Are you a major decision-maker for a company? Find out why management liability insurance is worth considering for managers and directors.
Protecting your business with insurance cover is more important than ever in today’s challenging business world. There are plenty of cover options to choose from for your business, but one vital form of cover is management liability insurance.
Why is management liability insurance so important?
This type of cover is designed to protect directors and officers from any legal liability they may incur while running a business e.g. if you unintentionally mismanage of a company you may be subject to claims from stakeholders. You could risk both:
- Losing the business
- Your personal assets in some cases
Management liability cover can help ensure the financially protected from these risks.
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- What exactly does management liability insurance cover?
- Who generally takes out management liability insurance?
- How is management liability insurance different to professional indemnity insurance?
- What are some specific types of claims that I'm protected against?
- Important definitions that can help me understand cover
- What are the most common types of claims made?
- How do I make a claim?
- When am I not covered?
- Some further questions you may have
Management liability insurance cover protects directors and officers from any liability for mismanaging a company. Not to be confused with professional indemnity insurance, management liability insurance covers you for claims against your actions of running a company.
Claims you're protected against
The range of claims that might be brought against directors and officers includes:
- Claims for wrongful dismissal or harassment from employees
- Claims from shareholders
- Claims from statutory bodies. This includes investigations by authorities like the Australian Securities and Investments Commission and WorkCover
- Claims from competitors who may accuse you of being involved in anti-competitive conduct
- Claims from a liquidator acting on behalf of the company itself
What type of expenses am I covered for?
Management liability insurance is therefore designed to cover any damages and claimant costs awarded against you. It also provides cover for your:
- Legal expenses
- Investigation costs
- Any pecuniary penalties
Without management liability cover in place, directors and officers stand at risk of losing not only their business, but also their personal assets and financial wellbeing.
This type of cover is designed for publicly-traded companies with either corporate boards or advisory committees. Management liability cover specifically protects:
- The company
- Individual managers
- Employees involved directly in management of the company
Many people make the mistake of assuming that management liability insurance and professional indemnity insurance are one and the same, but there are some key differences between the two types of cover
|Management liability insurance||Professional indemnity insurance|
|What are you protected against?||Claims against the management of the company||Claims against a company's professional services|
|Who do the claims usually come from?||Shareholders, employees, OH & S inquiries, etc||Clients, competitors, business partners|
|Who is this covered designed for?||Any party that directs or manages a company||Any party or business that provides professional services|
While professional indemnity insurance covers you for professional services rendered, management liability cover is concerned with the act of running a company. Make sure you’re aware of the difference between the two and that you take out both forms of cover if it is required for your business.
- Employment issues. Management liability insurance protects you against employment claims brought by employees. These can include claims for unfair or wrongful dismissal, discrimination, sexual harassment and wrongful failure to employ or promote.
- Occupational health and safety issues. Prosecutions and inquiries into breaches of occupational health and safety can be quite damaging for businesses and individual managers or directors. Management liability insurance provides cover in these instances. OHS claims increase steadily about 15 per cent every year, and the amount claimed has risen by roughly 20% in recent years.
- Shareholder action against company directors. For example, shareholders may bring a statutory derivative action.
- Embezzlement of company funds. Claims alleging any sort of improper and illegal conduct will need to be investigated. Management liability insurance provides cover in these instances.
- Intellectual property breaches or theft. These sorts of claims can be brought by your business competitors, and protection against this sort of action in today’s complex business world is vital.
- Unfair competition breaches. Your business competitors may accuse you of being involved in anti-competitive conduct. Cover for legal fees and any fines you may be required to pay is essential.
- Claims from statutory bodies. This includes investigations by authorities like the Australian Securities and Investments Commission and WorkCover. These are serious matters that can be very costly and damage to your business and to you personally.
- Claims from a liquidator acting on behalf of the company itself. A liquidator may allege that you are guilty of insolvent trading.
- Defamation by directors or officers. Defamation claims are becoming increasingly common in the Australian business landscape.
