New and proposed legislation tackling environmental pollution, augmented with recent court rulings, are further complicating the liabilities of corporate directors and officers. Directors and officers of companies or non-profit organizations, whether large or small, public or private, could be placing their personal assets on the line. New laws and recent court decisions are more broadly defining the responsibilities of directors and officers; personal liability suits against them are increasing and the costs, whether of a settlement, a fine or simply defense, are escalating.

Recent cases involving directors and officers of companies in Ontario have established important legal precedents in the area of environmental liabilities and undoubtedly will lead to more aggressive pursuit of polluters in the other provinces and the territories.

In one instance, a major corporation charged with ground water contamination was fined $120,000 and two of its executives were fined $12,000 each. Of interest in this case was the fact that the executives were convicted because they had knowledge of an environmental problem and failed to do something about it. The court ruled that the corporation could not pay the fine on their behalf and ordered them to pay the fine out of their own pockets. In another environmental pollution case, a corporation was fined $300,000 and one of its directors fined $25,000.

Diligence, Loyalty and Obedience

Owner/managers may unintentionally distance themselves from their duties as officers or directors. In doing so, they may inadvertently disregard three essential duties that must be carried out to prevent environmental risks and in the event of a lawsuit for environmental pollution, at least help protect them.

Directors and officers must be able to demonstrate:

• A duty of diligence:
  Directors and officers must act with the same care as a reasonably prudent person under similar circumstances would act. Additionally, they must perform duties in good faith and in the best interests of the corporation.
  
• A duty of loyalty:
  Personal activities that could harm or take advantage of the corporation must be avoided at all costs. Conflicts of interest, the realizing of secret profits or unfair gain through personal transactions are prohibited.
  
• A duty of obedience:
  Directors and officers are required to carry out their duties according to applicable statutes and the company charter. Should a director authorize acts that reach beyond the corporation's responsibilities, or defy the laws of the province or nation, the director may become personally liable.
  

Directors and officers who can demonstrate diligence, loyalty and obedience may be in a better position to protect themselves if they err in their business judgment.

Business Judgement

The application of business judgment is considered when determining liability. Benchmark questions that are frequently asked include:

• Did the individual fail to act when action was required (or did the individual conscientiously decide not to act)?
• Did the individual maintain an independent and disinterested position that ensured personal financial benefit was not obtained?
• Did the individual have sufficient relevant information with which to deliberate and make a decision?
• Did the individual act in the best interest of the corporation?
• Did the loss/negligence result from an honest mistake in judgment?

Insurance Issues

The recent lawsuits in this area have likely fueled the increased inquiries about Directors and Officers Insurance coverage for environmental risks.

Most insurers will underwrite a policy conditional upon whether the insured has demonstrated a desire and ability to reduce the liabilities and risk that their company and corporation are susceptible to. Risk control techniques that should be in place include:

• Risk avoidance:
  Evaluating which product lines or manufacturing processes threaten environmental pollution
  
• Risk reduction:
  Carefully evaluating all mergers, takeovers, or acquisitions in view of the environmental liabilities that could be acquired; and
  
• Risk transfer:
  Ensuring the directors of a company are indemnified.
  Insurers now offer coverages that extend from the very simplest extensions of standard commercial general liability policies to the broadest insurance available, that cover both third party liability and first party clean-up.

Some policies are available only with the prerequisite of environmental assessments, the cost of which can run into thousands of dollars. Other policies provide sudden and accidental coverage only but exclude exposures such as underground storage tanks which must be insured at additional premiums. Some include directors and officers as additional insurers as well as coverage for fines and penalties. The liability insurance in this area is as broad and varied as the environmental risks themselves and depending on the company's track record, can be very costly.

Shareholders' Agreements

A severe environmental problem could push a company into insolvency. If a corporation is closely held, the principal shareholders should ensure that the corporation draws up separate agreements with each of them to ensure that in the event of insolvency, the shareholders' personal assets are protected.

However, agreements between corporate entities and its directors and officers may be of little value should those in charge display a flagrant disregard for their responsibilities as officers of the corporation.

Review the Company's Environmental Practices

The personal liability of directors and officers stemming from environmental areas is a harsh reality. Owner/managers owe it to themselves and their business to establish policies and procedures to protect the company and its officers from environmental risks. As a preventative measure in this highly litigious area:

• Review your company's environmental practices
  
• Anticipate legislation and costs that could affect the business
  
• Allocate resources
  
• Maintain comprehensive records
  
• Review your company's insurance coverage on an annual basis and
  
• Seek professional advice

Ask a Professional

Seek advice from legal counsel on various environmental laws and regulations that may affect you and your company, and the best means of protecting the company and its directors and officers.

Then, you can work with us to ensure that the appropriate procedures are put in place, and remain in place, to gather the information to not only adhere to laws and regulations, but also financial reporting requirements.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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