Management Liability Insurance – What is it and Who needs it?

A business should consider having Management Liability (ML) insurance when it is exposed to the potential risks associated with the actions of its directors and officers.

ML insurance can help protect the personal assets of directors and officers, as well as the company itself, from the financial consequences of claims for wrongful acts such as mismanagement, breach of fiduciary duty or misrepresentation.

The Cover

A typical ML insurance policy has three (3) distinct covers:

• Directors’ and Officers’ Liability – Covers loss arising from claims made against directors and officers for actual or alleged wrongful acts whilst managing the business.

• Company Reimbursement – Reimburses the business for loss arising from claims for a wrongful act when it has indemnified its directors or officers for such claims but only to the extent the business is permitted or obligated to provide such indemnity.

• Company Liability – Responds to the loss arising from claims for wrongful acts made directly against the business in relation to alleged or actual acts or omissions by its directors, officers, or employees.

The type of loss covered by each of the above covers includes legal costs for responding to a claim, settlement (generally with the consent of the insurer) of the claim, and compensation awarded by a court or tribunal having authority to resolve the claim.

It is important to remember that ML insurance does not provide cover for claims relating to errors and omissions in the professional services the company provides to its clients. This type of cover is provided under Professional Indemnity insurance. Think of it this way: PI insurance covers the professional services of the business while ML insurance covers the running of the business.

ML insurance can help manage exposures encountered by the following types of organisations

Start-ups and SMEs: These businesses often operate with limited resources and may be more vulnerable to the costs associated with claims for wrongful acts, making ML insurance an essential safety net.

Not for Profits (NFPs): Unfortunately doing good deeds that benefit cohorts of the community does not make NFPs immune from  claims for wrongful acts, making ML insurance important for protecting the NFP, its directors and officers.

Management Liability Scenarios

The scenarios below are some of the instances where ML insurance can assist a business to manage the financial consequences of claims for the wrongful acts of its directors, officers or employees.

• Employee-Related Issues

The Employment Practices Liability extension of an ML insurance policy provides cover for loss arising from claims arising from allegations of wrongful termination, harassment, discrimination, or retaliation. These claims can be costly to respond to and resolve.

• Statutory Breaches

The Statutory Liability extension of an ML insurance policy provides cover for the costs and expenses associated with responding to and resolving claims involving breaches of statutory obligations. Where permitted by the relevant law, this can also include cover for pecuniary penalties and fines.

• Defamation

Technology has diversified the communication and publication channels available to business. This has increased the risk of unfavourable statements about a person’s character or reputation being broadcast to a wide audience. ML insurance typically covers loss in connection with defamation claims made against the company, its directors and officers.

• Reputation Protection

The Reputation Protection extension of an ML insurance policy provides cover for the costs incurred for the design and implementation of a publicity campaign to prevent or mitigate damage to the reputation of a director or officer in connection with a claim. This is especially important in today’s digital age, where social media and online communication can amplify reputational risks.

• Audits and Investigations

The Tax Audit Costs extension of an ML insurance policy covers the professional fees incurred during a tax audit or investigation (e.g. income tax, GST and fringe benefits tax) by authorities such as the Australian Taxation Office. This can alleviate the financial burden of complying with audit requirements.

• Regulatory Investigations:

Management liability insurance can also cover the costs of defending regulatory investigations and proceedings, which can be time-consuming and expensive. In Australia, this can include investigations conducted by entities such as the Australian Competition and Consumer Commission, Therapeutic Goods Administration, Environmental Protection Authorities, or the Australian Securities and Investments Commission.

• Crisis Management:

The Crisis Costs extension of an ML insurance policy covers the necessary fees, costs and expenses paid by the business for external crisis management services to support responding to a crisis event impacting the business such as workplace violence or fraud investigation.