Cyber Insurance And D&O Liability

Last Updated: September 19 2019

Article by Deepshikha Dutt

Introduction

In the past decade, there have been several reports of cybersecurity attacks and data breaches to large corporations.1 In many cases, those affected by the breach want to hold the directors and officers accountable, as they feel the corporation failed to implement the proper security measures to prevent a breach from happening or did not effectively handle the aftermath of the breach. However, directors and officers generally enjoy limited personal liability subject to a few exceptions.2 Nevertheless, as more specific guidance emerges for directors and officers handling cybersecurity issues, the scope of this liability may widen.3 Thus, directors and officers should not take comfort in the substantial barriers that prevent them from being held liable for issues relating to the organization.4 In fact, despite these substantial barriers, shareholders continue to pursue derivative actions against directors and officers.

This article will discuss the scope of personal liability directors and officers face relating to cybersecurity breaches, and recent actions pursued against directors and officers in Canada and the US. Following the article, key takeaways will be provided.

Scope of liability

Cybersecurity poses a significant threat to directors and officers as cyber threats continue to emerge, and the rules and regulations that guide cybersecurity continue to evolve. Directors and officers may be held liable in the event of a cybersecurity attack if they are found to have breached their duty of care or have failed to comply with any disclosure requirements. Moreover, directors and officers can be personally liable where a company fails to comply with Canada’s Anti-Spam Legislation (CASL).5

Directors and officers have a duty to exercise reasonable care and diligence, both at common law6 and under corporate statutes.7 Failure to oversee the company’s cybersecurity measures adequately, before and after a breach occurs, could be considered a breach of this duty.8 Moreover, failure to comply with federal and provincial disclosure requirements after a breach could lead to liability for secondary market misrepresentation.9

Therefore, having an appropriate response or compliance plan, and effective security measures to protect the company against future cyber threats is essential. This will help support any claim by a director or officer that all requisite care and diligence was met, and all regulations were complied with.10

Lastly, directors and officers can be held personally liable and receive fines where the company has violated CASL. Penalties for non-compliance with CASL carries a maximum fine of CA$1 million for individuals and CA$10 million for organizations.11 Moreover, directors and officers can be vicariously liable for non-compliance of an organization even where the regulator, Canadian Radio-television and Telecommunications Commission (CRTC), does not pursue the organization. In fact, the CRTC has made a public statement that directors and officers cannot hide behind their company’s structure or online entities to avoid liability.

Derivative actions in Canada and the US

Currently, there have not been any attempts at a lawsuit against directors and officers in relation to cybersecurity in Canada.12 However, given the amount of derivatives actions commenced in the US, it is possible that it could give rise to such claims in Canada. The US has seen several derivative action suits against directors and officers relating to cybersecurity over the past few years.13 All but one have been unsuccessful, largely due to technical and procedural reasons. However, in January 2019, a derivative action lawsuit settled for US$29 million, compensating the plaintiffs significantly.14 This is the first time shareholders have been awarded monetary damages for a breach-related derivative lawsuit. This settlement could spark the beginning of successful derivative action lawsuits, and inspire others to pursue civil actions against directors and officers for cybersecurity breaches. Moreover, this settlement can be used as a benchmark for future civil actions to compare to when deciding on the amount to be awarded. Effectively, this settlement may not only effect civil actions in the US, but also allow derivative actions to gain traction in Canada.

Penalties for violation of Canada’s Anti-Spam Legislation

More recently, the CTRC has held directors and officers personally liable for a company’s violation of CASL. On April 23, 2019, the CTRC found that a coupon marketing company, nCrowd, had violated CASL, and found the former CEO of the company to be personally liable.15 As a result, he received a CA$100,000 fine. Further, a different company that was also part of this scheme with nCrowd, had also violated CASL, and CRTC held this company’s CEO vicariously liable for the violation. As a result, he received a fine of CA$10,000. Ultimately, liability under CASL can extend beyond the corporation if the person authorized, acquiesced or participated in the commission of the violation.