- Taxation investigations. Management liability insurance covers you against these investigations into your company.
- Claims of breaches of directors’ duties. This may include claims of breaches of fiduciary duties, including breach of trust.
There are some important terms you should familiarise yourself with to help you understand the ins and outs of a management liability insurance policy. These include:
- Defence costs. Defence costs are defined as the reasonable costs, fees and expenses incurred in the investigation, settlement or defence of any claim. This can include things like lawyers’ fees and charges from experts in their field.
- Covered Property. This includes tangible property other than money or securities.
- Employment Wrongful Act. This term is used to cover issues such as wrongful dismissal, wrongful failure to promote or employ, wrongful disciplinary action, misleading advertising of an employment position, sexual harassment, discrimination and invasion of privacy.
- Limit of liability. This is the agreed limit your insurer will pay in the event of a claim and will be displayed in your policy documents.
- Bodily injury. This term includes injury, sickness, disease, mental or emotional distress, and death.
- Claim. A claim can mean a whole range of things, including a written demand for monetary damages, a civil or criminal proceeding or an arbitration.
Though the range of issues and incidents a management liability insurance policy covers is quite varied, the most common types of claims made include:
- Wrongful dismissal or harassment in the workplace
- Discrimination such as the wrongful failure to employ or promote
- Allegations of improper and/or illegal conduct
- Statutory derivative actions by shareholders
- False, misleading and deceptive conduct
- Breaches of a director’s duty
- WorkCover investigations and claims relating to OH&S
- Claims brought against the company by a liquidator
- Theft by employees
- Breaches of intellectual property rights
- Investigations by the Australian Taxation Office
If someone seeks reimbursement from you for company mismanagement, these are the steps you will need to follow when lodging a claim with your insurer;
- Notify your insurer as soon as possible of the impending claim against you
- Do not admit any liability without your insurer’s written consent
- Cooperate fully with the investigation and defence, providing evidence and documentation as required
- Agree to a settlement if recommended by the insurer’s legal defence team.
- Asbestos. No claim will be paid for any loss arising from the inhalation of or exposure to asbestos, or for the cost of cleaning up, or removal of, or damage to, or loss of use of property caused by asbestos.
- Bodily injury and property damage. No claim will be paid for any bodily injury, mental anguish, emotional distress, sickness, disease or death of any person, or for any damage to or destruction of property.
- Capital raising. The insurer will not be liable for any loss resulting from claims related to the raising of capital by debt or equity.
- Dishonest or criminal intent / improper conduct. Management liability insurance in Australia will not cover any loss resulting from claims related to wrongful acts committed with reckless, dishonest or criminal intent. In addition, you will not be covered if you use your position or any information you have as a result of your position to help yourself or someone else to cause a detriment to the company.
- Industrial relations. If the loss arises from claims related to things like strikes, lock-outs, negotiation of enterprise agreements or collective redundancies, your insurance policy will not provide any cover.
- Insolvency. Loss connected to the insolvency, bankruptcy or financial impairment of your company will not be covered.
- Outside jurisdiction. Claims brought in a court or tribunal outside of Australia or New Zealand will typically not be covered under your policy.
- Known claims and circumstances. Similar to the treatment of some pre-existing conditions on life insurance policy, claims made before the commencement date of the insurance policy will not receive coverage.
- Personal profit. If you gain any personal profit or financial advantage which you were not entitled to, you may not be covered under a management liability insurance policy.
- Pollution. The insurer will not be liable for any loss relating to pollution, including any financial loss to the company resulting from this.
- Products or services. Loss brought about by claims arising from any breach of duty in any professional services rendered by your company will not receive cover under management liability insurance. This is what professional indemnity cover is for.
- Securities. Any loss resulting from your offer, sale or listing of any securities will not be covered.
- War, terrorism and radioactivity. The insurer will not cover you for any loss relating to either of these three incidents.
- Major shareholder. Some policies will not provide cover in the event that you incur a loss resulting from claims made by a shareholder in control of 15 or more per cent of the company.