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Canada’s modern slavery act – what does it mean for D&O insurance?

The Fighting Against Forced Labour and Child Labour in Supply Chains Act, also known as Canada’s modern slavery act (the “Act”), came into effect on January 1, 2024, to encourage best and responsible business practices.
Closeup male hands making notes in corporation financial report. Businessman ceo executive manager and business team at table. Professional coworkers doing paperwork in office. Over shoulder view.

The Fighting Against Forced Labour and Child Labour in Supply Chains Act, also known as Canada’s modern slavery act (the “Act”), came into effect on January 1, 2024, to encourage best and responsible business practices.

The legislation creates new obligations for federal government entities and commercial organizations that meet the threshold to report on the measures taken to prevent and reduce the risk that forced labour or child labour is used by them or in their supply chains.

Who does the Act apply to?

  • The Act broadly applies to commercial entities that:
  • Are listed on a stock exchange in Canada
  • Do business or have assets in Canada and meet two of the following conditions in one of their two most recent financial years:
    • At least CA$20 million in assets
    • At least CA$40 million in revenue
    • Employ at least 250 employees.

What are the reporting obligations?

Entities subject to the Act are required to file annual reports with the federal government about the preventative measures taken to prevent and reduce the risk of forced labour or child labour in their operations and supply chains. The first report is due by May 31, 2024, and should cover calendar year 2023.

The report must include information about the entity’s (i) structure, activities, and supply chain, and, (ii) policies and due diligence processes in relation to forced and child labour. In addition, reports must be signed and approved by the board of directors (or other governing body) and available to the public on the entity’s website. Federally incorporated entities must provide these reports to shareholders with their annual financial statements.

What are the consequences of non-compliance?

Entities that fail to comply with the Act or any individual who provides false or misleading information may be found guilty of an offence punishable by summary conviction and liable to a fine of up to CA$250,000. The Act establishes personal liability for any director, officer, or agent of an entity guilty of an offence under the Act.

Public disclosure obligations of entities may also increase the risk of stakeholder litigation. Reports that contain false, misleading, or incomplete disclosure could result in costly litigation.

Are directors or officers of an entity insured?

Coverage may be available to directors and officers under D&O liability insurance policies. Tailored policies may provide several benefits to an entity, such as paying for the cost of defending against allegations involving directors or officers for non-compliance under the Act. Policies may also indemnify organizations for the cost of settling related securities or other litigation or paying court judgments. It is important to note that there may be limitations on available coverage.

Directors and officers subject to the Act are encouraged to carefully review their D&O insurance. Key issues include:

  • The definition of “claim” — the key trigger for coverage under D&O insurance — may not capture early-stage investigation costs incurred by directors and officers.
  • D&O insurance in Canada generally does not cover fines and penalties. As a result, the policy response may be limited to the cost of defending allegations.
  • Coverage is often broader for individuals than for the entities they serve. If claims are concurrently brought against reporting entities and their directors and officers, policy language may require extensive negotiation with insurers to determine what proportion of the entity’s defence costs will be paid, if any.

Directors and officers should understand their responsibilities under the Act and obtain appropriate legal advice.

Risk managers and boards need to understand their organization’s insurance programs, including potential coverage gaps and additional coverage available in the market. Marsh has a dedicated team of specialists in D&O insurance to help you understand, evaluate, and design effective risk management programs.

For more information, please contact your local Marsh representative.