How D&O risks are changing in the mining sector

If you place directors and officers’ liability insurance for mining companies, the underwriter will want to know how the client manages risks such as pollution and shareholder litigation, a commercial broker advises.

In lawsuits against directors and officers of mining companies in Canada, plaintiffs are often shareholders who allege the firms disclosed something too late, that too little information was disclosed or that the statements were misleading, said Denise Hall, senior vice president of the financial services group at Aon Canada.

“In the past, shareholder litigation was triggered by financial restatements. So there would be an issue with the financial results, the firm would re-state financials, there would be a drop in stock price and there would be a lawsuit,” Hall said Tuesday during a panel discussion at the Global Mining Risk and Insurance Conference, hosted by the Mining Insurance and Risk Association. “Now there is the notion of event-driven litigation. An event can cause a stock drop and there are many examples out there – cyber, the MeToo, wildfire, aviation issues and then some events, in a worst case, can lead to multiple litigation and corporate failure.”

As corporate insurers, D&O underwriters care about the mining sector because it makes up such a large portion of companies traded on the Toronto Stock Exchange, said Hall.

But there is a history of a high frequency of D&O claims affecting the mining sector, she suggested.

“There is pressure from insurers’ head offices to look at environmental issues as they underwrite. D&O underwriters are looking for practical information about how your company manages this risk.”

She pointed to the Northstar Aerospace case as an example of how directors and officers can be on the hook if a company is ordered by a regulator to clean up a polluted site.

In 2012, the Ontario Ministry of the Environment issued a clean-up order against 13 former directors of Northstar Aerospace Canada. The Cambridge site was contaminated by trichloroethylene. The environment ministry could not go after Northstar, because Northstar had court protection from creditors under the Companies Creditors Arrangement Act. But the environment ministry was able to go after individual directors and officers. Northstar’s directors initially opposed the cleanup order but later settled and reportedly agreed to pay on the order of $10 million.

Hall said Tuesday that in reviewing a potential mining client, D&O underwriters often as questions like the age of the facility, how long it has been operating and what is nearby.

“Recognize that your D&O underwriters are from a financial background. They are not engineers. They are going to try their best to understand your exposure,” said Hall.

The context was environmental liabilities arising from tailings facilities, class-action lawsuits from investors arising from falling share prices and protests at mining sites that are operating or under construction.

“I don’t have to tell you that the D&O market is changing. We are seeing increased premiums, upward pressure on retention levels and reduced capacity,” said Hall.

The conference was held at the Royal York Hotel in Toronto.