Key takeaways

  • Directors and officers should familiarize themselves with all regulatory guidelines to protect the company from a data breach and to avoid being personally liable for the breach;
  • D&O liability insurance does not always offer protection for cyber-related incidents or threats. It is important to confirm whether this is protected and the scope of protection provided. Not having proper protection could expose directors and officers to liability and significant payouts;
  • There have been no derivative action attempts relating to cybersecurity breaches in Canada, but given the current climate in the US, it is possible this will encourage such claims to occur in Canada; and
  • Directors and officers can be held either personally or vicariously liable for a company’s violation of CASL if that individual played some role in the commission of the violation.

Conclusion

Cybersecurity attacks and data breaches are inevitable and can happen to any organization, thus remaining a significant threat to corporate governance. While a cybersecurity attack is a crime, directors and officers may still be held liable for a breach if they failed to oversee the company’s security measures prior to the breach, or failed to take the necessary course of action after the breach occurred. Ultimately, boards of organizations must recognize the current cybersecurity environment that exists, and assemble a reasonable response plan to respond to these threats when and if they occur. Our final article will provide key takeaways and best practices for both insureds and insurers in relation to cybersecurity risks.

A special thank you to Emeleigh Moulton (summer student) for her assistance with this article.

About Dentons

Dentons is the world’s first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world’s largest law firm, Dentons’ global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

Calculating Damages In Representations And Warranties Cases

By

Mergers and acquisitions (“M&A“) can be a double-edged sword. When done right, M&A can allow acquirers to scale their businesses and create value through synergies. When done poorly, M&A can result in drastic overpayments for assets that are not nearly as valuable as believed and for economies of scale that are very difficult to achieve.

One of the main risks in M&A is information asymmetry: simply put, the vendor knows much more about its business than the acquirer. While the acquirer is able to perform due diligence, time pressures to close the deal mean that this process can sometimes be imperfect; issues are sometimes missed.  This is where Representations and Warranties (R&W) insurance can come into play. This brief article provides a brief overview of R&W insurance, and discusses some of the issues we have encountered as forensic accountants and business valuators in quantifying losses under this type of insurance coverage.

What is R&W Insurance?

R&W insurance provides indemnity for “losses” related to overpayment by the acquirer resulting from breaches of representations and warranties as set out in the purchase agreement for the acquisition.

These types of policies are becoming increasingly popular. One global broker recently reported a 30% increase in deals written in 2018 compared with the prior year. The average policy limit was equal to 15% of the total enterprise value of the deal (e.g. a deal for $100M would have a policy limit of $15M); while deductibles were generally set at 1% of enterprise value. The same publication also reported that premiums have been declining over the past two years, as more insurers enter this market. Another publication by a leading insurer in the space mentions that the frequency of claims has been roughly one claim for every five transactions.

Two types of mistakes

Based on our experience quantifying losses under R&W coverage, there are two main types of misrepresentations: one-time misrepresentations and long-term misrepresentations.

One-time misrepresentations

These types of misrepresentations generally relate to the balance sheet. M&A transactions typically will set a target level of “net working capital”, based on an overall understanding of the subject company. If issues with this calculation are discovered following the closing, the economic loss to the purchaser is generally equal to the amount of the misstatement.

Quantifying these types of issues involves first obtaining a detailed understanding of the components of the purchase price and ensuring that the alleged misrepresentations are not already factored into the price. For example, if the claim is that a large amount of inventory had to be written off following closing, one would need to make sure that the inventory balance included in the closing statements did not already consider a provision for obsolete inventory.

Long-term misrepresentations

Long-term misrepresentations will tend to involve the income statement. For instance, in one case we were recently involved in, the seller had represented to the purchaser that it was not subject to a particular type of property tax. This turned out to be incorrect, and as a result the purchaser was liable to pay this additional, unexpected amount every year for the foreseeable future. In that case, the loss to the purchaser is equal to the present value of the ongoing annual tax liabilities.

