Do you really need to worry about managing risk for your business?

Do you really need to worry about managing risk for your business?

The recent pandemic induced recession has been very stressful and led to many businesses either closing their doors or, at the very least, losing a significant amount of money. This, in turn, has resulted in many businesses refocusing on managing risk, rather than on making long term business decisions that can be disrupted by rapidly changing circumstances, such as snap boarder closures.

This change in strategy is important uncertain times. Reviewing risks, which include both internal and external risks is key. An example of external risks are those that are not under the business’ control, such as fluctuation in exchange rates, financial failure of customers and natural disasters. Internal risks include dishonesty by employees, ineffective managers or non-compliance with work, health and safety or employment laws.

The ability to make long term plans depends on mitigating the effects of external risks and managing internal risks, which some businesses do well and others not so well. For example, businesses that actively manage their risks during the recent recession had options which enabled them to pivot from making dresses or suits, to face masks. Those that didn’t manage their risk well, are still struggling or have closed their doors.

What are the goals of risk management?

Risk management helps you make better business decisions. It involves reducing the things that could have a negative effect on your business. The Australian Government provides free guides and templates to help you to put risk management plans into, from Emergency Management Plans, to dealing with consumer complaints under the Australian Consumer Law and managing Work, Health & Safety. These are free and can be found at: https://business.gov.au/risk-management/risk-assessment-and-planning/business-risks

Whilst external risks cannot be easily predicted, such as the effects of climate change, interruption in your global supply chain or trade restrictions, they can be mitigated if you manage them.

Risk management empowers you by assisting to develop a range of strategies to deal with risks and turn threats into opportunities. This allows you to make informed business decisions, especially during times of crisis such as the COVID-19 pandemic.

There are generally three ways to approach risk management. These are to eliminate, mitigate (which includes buying insurance) or accept the risk. When you eliminate a risk, you simply remove the cause, so that it never becomes a problem for your business. You need to eliminate risks that threaten the survival of the business. However not all risks can be eliminated. Not accepting the lease clauses from your landlord or not dealing with clients is not a real option. Next, you may mitigate the risk. This is where you decide to accept and manage the risk. The main aim is to reduce the possibility of it occurring, as well as the impact on your business. For example, you can install a burglar alarm to prevent a break-in or buy fire insurance to mitigate the financial impact from a fire, if it occurred.

If you accept the risk (retain the risk), you need to create contingency plans that allow you to deal with the consequences of the risks as they arise. These retained risks have a smaller impact on the business and can more easily be managed out of cash flow. For example, you may decide to retain the risk of cyber hacking and upgrade your firewalls, not buy insurance. Cash reserves should be set aside, to pay the costs of the retained risks, if and when they occur.

All this can be easier said than done, but managing risks will help you achieve your business goals, which is why risk management is so important to the success of SME’s.

We recommend you speak to your insurance adviser who can help you to identify your business risks and create a workable plan to manage them. For tips on managing risk for your business, talk to an insurance specialist today and find your local adviser.

General Advice Warning

The information provided is to be regarded as general advice. Whilst we may have collected risk information, your personal objectives, needs or financial situations were not taken into account when preparing this information. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement before making any decision to purchase this financial product.

Directors & Officers/Management Liability Insurance

Many small and medium-sized business owners think they don’t need Directors & Officers (D&O) Insurance as it’s only relevant to large multi-national companies. However, D&O insurance is just as important to SME’s as any other business.

Directors & Officers/Management Liability Insurance

What is Directors & Officers/ Management Liability Insurance?

There are hundreds of laws and regulations in states and territories that directors and officers must comply with when managing or operating a business, including OH&S, workplace risk, Corporations Laws, ASIC, and environmental laws.

D&O (large companies) and Management Liability (SMEs) insurance covers directors, officers and senior managers against actual or alleged acts, errors or omissions arising out of the operation or management of the company. The cover is for personal legal defence costs, as well as paying for any damages awarded for a breach of work-related duties and responsibilities. The policy will also reimburse the company for any legal costs advanced to the director or officer.

Why is D&O Insurance important?

Directors and Officers Insurance not only covers the personal liability of directors, officers and senior managers, but it will also reimburse others for any financial losses they’re incurred due to mismanagement.

Examples of claims include:

wrongful dismissal of an employee
email-related misconduct
breach of contract
OH&S breaches
environmental breaches.

What does D&O Insurance cover?

The main covers provided include:

Managers Liability - covers directors and officers for personal liability arising from claims made against them as a result of their role as managers of the company, where the company is unable or unwilling to pay their defence costs or damages.
Company Liability - provides cover to the company itself for claims made against the company arising from an alleged wrongful act or omission of the company. This is the key difference between Directors and Officers and Management Liability cover for privately owned businesses; otherwise, directors would still have to fund the defence costs for claims against the company out of their own pockets (as the company is treated as a separate legal entity when action is brought).
Employment Practices Liability - provides cover for alleged employment breaches, such as discrimination, harassment, bullying, failure to promote, breach of contract, retaliation and wrongful termination.
Crime – provides protection for your business when there has been a direct financial loss such as theft of money, securities and property. This can include employee fraud or dishonesty, third-party crime, electronic and computer crime, destruction and damage of money.
Statutory Liability (legal defence costs only) - (legal defence costs only) – provides cover for defence costs incurred from any formal investigation by a regulatory/government/professional body or other authorised institution. It also covers any fine or penalty imposed (where legally permitted and subject to policy conditions). The policy can also include a number of extensions, such as cover for legal costs associated with preparing and attending Workplace Health and Safety inquiries, and the accounting costs incurred during a tax audit/investigation.

It’s important to understand the difference between Professional Indemnity and Management Liability Insurance. The easiest way to look at the two insurance covers is that Professional Indemnity covers financial loss incurred by a customer who relies on your professional advice or work. Management Liability, on the other hand, protects your business and the personal assets of management against financial losses, due to allegations or actual mismanagement, misconduct, or legislative breaches.

At Insurance Advisernet, we’ll work with you to understand your business and provide advice on the best way to manage these risks, including the appropriate type and amount of insurance cover.

Frequently Asked Questions

What type of D&O or Management Liability insurance should I buy

As it’s a package, you can choose the basic Management & Company Liability section or add on Crime, Employment Practices and Tax Audit covers. It really depends on the size and nature of your business and the level of risk you’re willing to carry. Insurer cover varies – for example, some offer pollution defence costs, while others offer special cover for labour-hire companies. These are some questions to consider when taking out D&O or Management Liability insurance.

Do I need D&O / Management Liability Insurance?

All companies and businesses of any size can benefit from this insurance cover. Both small and large companies have exposure to employment practices, claims, crime and investigations. As a key premium rating factor is based on size and revenue/ turnover, the premiums are smaller for SMEs than for large companies.

Is D&O / Management Liability Insurance the same as Professional Indemnity Insurance – No, it isn’t.

No, Professional indemnity and Management Liability insurance cover different risks. Professional Indemnity covers financial loss allegedly or actually incurred by a customer who relies on your professional advice or work. Management Liability, on the other hand, protects your business and the personal assets of management against financial losses, due to allegations or actual mismanagement or misconduct that cause a financial loss to the company or shareholders.