, training,
and education. Examine the type
of training and education you are
providing employees and gauge
whether it is enough or whether
more is needed. Review any
incidents that have occurred in
the past due to lack of training,
and talk to employees to get their
feedback on the amount or type of
training they receive. Also, make
sure your managers are completely
aware of the legislation and
regulations your company must be
in compliance with.
• Internal policies. Do your policies
clearly state your ethical standards
and what is expected of employees?
Legal procedures should be outlined
within each policy so employees are
aware of the guidelines.

• Liabilities. Review potential liabilities
in all areas of the company and
the amount of risk each liability
poses. This includes reviewing the
amount of decision-making power
each employee has. In some cases,
your directors and officers may
have to rely on information from
these employees if they don’t have
the time to extensively research
the details themselves before
making a decision. The employees
that are tasked with gathering this
important information for your
managers need to be reliable.

Indemnification Provisions
While reviewing your business’ corporate
structure, it’s also a good time to take a
look at the indemnification clauses in your
bylaws or articles of incorporation. Offered
by many companies, indemnification
means that your organization will
compensate a director or officer for losses
incurred during his or her defense in
a directors and officers (D&O) lawsuit.
It’s important to review your clauses if
you haven’t done so in years because the
language may no longer be clear.
The expenses your executives may incur
in a D&O lawsuit can be compensated on
either a discretionary or mandatory basis.
With discretionary indemnification, a
company has no obligation to reimburse
expenses, although they can do so if
they wish. Reimbursement is decided on
a case-by-case basis. With mandatory
indemnification, businesses are obligated
to reimburse all directors and officers for
expenses incurred as long as the lawsuit
against them is defended successfully.
Determining which is better for your
business (mandatory or discretionary)
means you must consider your company’s
appetite for risk as well as the type of
director or officer you want to attract.
Keep in mind that there are exceptions

to the indemnification provisions. If a
lawsuit is brought against a director or
officer by a shareholder, he or she cannot
be reimbursed for any expenses because
essentially the company would be paying
itself. Also, if the company were to
become insolvent, it no longer has the
obligation to uphold the indemnification
provisions.

D&O Insurance
Commercial general liability policies
and umbrella policies do not cover
the cost of D&O lawsuits. Settling
these lawsuits—even if the director
or officer is found innocent—can be
costly, and can bankrupt a company or
an individual. Many companies choose
to purchase D&O insurance to protect
their executives from legal expenses and
personal liability exposures not covered
by indemnification.
Assess the D&O policy you have in place
and review the policy terms to make sure
your limits are high enough to cover
multiple suits against your directors and
officers. Also, pay attention to exclusions
in your policy, as employment practices
lawsuits are usually not covered. You
can count on the insurance professionals
at Cal LeGrow Insurance Limited for
the resources and expertise you need to
purchase a new D&O policy or update
your existing policy today.

Soon after returning to Newfoundland
in 2001, Bill joined Cal LeGrow.
Throughout his career at Cal LeGrow,
Bill’s work with large, diverse accounts
has provided him with the experience
needed to assist his clients in managing
their personal insurance needs, and also
providing risk management guidance to
help them build better businesses.

SPRING 2016

31