When the insurer said no, the company's own promise was tested

The situation

The letter arrived on a Tuesday. A former client of the company was suing, and one of the three names on the claim was Cristian, the outside director Joao and Ioana had brought on eighteen months earlier. Their first call was not to us. It was to the insurance broker who had sold them the directors and officers policy, the one they had bought specifically so a moment like this would not fall on the company's own thin balance sheet.

The broker's answer was not the one they wanted. The insurer was declining to defend Cristian, pointing to an exclusion in the policy for claims arising out of contract performance rather than a director's decision-making. That distinction mattered to the insurer and mattered very little to Cristian, who was now personally named in a lawsuit over a deal he had voted to approve as a director, with no lawyer paid for and no clear sense of what the company could or would do for him.

Joao still delivered mail on a route in the north end of the city most mornings before switching to the company's operations by afternoon. Ioana worked as an early childhood educator three days a week and ran the company's client relationships the other two. The business, a small logistics-scheduling platform, was doing roughly seven hundred thousand dollars a year in revenue, enough to be real, not enough to absorb an open-ended legal bill. They had brought Cristian on for exactly this kind of situation, someone with governance experience who could steady the board, and now the board's own promise to protect him was the only thing standing between him and a lawsuit he could not personally afford to fight.

The company's by-laws contained a standard indemnification provision, the kind every incorporator's template includes and almost nobody reads closely until it is tested. It said the company would indemnify a director for costs reasonably incurred in a proceeding relating to his role, provided he had acted honestly and in good faith with a view to the company's best interests. Nobody in the company had ever had to decide what that promise was actually worth.

The legal problem

Under Ontario corporate law, a company can indemnify its directors for legal costs arising from their work for the company, and that promise is very often mandatory rather than discretionary — but it normally lives in the company's by-laws or a separate indemnity agreement rather than its articles of incorporation, and it is permitted only within the limits the statute sets, which turn on the director having acted honestly and in good faith with a view to the company's best interests. That commitment is real, but it is not automatic insurance. It depends on the company actually having the cash to advance the costs, and on the underlying conduct meeting the good faith standard the clause describes. An insurer's denial does not resolve either question. It just removes the easier source of funding and leaves the company's own promise to be tested directly.

The insurer's exclusion turned on how the underlying claim was framed. The former client alleged the company had made representations about delivery timelines during contract negotiations that turned out to be wrong, and named Cristian personally because he had chaired the board meeting where the pricing and timeline terms were approved. The insurer characterized this as a dispute about contract performance, squarely within its exclusion, rather than a dispute about a director's oversight duties, which the policy would have covered.

That framing put real pressure on the company. Advancing Cristian's defence costs without insurance meant committing tens of thousands of dollars from a business that was still finding its footing, with no guarantee the underlying claim would fail. Joao and Ioana had to decide whether the company's indemnification promise was a formality they could quietly narrow now that money was actually on the line, or a commitment they intended to keep even when it was expensive.

There was a second layer underneath the money question. If the company advanced costs and then the claim revealed that Cristian, or the board generally, had acted carelessly or outside good faith, the company could be exposed to arguments that the indemnification should never have been paid at all, and Cristian could face a claim to repay it. Nobody wanted to fund a defence only to unwind it later. The decision needed a clear-eyed read of what had actually happened in that boardroom, not just a reflexive yes.

What we did

1. Reviewed the indemnification clause against the actual claim. We read the by-laws alongside the statement of claim line by line to confirm the allegations against Cristian arose from his conduct as a director rather than any personal dealing, which is what triggered the company's obligation to advance his costs rather than leave the question open to debate. That confirmation gave the board a defensible basis to act instead of guessing at what the clause required.
2. Pushed back on the insurer's exclusion in writing. We wrote to the insurer's claims department arguing the dispute was, at its core, about whether the board had exercised reasonable oversight when it approved the timeline terms, which is squarely the kind of governance question the policy was meant to cover, not a contract-performance dispute the exclusion was written for. Putting that argument on record early meant the company was not simply accepting the denial as final while the underlying claim moved forward.
3. Advised the board on advancing costs while the insurance question stayed open. Rather than wait for the insurer to change its position, we recommended the company advance Cristian's defence costs under its own indemnification clause immediately, on terms that preserved the company's right to recover from the insurer later if the denial did not hold up. That protected Cristian from having to fund his own lawyer while the coverage dispute was still unresolved.
4. Built the factual record for the underlying claim. We gathered every document connected to the disputed timeline representation, expecting the case to turn on formal board minutes and correspondence between the company and the client, because a claim about what the board knew and disclosed lives or dies on what the paper trail actually shows rather than on anyone's memory of the meeting.
5. Found the strongest evidence in an ordinary place. The board minutes were thin, as they often are for a young company. What settled the question was a shared scheduling calendar the operations team used day to day, which showed the delivery estimate the client relied on had been flagged as tentative and revised twice before the client signed, with time-stamped notes attached to each change.
6. Used that record to answer the insurer and the claim at the same time. The calendar entries showed the board and management had been transparent about the timeline's uncertainty rather than misrepresenting it, which undercut the client's claim on the merits and reinforced our argument that Cristian's conduct fell inside the good faith standard the indemnification clause protected. One document was doing two jobs at once, which is not something we could count on but was worth building the strategy around once it turned up.
7. Negotiated a resolution of the underlying claim. With the timeline evidence in hand, we brought the former client's counsel to the table and argued the claim did not hold up, since the time-stamped record left little room to argue the company had misrepresented anything, which led to a full dismissal of the case against Cristian and the company rather than a settlement payment.
8. Went back to the insurer for reimbursement. Once the claim was resolved in the company's favour, we renewed the argument that the exclusion had been wrongly applied and pressed for reimbursement of the costs the company had advanced, on the basis that a dismissed claim over board oversight was better evidence of the dispute's true character than the insurer's original reading of the exclusion.

The outcome

The claim against Cristian and the company was dismissed. The scheduling calendar evidence made the client's case difficult to sustain once it was on the table, and opposing counsel dropped the matter rather than push it to a hearing weeks before it was scheduled to be heard. Cristian never had to personally fund his own defence, and the company's indemnification promise held up exactly as written rather than becoming a source of further dispute between him and the founders.

The insurer, facing a resolved claim and a company willing to keep pressing the coverage question in writing, agreed to reimburse a meaningful share of the defence costs the company had advanced, though not all of it. A portion of the early legal spend, incurred before the calendar evidence was found and while the dispute over the exclusion was still unsettled, remained outside what the insurer was willing to cover. The company treated that shortfall as a cost of the lesson rather than something worth litigating separately against the insurer, given the amount remaining was modest, in the low thousands of dollars, against the value of the win already secured and the cost of a second fight to recover it.

The company came out of the matter with something more durable than the money. It came out with a tested indemnification process, something almost no small company has until it needs one. The board now keeps a standing note of who approved what and when, drawn from the same everyday scheduling and communication tools the team already uses day to day rather than relying on formal minutes alone, on the theory that the record that actually gets kept consistently is worth more than the record that only exists in principle. Cristian stayed on the board through the following year with a clearer sense of what the company's promise to protect him was actually worth, and Joao and Ioana kept a director whose governance experience the growing company still needed, rather than losing him to the kind of dispute that quietly ends outside directorships everywhere.

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