Risk Management: Protection from Liability
Apart from the diligent discharge of their duties, there are of number of ways that directors and officers can manage the risks associated with their personal liability.
A unanimous shareholder agreement can be used to shift some or all of the directorial responsibilities and liabilities to the shareholders of a corporation. Trust accounts and letters of credits can also be set up to ensure that the corporation does not default on payment of sums for which the directors and officers are personally liable. As well, resignation can protect directors and officers from liability for any events that occur subsequent to departure.
In some provinces, corporations are also permitted to indemnify their directors and officers for various actions taken on behalf of the corporation, provided that such director or officer was acting honestly and in good faith, with a view to the best interests of the corporation and, in the case of a criminal or administrative action or proceeding that is enforced by a fine, that the director or officer had reasonable grounds for believing that his or her conduct was lawful. Corporations, however, are prohibited from indemnifying directors or officers against breach of the fiduciary duty owed to the corporation. Indemnification can also be prohibited in any circumstances where the court determines it is inappropriate. In those cases, courts can find indemnities unenforceable for reasons of public policy. Although indemnities provide significant protection to directors and officers, it is important to remember that, in the context of insolvency, an indemnity is only as good as the corporation’s ability to honour it.
In general, a corporation may also obtain liability insurance for a director or officer against any liability incurred, so long as he or she acted honestly and in good faith, with a view to the best interests of the corporation. While insurance provides important protection, there are many exclusions from typical insurance policies, including:
- i. actions involving fraud, conspiracy, criminal acts, human rights violations or other intentional acts;
- ii. the obtaining of a personal profit or advantage to which the recipient was not legally entitled;
- iii. claims arising out of statutory liabilities;
- iv. claims for fines or penalties imposed by law, punitive or exemplary damages; and
- v. matters which the law may determine to be uninsurable.
For some corporations, the premiums for such policies may be prohibitive.
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