What is Management Liability Insurance and do you need it?

What is Management Liability Insurance and do you need it?

The increase in corporate litigation in Australia has caused many SMEs to reassess their risk of exposure and to redesign their insurance cover. One of the most underrated and underutilised insurance covers is Management Liability Insurance, mainly due to a global misunderstanding about its relevance to small businesses.

Essentially, Management Liability Insurance covers the costs of litigation pertaining to mismanagement by directors, managers and employees, costs that can reach into the hundreds of thousands of dollars and even higher.

What does Management Liability Insurance cover?

Allegations of mismanagement, compliance and legislative breaches from clients, shareholders, creditors, competitors and even regulatory bodies are far more common today than they were just a few years ago. Even if the claims are eventually unsupported, the costs of defending yourself in court can financially devastate your business and the loss to your reputation can be insurmountable.

Whilst the most common claims are for bullying or harassment in the workplace, as well as wrongful dismissal, Management Liability Insurance can be customised to cover other mismanagement claims that may be specific to your industry. For example, you can protect your business from claims concerning the following situations:

Claims of wrongful acts, such as a breach of duty against past, present and future directors.
Specific types of employee or third party fraud.
Corporate and statutory liability, such as wrongful conduct and legislative breaches.
False, misleading or deceptive conduct by company directors and officers.

Cover can include the legal fees for defending yourself in court, as well as the costs involved in attending an inquiry or investigation regarding the running of the company and any compensation payouts.

Management Liability Insurance vs Professional Indemnity Insurance

These are two completely different insurance covers and just because you already have Professional Indemnity Insurance, doesn’t mean that you don’t need Management Liability Insurance.

As you can appreciate, Professional Indemnity Insurance covers a business for claims against the financial losses suffered by third parties due to wrongful professional advice. On the other hand, Management Liability Insurance covers a business for claims against the financial loss suffered by third parties due to mismanagement.

One policy covers the activities of the business (Professional Indemnity Insurance) whilst the other policy covers the running of the business (Management Liability Insurance). Each type of policy protects your business from a different type of claim that can financially cripple your business. There’s not much point in hoping that your Professional Indemnity Insurance is all you need when a client sues not only your company, but also your directors!

If you don’t already have Management Liability Insurance, it’s a sensible idea to talk to an insurance expert who can craft a policy that perfectly suits your needs. Without this type of policy, you leave yourself wide open to significant financial losses, as you struggle to fund your own defence and pay any associated compensation claims if the allegations are supported.

To decide whether Management Liability Insurance is suitable for your needs, talk to one of our insurance specialists today.

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.