Directors, committee members or similar roles
Thanks to experience and acumen, lawyers are often seen as natural candidates to fill positions as directors or members of boards, councils or committees in both the public and private sphere. However, as lawyers in these roles are not practising law, the professional liability insurance policy (Part A) will not respond to any claims arising from or in any way connected to a lawyer’s role as a director or member of a board, council or committee in either the public and private sphere. In addition, a specific policy provision operates to exclude claims that arise out of a lawyer’s activities as an officer, director or similar role. If the lawyer is not covered, neither are the lawyer’s partners nor the firm itself.
Before you accept a director, committee or similar role
As the existence and extent of risk, if any, depends very much on the particular role that you are fulfilling, you will want to make your own assessment in this regard. In making your decision, you will want to include the following considerations:
- A director of a company, for instance, attracts very different risks than a member of a school parent planning committee. In some positions, you will be comfortable knowing that the risk of liability is so remote as to be almost non-existent. In others, the risks will be such that you will only act if adequately protected. And in others, the potential liability for matters ranging from unpaid taxes to corporate governance failures will be so great that you will not want to accept the appointment. Carry out whatever due diligence about the organization and others involved in it that may be necessary in order to fully identify any risks or potential liabilities.
- Protection may include directors’ and officers’ insurance (D&O) policies purchased by the organization on the private market, or an indemnity provided by the organization seeking your involvement (assuming the organization has the financial wherewithal to make good on the indemnity). If you buy excess insurance, that policy may "drop down" to provide an element of outside directors’ and officers’ liability (ODL) cover. In addition, the CBIA offers a policy specifically designed to provide some coverage to lawyers who sit on boards other than their law corporation. Your insurance broker can provide you more information.
- Even with D & O liability insurance, however, directors may still find themselves personally exposed because of deductible amounts and restrictions on the scope or limits of coverage. Further, the mere existence of insurance can encourage claims by those searching for a “deep pocket,” particularly if the director might be held to a higher standard of care because he or she is a lawyer.
- Unless you are prepared to offer legal advice or services (see below), make it very clear at the outset that you are not. If you are asked for legal advice, refuse. Ask the board, council or committee to confirm its understanding of your circumscribed role when you first join and, as appropriate, on an annual basis thereafter. A board, for instance, can pass a resolution that it will seek any legal advice or services required from outside counsel, not you.
A useful tool for helping lawyers assess the risk of sitting on a non-profit board is available from LawPro (Lawyers Professional indemnity Company, Ontario).
Before you agree to provide any legal services
Sometimes, the lawyer who acts as a director or board member, or others in that lawyer’s firm, also provides legal advice or services to the organization. If negligence claims arise, the compulsory policy will respond to allegations that clearly fall within the policy. Appreciate, however, that lawyers sued in both capacities are personally responsible for defence costs or judgments that relate to any non-covered aspects of the claim (a D&O policy may respond, if purchased). In addition, you will want to consider the following in deciding whether or not to act:
- The collegial environment of a small board or committee can create risks very similar to those that lawyers face when acting for friends or family. Read: About to act for family and friends? (Resist — it's just too risky)
- Legal advice provided on an ad hoc basis may end up being just plain wrong, as it may be based on a factual matrix that’s deficient. For instance, a not-for-profit organization may ask a lawyer sitting on its board for legal advice about managing a personnel issue with an employee, without providing all of the details needed for informed advice. Lawyers willing to offer informal views will want to confirm, in advance and in writing, that the organization will not rely on that advice but will consult its own lawyer for legal advice. Optimally, the minutes will reflect the caveat, as well.
- Any lawyer who agrees to sit as a director of a company at the request of a client may want to reconsider that decision or, at the very least, firmly establish parameters for that involvement, given the increased risks attracted:
- You must recognize and manage the very real risk of “split loyalties” – the potential conflict between your duties to the client as lawyer and the separate duties to the company as director. If the company starts to fracture and litigation looms, privilege issues can be extremely difficult to sort for the lawyer wearing two hats.
- Developments in the law suggest that matters may become even messier given the potential liability of the law firm for the acts of its lawyer partner qua director. In a class proceeding in Ontario, a common issue relates to a claim that a director (also a lawyer) is statutorily liable as a director for alleged misrepresentations in relation to a company’s takeover bid circular, and that such liability also extends to the director’s law firm. The director and his firm had acted for the company. The law firm’s motion for summary judgment dismissing the claim that it is vicariously liable for the actions of its partner qua director, as well as a claim in negligence, has been denied, although the defences may be raised at trial.
- Exclusion 6.2 of the policy (the “business exclusion”) will operate to exclude coverage if, for example, you have effective management or control of the organization, or a beneficial interest in the organization that exceeds an allowable threshold. You will want to consider whether or not your role triggers the operation of the Exclusion, as you – and your client – will want to know that your legal services are backed by insurance. Summary of Exclusion 6 of the Policy.
Of course, coverage for legal advice and services is only available for lawyers who pay the annual insurance fee, and other terms and conditions in the policy may limit or preclude that coverage. You will want to make separate inquiries in respect of any excess insurance your firm might carry.
If you would like the Insurer’s position on coverage in a particular set of circumstances, please send a detailed description of the circumstances, in writing, to an advance ruling advisor.