Why you need Management Liability Insurance today
What is Management Liability Insurance?
Management Liability Insurance (ML) is designed to cover small to medium sized private companies (SME’s) against the risks and liabilities associated with running and managing a business. A Management Liability policy offers broader coverage than a traditional Directors and Officers Liability Insurance policy and generally consists of a combination of coverage sections including D&O, employment practices liability, crime, statutory liability to name a few.
Why you need Management Liability Insurance?
There are few (if any) industries where companies can afford to ignore the legal and regulatory risks of their operations. The liability environment is constantly evolving particularly in the current economic climate, business failures, regulatory investigations and actions, employment practices claims, commercial disputes, and employee theft are becoming more prevalent. As a result, directors and officers of Australian companies are increasingly vulnerable.
How does it work?
The management liability insurance environment is constantly changing and coverage can vary depending on the type of policy and insurer. In general terms, a Management Liability policy structure can include:
Directors and Officers Liability Insurance coverage section generally includes a number of insuring clauses as follows:
Directors & Officers 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. Eg. Allegations of fraud or in cases where the company is insolvent.
Company Reimbursement cover – as the name suggests claims under this clause reimburse the company for defence costs and damages paid on behalf of the directors and officers in relation to claims made against the D&Os arising out of their role as managers of the company where it is legally permitted to do so.
Company Liability or Entity cover – provides cover to the company itself for claims made against the company arising from any alleged wrongful act or omission of the company. This is the key point of differentiation 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 (EPL) provides cover for alleged employment breaches, such as discrimination, harassment, bullying, failure to promote, breach of contract, retaliation and wrongful termination.
Crime cover 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. Interestingly, it is usually the most trusted employees that represent the greatest fraud risk. These employees know the security measures and can set up hidden arrangements that go undetected for some time.
Statutory Liability insurance 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). Examples of these are workplace health & safety, environmental protection authority, spam and privacy laws, industry specific rules and regulations, etc.
The policy can also include a number of extensions such as:
- WHS defence costs which cover legal costs associated with preparation for and attending Workplace Health and Safety Inquiries.
- Tax Audit which covers the accounting costs incurred during a tax audit/investigation.
- Again cover, limits and excesses can vary from policy to policy so it’s important that the cover provided is appropriate for the insured.
Who is covered?
Management Liability is mostly intended for incorporated entities such as private companies, unlisted public companies, clubs and charities limited by guarantee and incorporated associations. A ML policy provides cover for individuals of the insured entities and is usually defined under the definition titled Insured Person and generally includes directors, officers, and employees whilst acting in their capacity of such.
Most Management Liability policies are not designed for unincorporated businesses such as partnerships, trusts, SMSF unless the policy has been specifically structured to respond in that manner.
It is critical to ensure that the insured name on the policy is correct otherwise the policy may not respond to a claim. A trading name or a trust is not a legal entity and as such should not be shown as a named insured in its own right.
All entities that are to be covered should be named on the policy. Some policies will cover subsidiaries automatically and therefore do not need to be specifically named. Entities that are not considered subsidiaries but have common directors and ownership would need to be named if cover is required. An ownership structure can be very beneficial to outline the relationship between each entity and can assist to determine which entities are required to be named on the policy. Again not all policies are the same and the approach to covering entities may vary in the market.
The availability of Sole Traders Management Liability exists but is not as widely spread as traditional ML policies. The key difference between a standard ML policy and one intended for sole traders is the absence of the Company Reimbursement and Company Liability insuring clauses. Also Tax Audits Costs relate to the sole trader personally and the business as these cannot be separated.