Do We Have Insurance For That? ' Why Directors Should Obtain Legal Advice When Buying Company And D&O Insurance

• Published date: 16 February 2022
• Subject Matter: Corporate/Commercial Law, Insurance, Technology, Corporate and Company Law, Directors and Officers, Contracts and Commercial Law, Insurance Laws and Products, Fin Tech
• Law Firm: McMillan LLP
• Author: Mr Georges Dubé, Jeffrey Levine and Nicole Rozario

Directors of public companies are aware that the role comes with risk of personal liability. That risk can be effectively managed with the adoption by the company of insurance coverage tailored to address the particular risks and circumstances of the business. Directors are wise to determine whether a particular risk is covered by such a policy before the policy is adopted, and with the benefit of legal advice, rather than in the context of inquiring as to coverage when facing a claim. In the later case, where coverage is in doubt, little can be done to rectify the policy. This article: (A) reviews the major parties involved in negotiating insurance agreements; (B) identifies interpretative principles that apply to custom insurance agreements, as compared to standard form insurance agreements; and (C) illustrates the reasons why prudent companies should engage legal counsel to assist in negotiating insurance agreements and the review of existing policies.

The prudency of involving legal counsel before coverage under a policy is actually necessary is particularly true in rapidly emerging sectors such as cannabis, space travel, cryptocurrency, NFTs, and e-sports where industry players have notably faced shareholder claims, regulatory actions, product liability issues, and fraud. Companies operating in these sectors are looking for insurance to mitigate new risks, and insurance companies and brokers are correspondingly attempting to address those needs. A spokesperson from one major insurer, for example, recently noted that "[cryptocurrency assets] are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area."¹

Despite insurers' and brokers' good faith actions in providing insurance, companies operating in these industries purchasing insurance for the first time face multiple issues in connection with their intended coverage. Company and directors and officers liability (D&O) policies catering to cannabis and cryptocurrency companies, in particular, carry bespoke exclusions and carve outs for shareholders claims, bankruptcy claims, and regulatory violations. Prudent companies and their boards of directors should engage legal counsel to assist their insurance broker in negotiating these new agreements. Companies would also be prudent to engage counsel to review existing policies to ensure that new product offerings and their associated risks remain within the bounds of insurance coverage the company understands that it has.

A. The Cast of Characters Involved in Negotiating an Insurance Contract

There are generally three parties that are integral to the formation of an insurance contract: an insurer, an insured, and an intermediary broker/agent.

a. Insurer

The party giving an undertaking to indemnify the other party from loss or liability in respect of an event that is uncertain to happen is referred to as the "insurer". The insurer and insured owe each other mutual duties of utmost good faith and fair dealing in negotiating insurance contracts and settling claims.² Insurers are chiefly subject to this duty during the settlement process, when a policyholder has sustained some type of loss. The insurer must investigate claims fairly, in a balanced, reasonable, and expeditious manner.³

b. Insured

The party obtaining the assurance of indemnity upon the loss occurring is referred to as the "insured." Insureds have a duty to disclose all matters relevant to the risk insured against.⁴ This includes a requirement to respond honestly to questions posed by the insurer.⁵ Insureds must be careful when answering questions - in some cases, insurers have denied coverage when an insured misunderstood a question and unintentionally provided a wrong answer.⁶

c. Broker/Agent

An insurance "broker" or "agent" acts as an intermediary between the insured and insurer. In Ontario, there is a critical distinction between the two: agents essentially work for a single insurer to place insurance, while brokers work for insureds.⁷ Brokers offer clients a choice of products and price comparisons from various insurance companies.⁸

In Ontario, brokers are a self-regulated profession. They are subject to licensing, professional competence, and ethical conduct requirements established by the provincial regulatory body, the Registered Insurance Brokers of Ontario ("RIBO").⁹ According to RIBO, "[e]very registered insurance broker must meet certain qualification standards and continuing education requirements, established by the Qualification & Registration Committee."¹⁰

As self-regulated professionals, brokers are subject to concurrent duties in contract, tort, and equity.¹¹ Brokers have a legal duty to provide information about available coverage, but also advice about which forms of coverage a client requires.¹² A broker must understand the nature of their client's business and assess the risks that should be insured against.¹³

This is a high standard to meet. The Supreme Court of Canada has articulated the specialized type of expertise brokers should have:

It goes without saying that an agent who does...