Insolvency Surge: Equipping Directors and Officers with Strategic Insurance
Across North America, company insolvency is on the rise. This creates a significant impact on not only the economy, local communities and consumers, but also each organization’s employees. Directors and officers may be uniquely impacted, as they are held to a higher standard of accountability given their roles and responsibilities. If bankruptcy hits, directors and officers should be able to rely on comprehensive D&O protection.
What are Canadian business experiencing?
According to the Office of the Superintendent of Bankruptcy, business bankruptcies have been increasing – reaching a 15-year high in the third quarter of 2024, the highest since the financial crisis of 2008.
Business insolvencies for the 12 month period ending January 31, 2025, increased by 11.7% compared to the previous 12 months, with the construction, transportation and warehousing industries seeing the biggest increases1.
What about in the United States?
According to the U.S. Department of Labor, last year there were 481,350 bankruptcy filings for non-business cases and 22,762 for business cases, representing a 16.2% increase from 20232.
What is driving this significant increase?
Economic uncertainty: The lingering effects of the COVID-19 pandemic and other recent global economic events have led to job losses, business closures and financial instability for many Canadian business leaders.
Inflation: The cost of living and, as a result, cost of operating a business has risen significantly, with higher input costs for essential materials, equipment, labour and energy.
Rising interest rates: The Bank of Canada has raised interest rates to combat this inflation. Higher interest rates increase the cost of borrowing, making it harder for individuals and businesses to service their debt. As a result, access to essential capital and financial support from the private sector is proving to be difficult, and as such, the return on investment becomes more uncertain.
- End of pandemic support: Many businesses that relied on government support during the pandemic are now facing financial difficulties, as these programs have ended. This has also led to an increase in business bankruptcies.
What liability could directors and officers face in bankruptcy or CCAA?
When a company faces bankruptcy or enters a Companies' Creditors Arrangement Act (CCAA) process, directors and officers (D&O) could be held personally liable for their actions. Common D&O lawsuits include:
Creditor lawsuits: Creditors may sue directors and officers alleging mismanagement or breach of fiduciary duty that led to the company's insolvency.
Shareholder lawsuits: Shareholders may sue directors for failing to protect their interests or for making poor decisions that contributed to the company's financial distress.
- Regulatory actions: Government agencies may pursue actions against directors for violations of securities laws or other regulations.
A robust D&O insurance policy may provide coverage for claims made against directors and officers during the insolvency proceedings, with considerations for specific exclusions and limitations within the policy. Underwriters at CNA Canada note that a bankruptcy plan or CCAA proposal usually includes provisions to release certain claims against directors, but typically doesn’t include fraudulent actions or intentional misconduct. For this reason, maintaining thorough records of decisions and actions as a director is important to help demonstrate good faith and diligence in the event of litigation.
While bankruptcy or CCAA plans often include provisions to settle or release claims against directors as part of the restructuring process, even when a company files for bankruptcy, lawsuits against its directors and officers can still proceed. That’s why carrier expertise and a comprehensive and well-designed D&O insurance policy can be crucial to help protect directors and officers from personal liability during insolvency proceedings.
1Office of the Superintendent of Bankruptcy, 2025
2US Department of Labor, 2024
In Canada, products and/or services described are provided by Continental Casualty Company, a CNA property/casualty insurance company. The information is intended to present a general overview for illustrative purposes only. Read CNA’s General Disclaimer.