How does one value these sorts of long-term misrepresentations? One shorthand approach might be to simply apply the acquisition multiplier to the value of the annual misstatement. For instance, if the deal multiplier was 10 times the seller’s trailing EBITDA, and the value of a misrepresentation (such as the unreported property tax issue) is $1M per year, then one might reasonably conclude that the value of the misstatement is $10M.

This approach can be appropriate in some cases, but sometimes it can lead to incorrect results, when the cash flows associated with the misrepresentation in question have different characteristics (term, riskiness or growth forecast) than the acquired business as a whole. Consider the following example:

  • The business being sold has two divisions, Rapid Robotics and Flat Pancakes. After-tax cash flows last year were $10M ($5M for each division), and the business recently sold for $200M, or 20 times after-tax cash flows.
  • It was discovered that due to regulatory changes in the pancake market (which were known to the seller prior to the deal), Flat Pancakes will need to eliminate a particular product line that accounted for $1M in after-tax cash flows. The purchaser advances a claim for $20M, equal to the annual value of the misrepresentation of $1M times the acquisition multiplier of 20 times.
  • The problem with this approach is the 20x multiplier may actually consist of a multiple of 30 times cash flows for the Rapid Robotics division, and only 10 times cash flows for the Flat Pancakes division. The higher multiplier for Rapid Robotics would represent the value attributed by the purchaser to the anticipated growth in that division.
  • This means that the value of the $1M misrepresentation in the slow-growth Flat Pancakes division is only $10M, not $20M.

In order to perform a proper analysis of these longer-term misrepresentations, it is therefore generally very beneficial to obtain a copy of the valuation model used by the acquirer in the transaction in order to understand how the transaction multiplier was arrived at and to reverse engineer the impact of the particular misrepresentation on business value.

Closing

This article has only scratched the surface of the types of issues that, in our experience, can arise from post-acquisition M&A disputes. As M&A insurance becomes, in the words of one insurer, “the new normal”, we will no doubt have the opportunity to revisit this topic in future articles.

About Dentons

Dentons is the world’s first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world’s largest law firm, Dentons’ global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

Pacific Blue Cross forms national alliance with Blue Cross Life

BURNABY, BC, Sept. 16, 2019 /CNW/ – Blue Cross Life Insurance Company of Canada and Pacific Blue Cross will form an alliance, effective January 2, 2020, to bring together local service and insight, with national expertise and scale, to provide best products and services to British Columbians.

This nationally aligned Blue Cross alliance brings several new benefits that will help Pacific Blue Cross grow with advisors, plan sponsors and members. Enhancing its capabilities in underwriting, pricing, reserving, actuarial and medical underwriting allows Pacific Blue Cross to invest in more work and wellness solutions to improve health and wellbeing for British Columbians. Pacific Blue Cross will remain the primary contact for all sales, service and claims.

Pacific Blue Cross will continue to offer the products sold under its policies as a distributor for Blue Cross Life. Types of policies that are subject to the transaction are Group (Basic & Optional Life; Dependent Life; Accidental Death & Dismemberment; Optional Accidental Death & Dismemberment; Critical Illness; Long Term Disability; Short Term Disability) and Individual (Life; Accidental Death & Dismemberment; Critical Illness). Coverage for existing policyholders will continue within the current plan design.

“Pacific Blue Cross is excited to bring the benefits of a national carrier to our local expertise,” said John Crawford, President & CEO, Pacific Blue Cross. “This alliance with Blue Cross Life is a foundational building block towards improving health and wellbeing for British Columbians. We have created the ability to bring on new business with our trusted advisors while improving our value proposition to our clients and members.”

Canada’s Blue Cross plans have a long history of working together and leveraging individual strengths for mutual benefits. This milestone ensures Pacific Blue Cross is better-suited to meet the evolving benefit needs of its members, today and in the future.

“This alliance is a key milestone in our strategy to build a truly national scope; making our organization stronger and improving our ability to collaborate with other Blues Cross plans across Canada,” said Marie-Josée Martin, President & CEO, Blue Cross Life. “I look forward to working closely with Pacific Blue Cross as the newest shareholder and distributor of Blue Cross Life.”

