HALIFAX, Nova Scotia—Companies with shares traded only on Canadian stock exchanges face a rising number of directors and officers liability claims due to amended securities laws and investor losses, insurance experts say.

Historically, Canadian companies were vulnerable to securities claims if they were listed on U.S. stock exchanges or had U.S. operations, said Jordan Solway, regional vp, claims and legal for Arch Insurance Canada in Toronto.

This changed when Ontario amended its securities law in 2005 to create civil liability for inaccurate or incomplete disclosures in the secondary market. Alberta and Manitoba followed with similar laws while British Columbia, Quebec and Saskatchewan are considering such legislation (BI, July 30).

"The disclosure of the companies is going to be under far more scrutiny than ever before," Mr. Solway told attendees at the 32nd RIMS Canada Conference, which was held Sept. 17-19 by the Canadian arm of the Risk & Insurance Management Society Inc.

Claims under Ontario's securities law, known as Bill 198, so far have been limited because the stock market has been on an upswing, but that could change as investors begin to experience losses in the market, he said.

Until recently, only one claim related to secondary market liability was filed in Canada, against Mississauga, Ontario-based entertainment technology company and theater owner IMAX Corp. Lawsuits have now been filed against three other companies, two of which are Canadian companies not listed on U.S. stock exchanges that have market capitalization below $100 million Canadian ($99.1 million) (see story, page 35).

"You're going to see an upswing in both frequency and severity" in claims against companies listed only in Canada that have market capitalization of less than $100 million Canadian, Mr. Solway said.

Canadian companies with greater market capitalization are often listed on U.S. stock exchanges and already resemble U.S. companies in exposure to securities claims, he said.

Several major Canadian companies trading on U.S. stock exchanges have settled securities claims filed against them. Toronto-based communications equipment provider Nortel Networks Corp. last year agreed to pay more than $800 million, $228.5 million of which was paid by D&O liability insurers, to settle securities claims in the United States and Canada.

"Those organizations, I think, by and large, have already experienced the frequency and severity that defines the U.S. market," Mr. Solway said.

In addition to Bill 198-related claims, a ruling from the Supreme Court of Canada may affect the frequency and severity of D&O claims in Canada, according to Garth Pepper, a principal and national leader of the management risk practice for Integro (Canada) Ltd. in Toronto.

The Supreme Court is considering an appeal of an Ontario Court of Appeal ruling in Douglas Kerr vs. Danier Leather Inc. that overturned a lower court decision. The lower court significantly expanded financial disclosure requirements for Canadian companies and failed to give deference to the business judgment of directors and officers, leaving them vulnerable to lawsuits (BI, Jan. 2, 2006).

The Supreme Court's opinion could "severely support or test" the business judgment issue, Mr. Pepper said.

Despite the risks, Canadian D&O rates have declined amid an abundance of capacity in the market, said Darin Scanzano, senior vp, specialty casualty division for Liberty International Underwriters in Toronto.

"There's no doubt about it," Mr. Scanzano said. "There's an oversupply of capacity right now."

Policyholders with multiple layers, though, need to pay careful attention to their D&O renewals as "consistency of coverage" is becoming an industry issue, Mr. Pepper said.

While excess insurers previously may have simply followed a primary D&O insurer's form, excess policies now often have major differences in wording. That could permit excess insurers to exclude coverage, such as different requirements for reporting claims and different presumptive indemnification provisions, Mr. Pepper said.

"There's a real need to really understand how these excess layers apply in the program," he said. "They're not all just straight follow-form wordings."

The expected increase in frequency and severity of claims and problems inherent in traditional D&O policies have led to development of new or enhanced D&O policies such as Side A difference-in-conditions coverage that could address some of the deficiencies, the insurers and the broker said.

In 10 years, the market may even see separate policies for directors and for officers because independent directors are probably the "least in the know," yet often are accused of participating in fraud, Mr. Solway said. Director-only coverage would be better because directors are viewed by underwriters as being a "better risk" than officers, he said.