D&O Coverage When a Non-Profit Winds Up

A claims file arrived at the insurer's desk following a demand for defence coverage under a directors and officers liability policy. The insured was a former director of a now-dissolved arts cooperative that had operated in Calgary for more than 15 years before voluntarily winding up its affairs. The policy remained in force through an extended reporting period that the organization had purchased as part of its dissolution planning, and the former director was now facing allegations that threatened to convert her years of volunteer board service into significant personal liability.

The claimant was a donor who had contributed a substantial sum to what the cooperative had promoted as a capital campaign for a new performance space. His position was that he had been induced to make those contributions through misrepresentations about how the funds would be deployed, and that the director had breached her fiduciary duties by authorizing payments to a vendor that turned out to be a company controlled by her spouse. The donor sought recovery of his contributions on the theory that the fiduciary breach and the alleged misrepresentation voided whatever charitable intent might otherwise have applied.

The former director maintained that she had done nothing wrong. According to her account, all payments to the vendor had been properly approved by the board through ordinary governance processes, and the relationship between the vendor and her spouse had been fully disclosed at the time the contracts were entered into. She pointed to board minutes that she said would confirm disclosure and approval, and she insisted that the capital campaign had simply failed to reach its fundraising targets, leading to the cooperative's decision to wind up rather than proceed with a project it could no longer afford.

The insurer now faced a series of interrelated coverage questions. The policy was claims-made, and the timing of when the claim was first made relative to the policy period and the extended reporting period required careful analysis. The intentional conduct exclusion in the policy raised the question of whether the alleged authorization of payments to a related-party vendor, if proven, would fall within conduct that the exclusion was designed to remove from coverage. The distinction between directors and officers liability coverage and errors and omissions coverage also required examination, since the cooperative had held both forms of coverage at various points and the nature of the alleged wrongdoing determined which policy, if any, would respond. The organization's T3010 returns filed with the Canada Revenue Agency over the years preceding dissolution offered a documentary trail that might illuminate what disclosures had actually been made, what governance processes had been followed, and whether the conduct alleged fell within or outside the coverage the former director believed she had.