As this alliance is subject to regulatory approval, submissions have been made to both OSFI and FICOM. The organizations are now working to advance implementation and integration activities.

About Pacific Blue Cross

Pacific Blue Cross is a Health Benefits Society and British Columbia’s number one health benefits provider. Based in Burnaby, BC, the not-for-profit organization provides health, dental, life, disability and travel coverage for 1 in 3 British Columbians through group benefits and individual plans. As part of its mission to improve health and wellbeing in BC, Pacific Blue Cross proactively supports charitable organizations across the province working to improve health outcomes.

About Blue Cross Life Insurance Company of Canada

Blue Cross Life is a federally-licensed company with operations located in several provinces.

The Company is owned by four Shareholders, operating as Alberta Blue Cross, Saskatchewan Blue Cross, Manitoba Blue Cross, and Medavie Blue Cross. It specializes in life insurance and disability income protection products to supplement the portfolio of health and dental products distributed by its Shareholder Blue Cross Plans.

SOURCE Pacific Blue Cross

Canadian startup RVezy obtains BC Insurance Policy for RV’s

VANCOUVER, Sept. 16th, 2019 /CNW/ – Canadian owned and operated RVezy.com, the country’s first peer to peer RV rental marketplace, continues to lead the RV sharing economy and now offers full insurance coverage to Motorhome and Travel Trailer owners in British Columbia.

Launched in 2016 as Canada’s first RV rental marketplace, RVezy has revolutionized RV travel across the country – whether it’s having an RV delivered directly to your destination or setting out on a family road-trip, RVezy brings vacationers and RV owners together from around the globe. With over 50,000 RV rentals, RVezy has been leading the RV sharing economy.

RVezy’s Co-Founder Michael McNaught explained, “British Columbia is one of Canada’s most sought after destinations. The beauty of the terrain and accessible countryside make it a world-class destination for millions of travelers.”

Thousands of BC residents will now have the opportunity to share their motorhome with aspiring vacationers with the backing of full insurance coverage throughout the USA and Canada.

“For the past four summers, thousands of Canadians have taken part in the RV sharing economy earning millions of dollars of extra income. That additional income helps RV owners by offsetting the costs of owning their RV; it is a true win-win added McNaught.”

McNaught is expecting these changes will bring an additional $10M of tourist travel to the province in 2020, benefitting local campgrounds, restaurants, and popular attractions.

“We are very proud of what we have built here in Canada. We receive thousands of inquiries a year about travel in British Columbia and this is an exciting moment that we can now serve those requests.” McNaught added.

RVezy.com is a fully bi-lingual, Canadian owned startup headquartered in Ottawa.

www.rvezy.com

Surex is the Fastest-Growing Insurance Brokerage Two Years in a Row on the Growth 500

MAGRATH, Alberta — Surex, Canada’s online Insurance Marketplace™, is excited to announce that its revenue growth of over 1000% in 5 years, has landed the company in the top 100 of the Growth 500. Surex was ranked no. 93 by Canadian Business and Maclean’s on the annual Growth 500, the definitive ranking of Canada’s Fastest-Growing Companies. Produced by Canada’s premier business and current affairs media brands, the Growth 500 ranks Canadian businesses on five-year revenue growth. Growth 500 winners are profiled in a special print issue of Canadian Business published with Maclean’s magazine and online at CanadianBusiness.com and Growth500.ca.

Surex made the 2019 Growth 500 list with five-year revenue growth of 1071%.

“The companies on the 2019 Growth 500 are truly remarkable. Demonstrating foresight, innovation and smart management, their stories serve as a primer for how to build a successful entrepreneurial business today,” says Beth Fraser, Growth 500 program manager. “As we celebrate over 30 years of the Canada’s Fastest-Growing Companies program, it’s encouraging to see that entrepreneurship is healthier than ever in this country.”

“We are proud to have been selected to the Growth 500 list for the second time in two years,” said Lance Miller, CEO and Co-Founder of Surex. “We have worked aggressively to build Surex as Canada’s fastest growing online Insurance Marketplace, and to make purchasing insurance as easy and frictionless as possible for Canadians. We are proud to be small-town Canadian entrepreneurs and we will continue to expand the team and the technology that has brought us here.”

