Directors’ Liability, Insurance and Risk Management
A Primer for Board Members
by Tracey Yan, SCSBC Director of Finance ◊
Risk management is one of those buzz phrases you hear a lot lately, particularly in the boardroom. For many of us, paying the annual insurance bill may seem like all we need to know about the subject of directors’ liability and risk management, but putting our heads in the sand will not do us or our schools any good. A little bit of knowledge can help you rest assured that your school is doing everything it needs to do to protect its students, staff, and volunteers, as well as its physical and financial assets.
So what are the key things you need to know? Here are a few to start you off in the right direction.
Duties of Directors and Directors’ Liability
There are three main legal duties of directors of non-profit organizations under Canadian law:
- The Duty of Diligence: Diligent directors act prudently and in the best interests of the organization. Directors are well-informed and act cautiously, foreseeing potential risks and taking reasonable steps to manage those risks.
- The Duty of Loyalty: Directors are required to put the organization’s interests first, ahead of personal or other interests. Directors also have an obligation to keep organizational matters private and confidential.
- The Duty of Obedience: Directors must comply with the organization’s governing documents, and ensure that its committees and staff do as well. Directors must also ensure the organization complies with external rules and laws, in particular with respect to statutory obligations to its employees such as paying salaries and government remittances, providing holidays, and ensuring a safe work environment.
When directors fail to uphold these practices, something can go wrong – a law may be broken, a contract may be breached, or an action (or inaction) may harm someone – and directors of the organization may be held responsible. Because of this risk, your school should have directors’ and officers’ insurance in place to indemnify (compensate) its directors for liabilities that may occur as they carry out their duties. This insurance should cover legal fees, fines, and financial settlements from any lawsuit. Don’t be afraid to ask to review your school’s policy to ensure you are comfortable with its coverage.
No one wants to get into a situation where you actually have to make an insurance claim, so there are policies and procedures that your board and your school should have in place to limit the risk of this happening. This is what we call “risk management.” We can’t call it risk avoidance because inherently everything we do has some degree of risk. We just need to make sure we manage risks responsibly and think ahead to potential consequences.
- Risk management involves three steps:
- Examine the situation and think about what could go wrong and what harm could result.
- Determine practical measures that can stop the harm from occurring.
- If harm does occur, determine practical measures that can limit the harm or pay for the harm.
Evaluating your school’s various activities on a regular basis to assess risks and how they are managed is an important role of the board, although it is often delegated to a risk management committee or the finance committee. It is essential to look at all sides of your schools’ operations, including educational practices but also areas such as building maintenance, computer security, and finance procedures.
Once you have a list of all the risks your school could potentially face, figure out what “practical measures” are needed to manage those risks. These might include the following:
- The school might decide to simply accept a small risk and make no changes to its practices.
- The school may also decide to find ways to reduce the risk by changing the way people behave.
- For a higher risk activity, the school may decide to eliminate the risk altogether by stopping the activity.
- The school can also decide to transfer the risk to someone else.
Every school will face different risks and will find different ways to manage those risks based on reasonable standards of care. It’s common sense to screen and train your staff and volunteers well, to inspect your facilities regularly, to enforce rules consistently, to take proper minutes at board and committee meetings, and to make sure your T4s are filed on time. But sometimes things slip through the cracks, and it’s the board’s responsibility to make sure procedures are in place to reduce the likelihood of that happening.
Insurance is one of the main ways your school transfers risks to others. I’ve mentioned directors’ and officers’ liability insurance already. The key is to review this policy’s wording carefully. Most don’t cover actions of directors outside of their scope of duties, or anything criminal or fraudulent. Some policies also exclude breach of contract, including wrongful dismissal of employees, complaints under the human rights code such as discrimination or harassment, or fines and penalties under a legal statute, such as fines that may occur if payroll remittances are not made to Canada Revenue Agency. Try to find a policy with the
most comprehensive coverage.
Other insurance policies your school should have in place:
- Property insurance covers the value of the school building and its contents should there be physical damage to the school, such as fire or earthquake or simply a failed boiler. Given recent increases in construction costs, it’s a good idea to have a regular appraisal done to make sure the full replacement value of your property is covered.
- Business interruption insurance covers the costs which continue while the school is closed due one of the events described above. This ensures your staff can be paid until the building is repaired, so make sure it is enough to cover payroll for at least six months.
- General liability insurance covers claims that may occur during the course of regular operations, such as a parent being injured by slipping on an icy parking lot.
- Abuse coverage is often a separate policy from general liability.
- Cyber insurance is a relatively new type of insurance, which covers damages caused by loss of digital data.
Your insurance underwriter may require a lot of information to provide these policies at their most favourable rates: property appraisals, disaster recovery plans, privacy policies, questionnaires about data security and back up procedures, and copies of discipline and abuse prevention policies. They may also wish to visit your property and meet with the school’s facilities and administrative staff. If your insurance agent is not requesting this information, it may be time to call in someone new to review your policies and get market quotes. This will help ensure that the school is getting the insurance coverage it needs, and for the best rates.
Understanding your duties as a director around the issue of risk management and insurance is an important topic that every board should spend adequate time addressing. Hopefully this article has given you the information you need to jump start that conversation.