Increase In Claims Against Directors And Officers A Major Challenge For Insurers

Over the last 20 years, we've seen a steady increase in claims against corporate directors and officers (D&Os) in Canada. Because Canadian courts apply a relatively low threshold to the certification of securities class actions and are generally reluctant to dismiss them at an early stage, there has also been a trend toward higher settlements in an environment where plaintiffs are more confident they can "hang in" and bargain for more.

These trends are likely to continue in 2017 for a number of reasons, some of which are detailed below, and will pose challenges for D&O liability insurers.

Securities regulators and whistleblower programs

Securities regulators in Canada, particularly in Ontario, Quebec, and Alberta, have shown an increasing enthusiasm for investigating companies and their executives.

The last year also saw the launch of two new whistleblower programs, one in Ontario and the other in Quebec. In both provinces, individuals now have added incentive to come forward to report wrongful conduct by D&Os.

Both programs offer anti-reprisal and confidentiality protections to whistleblowers. In Ontario there are monetary rewards, representing a percentage of sanctions paid up to a maximum of $5 million, in exchange for useful information; even whistleblowers involved in the wrongdoing can be eligible. Quebec's securities regulator has opted not to offer financial incentives.

Of interest to insurers would be the issue of whether whistleblowers who participated in the wrongdoing would trigger the policy's prohibition against admission of liability, thus putting themselves in a position where their good faith effort to report wrongdoing has had the unwanted consequence of putting themselves outside of coverage.

Litigation funding

A second factor is the emergence and acceptance of third-party litigation funding which, after some initial resistance from the courts, is now considered a promising growth area in Canada, as funders tailor their offerings to the market. A 2011 Ontario Superior Court1 ruling recognized the legitimacy of the practice as a means to overcome financial barriers to access to justice for people who would otherwise be discouraged from taking legal action. A handful of decisions have followed which have endorsed the availability of litigation funding arrangements, subject to certain safeguards. Canada is following a global trend that started in Australia, allowing claimants to launch class action lawsuits while...