“Our vision is to change the way Canadians purchase insurance, and we are not satisfied with incremental change,” said Matt Alson, COO and Co-Founder of Surex. “We are humbled to see the results of our efforts be recognized by one of Canada’s most prestigious entrepreneur programs. Our growth is thanks to our team and our customers who trust us with their business.”

Surex provides auto, home, and business insurance to customers in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Saskatchewan, and in the Northwest Territories and the Yukon.

For more information about Surex, please visit www.surex.com.

About the Growth 500
For over 30 years, the Growth 500 has been Canada’s most respectable and influential ranking of entrepreneurial achievement. Ranking Canada’s Fastest-Growing Companies by five-year revenue growth, the Growth 500 profiles the country’s most successful growing businesses. The Growth 500 is produced by Canadian Business. Winners are profiled in a special Growth 500 print issue of Canadian Business (packaged with the October issue of Maclean’s magazine) and online at Growth500.ca and CanadianBusiness.com. For more information on the ranking, visit Growth500.ca.

About Canadian Business
Founded in 1928, Canadian Business is the longest-serving and most-trusted business publication in the country. It is the country’s premier media brand for executives and senior business leaders. It fuels the success of Canada’s business elite with a focus on the things that matter most: leadership, innovation, business strategy and management tactics. Learn more at CanadianBusiness.com.

Taxi drivers fear proposed insurance increase will put them off the road

By Robert Jones · CBC News

On an ongoing drama of rising car insurance rates unfolding at New Brunswick’s Insurance Board, the consortium of companies that underwrite higher-risk drivers is asking for a premium increase in excess of $1,000 on provincial taxis beginning Jan. 1.

The insurance group, known collectively as the Facility Association, only began implementing its last rate hike on taxis —  an 8.4 per cent increase — earlier this month.

The current proposal is to lift those premiums another 20.2 per cent, which would take the cost of insuring the average cab in New Brunswick to $5,906 per year. That would be $1,069 higher than current levels and $2,000 more than they were as recently as 2017.

George Youssef, the part owner of Checker Cab in Fredericton said the rapid escalation of insurance costs, on top of other operating costs, is a serious problem.

“That’s really a killer,” said Youssef.

“[It] stops people from being able to afford to purchase a vehicle on their own and pay the insurance. I mean you’re talking almost $15,000 to $20,000, depending on the vehicle, just to get a car on the road for one year.”

In Saint John, Shelly Orr with Vet’s Taxi agreed.

“In the taxi industry, they’re going to put a lot of people out of work.  A lot of these guys own their own cars. They can’t afford another insurance increase.”

Just over 400 taxis are insured with the Facility Association in New Brunswick — virtually all the commercial cabs driven in the province.

The association is a collective of every automobile insurer licensed in New Brunswick and by law must cover car owners who can’t get insurance from regular companies.

Last year the group applied for a 21 per cent increase in taxi rates but after a hearing at the Insurance Board it was allowed only a portion of that.

The board questioned whether insurance companies were inflating costs for services they were providing the association and disallowed most of the increase being asked for.

“The [board] finds the applicant’s filing not to be just and reasonable in its entirety,” Insurance Board chair Marie-Claude Doucet wrote in the final decision.

“The panel recognizes that Facility Association is required to pay fees to its servicing carriers. That said, the panel was provided with no evidence indicating whether these fees accurately reflect the actual costs incurred by servicing carriers.”

Insurance industry not deterred

The ruling allowed rates to be raised after Sept. 1 of this year by the reduced amount of 8.4 per cent, but undeterred, the association has returned and asked for another 20.2 percent on top of that beginning in January.

Youssef hopes the Insurance Board is equally tough this time.

“Well, I hope the board gives us whatever it can because I mean the insurance for the vehicle is almost the exact same as the cost of the vehicle,” he said.

A hearing on the application is scheduled to begin Oct. 1.

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