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D&O insurance exists because all corporate directors are potentially subject to personal liability claims, not only for their own conduct as board members (e.g. conflicts of interest) but — in some cases — for the company's conduct (e.g. with respect to taxation and environmental issues). Should a claim arise, a director should first refer to the indemnification provisions under Canada's corporate laws, the corporation's organizational documents and any contractual agreements in place between the director and the corporation. This will help to determine what, if any, legal obligations the corporation has to compensate the director with respect to the claim. The director should also familiarize themself with the scope of any D&O insurance policies that the corporation has in place, which policies may be used by the corporation both to satisfy any of its legal indemnification obligations discussed above and to compensate directors for claims that may in fact be above and beyond any such obligations. D&O insurance coverage comes in several distinct types. The main category that is personally relevant to directors is "Side A" coverage, which is directly available to directors for matters that the corporation is not legally required to indemnify. In addition to this, there is also "Side B" coverage, which reimburses the corporation for amounts paid as indemnification to directors or corporate officers and is more traditionally used to cover matters that the corporation is legally required to indemnify. Lastly, "Side C" or "entity" coverage is also available to corporations to assist them when they are sued alongside their directors and officers. While D&O policies are generally tailored to each company's needs, there are certain common issues on which directors should focus as they assess the adequacy of their coverage. Six of these are discussed below, with additional information available in the publications mentioned at the end of this article. 1. Severability New directors are typically added to an existing group D&O policy that was issued on the basis of an application submitted by existing or past directors. Because the insurer is often permitted to rescind a policy on the basis of inaccuracies in the application form, this means that a new director could theoretically lose their coverage because of someone else's misstatements. To prevent this, many D&O policies include a "severability" clause that limits denials of coverage on this basis to board members who knew of the misstatements. 2. Dilution D&O insurance policies often cover not only the directors and officers but also the corporation itself. Because each policy is capped at a certain aggregate amount, it is important from a director's standpoint that the policy clearly gives the Side A coverage precedence, with respect to payouts, over the Side B and Side C coverage. 3. Former and related directorships The definition of "insured person" will typically include former directors. Those who also serve on the boards of subsidiaries or affiliates should confirm that they are also covered in those roles. 4. Exclusions D&O policies generally contain exclusions for fraud, dishonesty or criminal conduct. While these may broadly speaking be non-negotiable, there may be aspects of them that are important to discuss (e.g. from a director's perspective, the insurer should not be able to deny coverage simply on the basis of an allegation). 5. Insolvency Directors should consider how their policies deal with insolvency situations, including general carve-outs that may permit their insurer to cancel coverage on insolvency or bankruptcy. 6. Top-up policies D&O insurance is purchased in towers. In other words, there is a primary policy that is supplemented by multiple levels of excess insurance coverage that can be used as back-up. The corporation's suite of insurance can almost always be topped-up — for a price — by obtaining additional coverage from another provider. A new director concerned about the level of coverage in the current policy may wish to request this. For further information Stikeman Elliott's publication Directors and Officers in Canada is available to provide additional information on D&O insurance, visit stikeman.com/directors Our complete library of publications is available on our Knowledge Hub at stikeman.com/kh Protecting Canadian Directors: The Role of D&O Insurance This article highlights some of the key points that Canadian corporate directors need to keep in mind as they consider the adequacy of their Directors and Officers ("D&O") liability coverage in Canada's increasingly litigious environment. Courtney Wilson Partner, Stikeman Elliott LLP cjwilson@stikeman.com +1 416 869 6847 Download Stikeman Elliott's Directors and Officers in Canada guide at stikeman.com/directors Stikeman Elliott LLP / stikeman.com

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