Not-For-Profit Organization

To avoid liability risks, a director must demonstrate that they have acted with due diligence in discharging these duties. However, standards vary in different provinces depending on whether common or statutory law provisions apply and are different in application to charitable corporations and trusts. Under other statutes, higher standards have been applied to the application of care for the fiduciaries of trusts, into which category directors of community foundations fall, than for those of non-profit or for-profit corporations.

Insuring agreements define who and what is covered by the policy. Insuring Agreements often give a broad overview of the scope of coverage, then narrow it down in the Exclusions and Definitions sections. It’s important to read these three sections together for a clearer picture of precisely what is—and isn’t—covered to know you have the coverage you expect.

Directors and officers can protect themselves against liability by staying well-informed about decisions they make or approve for the corporation. They should understand the articles and by-laws of their corporation, seek legal and accounting advice when necessary, and ensure that effective management is in place for the corporation.

Directors and officers should have personal indemnification agreements with the corporation and ensure that the corporation maintains sufficient insurance to protect them.

D&O insurance protects company officials when corporate indemnification is unavailable, whether due to insolvency or legal prohibition. D&O insurance also provides a mechanism for corporations to be reimbursed when they do indemnify their executives. D&O insurance can also protect the entity itself.

A D&O policy coverage is triggered by a claim for a loss [could be monetary or non-monetary] during the policy period that alleges an insured committed a wrongful act in their capacity as a director or officer and which is not otherwise excluded under the policy.

The policy provides defence and settlement costs also subject to policy terms.D&O Policies are written on a claims made basis, which is a different trigger than the more familiar CGL policy. Unless otherwise restricted, the policy will cover claims made during the policy period, previously unknown to the insured but where the act may have occurred in the past.

The Insurer shall have the right and the duty to defend any Claim made against the Insureds, even if such Claim is groundless, false or fraudulent.

Corporate officials’ front line of liability protection is indemnification. Indemnification means “to pay the costs of or to reimburse another person for costs incurred.” This is usually embodied in corporate documents such as articles of incorporation or by-laws.

Although corporate indemnification is broad, it is not unlimited. There are times when a corporation may not indemnify an individual. For a corporation to be permitted to indemnify a director or officer under the CBCA (and not-for-profit act), the following conditions must be satisfied:

• the director or officer acted honestly and in good faith with a view to the best interests of the corporation (the “Good Faith Requirement”);
• in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the director or officer must also have had reasonable grounds for believing that their conduct was lawful (the “Lawful Conduct Requirement”);
• the costs, charges and expenses must have been reasonably incurred; and
• the director or officer must be involved in the proceeding because of their association with the corporation or other entity.
• D&O insurance assumes the indemnity obligation of the corporation
• Covers the personal liabilities of the individual Ds and Os
• Protects the organization’s assets
• Protects stakeholder assets
• Pays defence even in a frivolous suit
• Provides access to expertise in a claim situation
• Required to attract capable Ds and Os

Employment Practices Liability Insurance (EPLI) covers an employer’s defence costs and losses from employment-related claims, including allegations of discrimination, harassment, retaliation and unlawful termination.

Fiduciary Liability provides coverage for the fiduciaries, directors and the corporate entity against potential liabilities which may arise from the mismanagement of an employee benefit plan.

The Limit of Liability typically includes both legal defence and settlement costs. However, this exclusive feature gives additional limits for defence costs, so the policy limit is still available for settlement costs.

The hammer clause in the policy allows the insurer to propose an amount to settle a claim out of court and avoid court proceedings. The clause stipulates that the insurer can restrict claim payments if the insured does not accept this settlement amount.  When this clause is deleted, the insurer can no longer restrict claim payments.