Audit, Compliance and Risk Blog

Director’s Liability Insurance Does Not Cover Personal Guarantee Given By Director

Posted by Ron Davis on Thu, Jul 14, 2016

Gavel_2.jpgIn Great American Insurance Co. v. Ramsoondar (2016 ABQB 73), the Alberta Court of Queen’s Bench was asked to declare that a director and officer liability insurance policy did not cover the losses claimed against Fredy v. Ramsoondar pursuant to a personal guarantee he granted to Faunus Group Inc. (FGI), a client of United Protection Services Inc. (UPSI). UPSI was a wholly owned subsidiary of United Protection Services Group Inc. (UPSG), and UPSG obtained a director and officer liability policy from Great American Insurance Co., and listed Ramsoondar as its chief financial officer on the policy.

UPSI had entered into a contract to provide services to FGI and Ramsoondar had given a personal guarantee to FGI to cover any losses incurred by FGI, if UPSI did not perform the contract. Ramsoondar had also promised to keep UPSI solvent and able to pay its debts in his guarantee. UPSI breached the contract and declared insolvency and FGI sued Ramsoondar on his guarantee. Great American began funding Ramsoondar’s defence, but reserved the right to deny coverage on the grounds that the loss was not one covered by the policy, or that it was not one incurred by Ramsoondar in his capacity as an officer of UPSG.

The insurance policy offered insurance against claims against the covered individuals for any “Wrongful Act.” A “Wrongful Act” was defined as any “act, omission, error, misstatement, misleading statement, neglect or breach of duty . . . by any Insured Persons in their capacity with the Company” and matters claimed against an individual “solely by reason of their status with the Company.”

The Court held that director and officer liability insurance is intended to cover fortuitous losses that injure the insured and not the “commercial risks the individual has chosen to assume and is called upon to pay in the course of business.” The Court held that FGI’s claim was against Ramsoondar in his personal capacity as a guarantor, not in his capacity as a director or officer of UPSG. The claim did not arise from the performance of his duties as an officer, but rather from his decision to assume personal liability for the performance of the corporation’s obligations to FGI. The Court issued a declaration that the claim by FGI against Ramsoondar was not covered by the director and officer liability policy issued by Great American Insurance Co.

As this case illustrates, the wording of director and officer liability insurance policies can, and does, restrict the claims that will be covered by the policy. It is unlikely that any such policy will cover risks assumed by individuals in contracts entered in their personal capacities, such as the guarantee in question above, even if it is a guarantee of the corporation’s performance.

STP has recently published an update to its publication Directors' Liability in Canada and also publishes the following related guides:

About the Author
Ronald Davis is an associate professor emeritus at the Peter A. Allard School of Law, University of British Columbia. He obtained his Bachelor of Laws degree from the Faculty of Law, University of Toronto in 1990, graduating as that year’s silver medalist. He was called to the Ontario Bar and practiced law in Toronto for 10 years before returning to graduate studies at the University of Toronto. See for a full bio of Ronald Davis.


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Tags: Insurance, Insurance Claims, Canadian, directors, directors & officers