New CIBC Centre Research Reveals Canadian Directors Worried About Lawsuit Risks

Canadian directors of TSX-listed companies say they face a high risk of potential lawsuits from shareholders and institutional investors around issues related to financial accounting disclosure and fraud.

What’s more, one-third report that insurance companies offering directors’ and officers’ (D&O) insurance have denied their claims, a much higher rate than U.S. companies.

The new CIBC Centre for Corporate Governance and Risk Management at the Segal Graduate School of Business recently surveyed directors’ attitudes toward risk, the nature of the risks they face and their practices regarding risk management and insurance.

The survey, the first in Canada in 10 years to examine D&O insurance, polled all TSX-listed firms. Respondents (70% of whom were CEO or Board Chair) say they expect changes in Canada’s business environment will result in more litigation and mounting legal costs, with the greatest potential claims arising from inadequate or inaccurate disclosure. According to centre director Dr. Daniel Shapiro, respondents say their greatest claimant risk is large institutional investors, which runs counter to the situation in other countries, where the risk from institutional investors is quite low.

Four insurance companies currently provide the majority of D&O coverage and many TSX-listed firms use more than one insurer. Over the past three years, 14 percent of respondents reported actual or threatened claims, with one-third of those claims disputed by their own insurance companies.

“That’s just extraordinary,” says Paul Reynolds, a director of Bishop Phillips Consulting Canada, a leading risk management consulting firm which commissioned the survey. “The equivalent claim dispute rate in the U.S. is just seven percent.”