Should businesses consider Management Liability?

Generally, one of the largest assets of a director of a private company can be their own business. Conversely, it can also be one of their largest personal liabilities.  It is usual for directors and officers to purchase insurance policies to protect the buildings and equipment used within their business. However, they often overlook or may not even be aware cover is available for the personal liabilities they can incur in the course of running their business – Business Management Liability.

What does Management Liability Cover?

Management Liability insurance policies address the personal liabilities directors and officers of private companies and incorporated organisations face in the administration and operation of the business. It includes cover for loss or damage arising from allegations of mismanagement; employment practices issues; workplace health and safety investigations; fines and penalties arising from inadvertent breaches of various types of legislation where legally permissible to do so.  Coverage also extends to protect the organisation for the above, as well as employee theft and third-party crime; tax audit costs and crisis costs.

How regulations can affect businesses

There are many pieces of legislation in Australia which impose personal liability on directors and officers for failing to ensure their businesses comply with the law. In addition to this, the operating environment in Australia is constantly changing so it is extremely difficult for businesses and their managers to keep up let alone ensure that their employees and contractors always follow the correct procedures. The challenges of the last two years have made this abundantly clear to most directors and officers of businesses and Not-For-Profit organisations.

Regulatory authorities, employees, shareholders, customers, creditors, competitors and liquidators can all bring action against directors and officers for their role in managing a company. Defending allegations to protect the reputation of the company and its management can be very expensive and time-consuming. A Management Liability policy can protect the company’s cash flow by covering legal costs and compensation in the event of a third-party claim. The policy also provides access to legal advisors and fraud investigators which reduces stress on management and ensures that claims are dealt with by subject matter experts.

Management Liability Claims Examples

Some examples of the types of claims that may be covered under an ML policy include:

Example 1

A former shareholder in a tile importing company brought an action against the board of directors alleging they had breached their fiduciary duty to act in the best interests of all shareholders. The action alleged that at the time the former shareholder sold their shares the majority shareholder was aware of the impending sale of assets to a competitor but declined to pass this information onto the former shareholder, thus inducing the former shareholder to sell their shares at a lower price than would have been realised after the asset sale. The Court found the directors had breached their fiduciary duty to the minority shareholder and ordered them to pay $300,000.

Example 2

A sixty-year-old site supervisor alleged wrongful termination and age discrimination after their role was made redundant but later filled by a young relative of the business owner. The site supervisor was awarded $120,000. The compensation and legal costs would be covered by a ML policy.

Example 3

An employee alleged bullying and harassment after returning from parental leave. The employer failed to address the complaint or comply with its own bullying and harassment policy. The Court awarded damages totalling $237,770 to the employee.

Example 4

An engineering workshop was prosecuted under the WH&S Act following an employee being injured onsite using a grinder without a safety guard. The insured was required to attend court and the insurer appointed solicitors to defend the insured. The ML policy covered $13,500 for legal fees and $4,053 for investigation costs. The resulting fine of $41,000 was also covered. Fines for WH&S contraventions in NSW, VIC and WA are no longer covered however associated costs are covered.

Example 5

An insured restaurant and its licensee were fined $20,000 and $2,500 for alleged breaches of the Food Safety Act despite having immediately rectified matters. The ML policy responded to cover the fines and associated legal costs.

Example 6

An insured company reported an employee theft of $38,000. Forensic investigation showed the Accounts Receivable Clerk had been changing bank deposit slips, revising payments, crediting invoices and amending records for five years. The total theft amounted to over $500,000. The ML policy covered the theft up to the Crime sub-limit plus another $50,000 for fraud investigation costs.

Example 7

An importing company received notification from the ATO that it intended to perform a Comprehensive Risk Review of the insured’s tax affairs for the previous three years. The ML policy responded and the insurer appointed a tax audit specialist to assist the insured to compile the details required by the ATO. The process took several weeks at a cost of almost $40,000.

Protecting businesses with Berkley Insurance Australia

Mistakes and accidents can occur in well run businesses. A Management Liability policy can help to protect both the personal assets of the directors and officers and the company’s bottom line against financial loss arising from liability that may be incurred whilst running a business. Brokers can now bind ML policies automatically on bindIT.

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