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Directors can be personally liable for the organization's decisions and some of its debts. D&O pays for the defence.
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Directors and officers (D&O) liability insurance pays to defend the people who govern an organization, and settles claims against them, when they are accused of a wrongful act in managing it. It protects personal assets when the organization cannot or will not indemnify them, reimburses the organization when it does, and in private-company and non-profit forms usually covers the organization itself. It is written on a claims-made basis.
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Directors and officers can be sued personally for how an organization is run, by shareholders, investors, creditors, members, employees and government. Some statutes go further: directors can be personally liable for unremitted source deductions and GST/HST, and for up to six months of unpaid employee wages. D&O liability insurance funds their defence and protects their personal assets.
We arrange D&O for private companies, startups closing funding rounds and non-profit boards. Most gaps we find are in the wording, not the limit: an insured vs. insured exclusion without carve-backs, no protected Side A limit, taxes excluded, or no run-off after a sale. We coordinate D&O with professional liability and cyber so claims do not fall between policies.
A D&O policy responds to claims alleging a wrongful act by a director or officer in that role. Wordings define a wrongful act broadly: an error, misstatement, misleading statement, act, omission, neglect or breach of duty. The claim can be a lawsuit, a written demand, a regulatory investigation or an administrative proceeding.
Who sues? For private companies, the usual claimants are shareholders and investors, creditors, competitors, customers, employees and government. For non-profits, add members, donors, funders and volunteers. Claims by employees about hiring, dismissal or harassment are usually handled by employment practices liability, often sold in the same package.
A D&O policy is really three covers in one wording. Understanding them explains most of the questions boards ask.
| Insuring agreement | What it pays | When it matters |
|---|---|---|
| Side A: individual cover | Loss of directors and officers that the organization does not indemnify | The organization is insolvent, refuses, or is not legally permitted to indemnify, such as in some actions brought by the corporation itself |
| Side B: corporate reimbursement | Reimburses the organization for amounts it pays to indemnify its directors and officers | The organization indemnifies under its by-laws or the corporate statute, then recovers from the policy above the retention |
| Side C: entity cover | Loss of the organization itself for claims made against it | Common in private-company and non-profit forms, where the organization and its board are often sued together |
The three sides usually share one limit. A large entity claim under Side C can therefore use limit that individual directors later need. Boards that want protection ring-fenced for themselves can buy a separate Side A limit, sometimes called Side A difference in conditions cover, which sits above the main policy and can drop down if it fails to pay.
The retention, or deductible, usually applies to Side B and Side C, not to Side A. A director who is not indemnified should not have to pay a deductible personally.
Most claims against directors rely on duties of care and loyalty. Several statutes go further and make directors personally liable for specific debts of the corporation. These are the ones Canadian boards meet most often.
| Liability | Statute | Key terms |
|---|---|---|
| Unremitted source deductions (income tax withholdings) | Income Tax Act, s. 227.1 | Directors at the time are jointly and severally liable with the corporation, with interest and penalties. Due diligence defence. No action more than two years after the director last ceased to be a director |
| Unremitted GST/HST | Excise Tax Act, s. 323 | Same structure: joint and several liability, due diligence defence, and no assessment more than two years after ceasing to be a director |
| Unpaid employee wages, federal corporations | Canada Business Corporations Act, s. 119 | Up to six months' wages per employee for services performed while a director. Director must be sued while a director or within two years after |
| Unpaid employee wages, Ontario corporations | Business Corporations Act (Ontario), s. 131 | Up to six months' wages and up to 12 months' accrued vacation pay |
| Unpaid wages, Ontario employment standards | Employment Standards Act, 2000, s. 81 | Up to six months' wages and 12 months' vacation pay. Can be enforced by an employment standards order, and the employer does not have to be pursued first. Termination and severance pay are excluded |
| Unpaid wages, Ontario non-profits | Not-for-Profit Corporations Act, 2010, s. 40 | Up to six months' wages and 12 months' vacation pay. The ESA director provisions do not apply to these corporations; this section does |
These liabilities usually surface when a business is failing, which is exactly when the corporation cannot indemnify. That is the Side A scenario. Read how your policy treats taxes and wages: some wordings cover them only to a sublimit, only when the corporation is insolvent, or exclude amounts that are taxes rather than penalties. Other provinces' corporate statutes have their own versions of the wage rule.
Resigning is not an instant exit. The two-year windows above mean a former director can be pursued after leaving the board, so D&O cover for past directors, and a run-off period if the company is sold or wound up, matters.
Canadian corporate statutes let corporations indemnify their directors and officers, and expressly allow them to buy insurance for them. The CBCA (s. 124), the Ontario Business Corporations Act (s. 136) and the Ontario Not-for-Profit Corporations Act, 2010 (s. 46) all follow the same pattern: the corporation may indemnify, it may advance defence costs, and it may purchase and maintain insurance for the individual's benefit.
