D&O Indemnification and Insurance for Charities in Ontario

Ontario Regulation 4/01 (the "Regulation") under the Charities Accounting Act (Ontario) authorizes a corporation to protect directors and officers through indemnification or insurance, or both.

1. Indemnification

(a) General Permission

Under the Regulation, each director and officer of a charitable corporation may, as a general rule, be indemnified by the corporation for personal liability arising from his or her acts or omissions in performing his or her duties as a director or officer. Indemnification may also extend to the estate of a deceased director or officer.

(b) Limiting Conditions

However, indemnification is subject to the following limitations and conditions:

● No indemnity can be made for a liability that relates to his failure to act honestly and in good faith in performing his duties (the Fiduciary Duty Requirement).

● The terms of the indemnity must not impair a person's right to bring an action against the director or officer. While indemnification may enable a director or officer to afford a proper defence, this cannot be said to impair a plaintiff's right to bring the action.

● No indemnity can be paid if doing so would render the corporation insolvent (the Solvency Requirement).

● The indemnity may only be paid from the property to which the personal liability relates and not from any other charitable property (the Source Requirement).

(c) Mandatory Factors for Board Consideration

Before giving an indemnity, the board of directors of the charity must consider the following factors:

● the degree of risk to which the director or officer is or may be exposed;

● whether, in practice, the risk cannot be eliminated or significantly reduced by means other than the indemnity or insurance; and

● whether it advances the administration and management of the charitable property to give the indemnity.

2. D&O Insurance Coverage

(a) General Permission

Directors' and officers' insurance ("D&O Insurance") may also be purchased by a charitable corporation to indemnify a director or officer from personal liability arising from her acts or omissions in performing her duties as a director or officer. The proceeds of the insurance may be paid to the estate of a deceased director or officer.

(b) Limiting Conditions

However, the purchase of D&O Insurance is subject to the following limitations and conditions:

● The terms of the insurance policy must not impair a person's right to bring an action against the director or officer.

● The purchase of insurance must not, at the time of the purchase, unduly impair the carrying out of the charitable purpose for which the corporation holds the charitable property.

● The purchase of insurance must meet the Solvency Requirement and the Source Requirement.

(c) Mandatory Factors for Board Consideration

Before purchasing D&O Insurance, the board of directors must likewise consider:

● the degree of risk to which the director or officer is or may be exposed;

● whether, in practice, the risk cannot be eliminated or significantly reduced by means other than the D&O Insurance or indemnification;

● whether the amount or cost of insurance is reasonable in relation to the risk; and

● whether it advances the administration and management of the charitable property to purchase the insurance.

The better view is that the Regulation applies to a federal corporation carrying on its charitable activities in Ontario. While the requirements for indemnification and D&O insurance differ under the Canada Not-for-profit Corporations Act ("CNCA") from those set forth in the Regulation, it cannot be said that the paramountcy doctrine makes the requirements of the Regulation inoperative in the case of a federally incorporated charity. Compliance with the Regulation does not mean the corporation would breach the requirements of the CNCA. Nor is the Regulation operationally inconsistent with the CNCA. A CNCA corporation carrying on charitable activities in Ontario must comply with whichever is the more stringent regime. Compliance with the more stringent regime entails compliance with both regimes.