The same sections set limits. A corporation cannot indemnify someone who did not act honestly and in good faith with a view to the corporation's best interests, and for proceedings enforced by a monetary penalty, the individual must have had reasonable grounds to believe the conduct was lawful. Indemnity for an action brought by or on behalf of the corporation itself needs court approval. And indemnity is only as good as the corporation's balance sheet. D&O insurance fills each of those gaps.
For Ontario charities, the Charities Accounting Act regulation on approved acts (O. Reg. 4/01) permits buying insurance to protect directors and officers, but only after the board considers listed factors, including whether the cost is reasonable in relation to the risk and the revenue available, and only if the purchase does not unduly impair the charitable purpose.
Both are written on management liability forms that differ from public-company D&O, which centres on securities claims. The risks that drive each are different.
| Private company | Non-profit or charity | |
|---|---|---|
| Typical claimants | Investors and minority shareholders, creditors, lenders, competitors, employees | Members, donors, funders, employees, volunteers, regulators |
| Common allegations | Oppression of minority shareholders, misrepresentation in a financing, breach of fiduciary duty, failed sale or merger | Misuse of restricted funds, governance disputes, membership expulsions, employment claims |
| Statutory exposures | Source deductions, GST/HST, unpaid wages | Source deductions, unpaid wages, and charity-specific rules on spending and records |
| Key policy issues | Insured vs. insured exclusion and its carve-backs for shareholders and creditors, change of control | Volunteer and committee members as insureds, employment practices cover, cost against a small budget |
| Who often insists on it | Investors at closing, lenders, incoming directors | Funders, prospective directors, umbrella organizations |
Founders closing a round should read startup insurance by milestone and our startup insurance page. Our article on D&O for private companies goes further into shareholder claims. Boards of charities and associations can start with non-profit insurance.
| Excluded or limited | How to cover it |
|---|---|
| Bodily injury and property damage | Commercial general liability |
| Professional services to clients | Professional liability (E&O) |
| Employment claims such as wrongful dismissal, discrimination and harassment | Employment practices liability, added to the D&O package; it is often excluded from D&O alone |
| Insured vs. insured claims, where one insured sues another | Negotiate carve-backs for derivative actions, claims by former directors, whistleblowers and bankruptcy trustees |
| Fraud, dishonesty and deliberate illegal acts | Not insurable, but insist the exclusion applies only after a final adjudication, so defence is paid until then, and that one person's conduct is not imputed to others |
| Prior and pending litigation | Disclose known matters; keep continuity dates when changing insurers |
| Pollution | Environmental liability cover; some D&O policies give limited defence for shareholder claims |
| Cyber incidents and data breaches | Cyber liability; D&O may respond only to the board's alleged mismanagement of cyber risk |
| Theft by employees | Commercial crime |
| Fines and penalties where not insurable by law | Not insurable; the policy may still pay defence |
D&O is written on a claims-made basis, so the policy in force when the claim is made is the one that responds. Our professional liability guide explains retroactive dates and reporting in detail. Points specific to D&O:
A family-owned Ontario manufacturer with three directors runs short of cash. For two quarters, it pays suppliers and staff but falls behind on remitting payroll source deductions and HST. It later makes an assignment in bankruptcy, owing employees their final weeks of wages and accrued vacation pay.
Three claims follow. The CRA assesses the directors personally for the unremitted deductions and HST, plus interest and penalties. Former employees file for unpaid wages and vacation pay against the directors under the Employment Standards Act. A lender alleges the directors misrepresented the company's position when renewing its credit line.
The bankrupt company cannot indemnify anyone, so Side A is the only source of cover. The policy funds lawyers for all three directors. On the CRA assessments, the main defence is due diligence: evidence that the directors took active steps to prevent the failure to remit. On the tax amounts themselves, cover depends on the wording; some policies pay statutory liabilities to a sublimit in insolvency, others exclude taxes. The wage claims are often within cover under a statutory liability extension. The lender's claim is a classic D&O allegation.
The lesson is that the wording matters most when the company is failing. Boards should check how their policy treats taxes and wages before they need it.
D&O is rated on the organization's financial strength and governance more than on its size alone. Underwriters look at:
Non-profits are usually rated on budget, funding sources, employee and volunteer numbers, and activities.
Insurabiz is an independent brokerage working only in business insurance. We do not work for one insurer, so we can compare management liability wordings clause by clause.
Ready to compare? Request a quote, or see bundle and save to package D&O with E&O and cyber.
Our claims team coordinates with the insurer from first notice to resolution.
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This page is general information, not insurance or legal advice. Coverage depends on your policy wording and the insurer. Speak with a licensed broker about your situation.
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