Since business owners, executives and senior managers can potentially be held liable for the legal costs and damages involved in management liability disputes, management liability insurance is considered a prudent purchase for business owners and executives to think about, to protect their own personal assets from a risk management standpoint.
The business itself can also potentially be held liable, resulting in a costly process in defending against allegations made. Management liability insurance protects private companies of all industry types against the costs of liability claims brought by third parties that could result in financial hardship being experienced.
This comprehensive policy covers you as the business owner, your senior managers and in some instances your business against key risks that may result in legal action being brought against a company, its directors, officers and employees by external or internal parties and stakeholders.
In a regulatory context, a company’s past and present board members can be held legally liable for actions or omissions by the business or its staff under a range of state and federal statutes. These include employment; work, health and safety laws; and environmental protection; and can involve regulators such as the Australian Securities and Investments Commission (ASIC) or industry specific government bodies. Legal action can also be brought by employees, competitors, creditors, shareholders, clients and liquidators.
Examples of such actions include
• liability attached for one of your staff harassing or bullying a colleague without your knowledge
• a case of wrongful dismissal brought by a former employee
• theft by a staff member
• an ATO audit and expenses relating to alleged tax avoidance or tax audit costs
• your business computer system could be hacked and sensitive information lost resulting in liability.
Regulatory investigations and D&O claims may be triggered by allegations of unsatisfactory financial performance and / or solvency issues, supplier agreements, risk management related issues, workforce management and contingency planning. Bodily injury and property damage are generally listed as exclusions in standard D&O policy wordings. However, defence costs may still be covered under the policy, depending on the breadth of cover brokered and the specific exposures of the company and its industry.
Tips for optimising your risk management profile
When reviewing your D&O risk management framework the key points that insurers want to see include
• meeting financial and contractual obligations
• supply chain risk and the business impact associated with delays
• adhering to compliance requirements set out by specific legislation.
Understanding how to mitigate these risks should be factored into business continuity plans as standard practice. Also consider the potential of senior management’s actions or decisions to result in insolvency and potential personal liability for directors, who may be held responsible for debts incurred by the company if it is unable to pay its debts when they fall due.
2. Errors and omissions liability: a subjective area
Errors or omissions (E&O) is a legal term that may also refer to malpractice in some professions that involve a duty of care, or professional liability or indemnity in others across a broad range of occupations that provide specialised services. Essentially it applies to mistakes or failures by a business or its employees, according to its clients. These shortcomings may be actual or perceived.
Errors and omissions insurance comes into play when legal costs of a case brought by a client are involved, including investigatory expenses and settlements out of court. The terms of the policy may vary according to the profession concerned. Cover applies to claims made during the policy period, which may refer retrospectively to prior events. Consequently the retroactive date specified in the policy is of critical importance.
Tips for optimising your E&O risk profile
There are a number of ways in which businesses that provide professional services can minimise the likelihood of an errors and omissions action. Insurers will be looking for evidence of
• terms of contractual agreements spelled out in detail, especially where sub-contractors or outsourcing are involved
• quality control and use of internal and external auditing
• job specification controls and client sign-off protocols
• client data protection measures.
3. Taxation: covering the costs of audits or investigations
Any examination of a business’s tax history involves, at the least, the services of an accountancy professional and a full audit can create an unanticipated drain on working capital.
Having insurance cover for responding to Australian Tax Office or New Zealand Inland Revenue Department demands for your business’s tax information provides for costs of accountants’ or registered tax agents’ fees.
Tips for optimising your tax risk profile
The information insurers want to see in relation to tax cover includes
• whether the ATO or NZIR has notified the intention of conducting audits of the industry your business is involved in
• if the insured has ever been investigated previously
• contact details for the business’s accountant or tax agent.
All forms of trade involve credit risk but businesses involved in supply chains locally or internationally are subject to exposures outside of their control. If a company’s customers default on payment or become insolvent it can disrupt liquidity or in some instances put the supplier business itself at risk of closure.
Trade credit cover is designed to ensure that a company is not adversely affected by customer non-payment by providing insurance protection against
• financial loss due to late or non-payment of accounts receivable
• difficulties associated with cash flow interruptions.
For effective risk management companies need reliable information about their trading partners’ solvency information. A company dealing only with a small number of high value contracts is at higher risk if one or more of their customers’ businesses fails.
Tips for optimising your trade credit risk profile
Insurers will want to see up to date information about businesses’ financial position as well as their creditors’, including
• details about customers and the terms of contractual agreements
• regular reviews of credit limits
• types of goods and if they are exported where to and if political risks are involved
• whether the trade sector is profitable and what the margins are.
Given the nature and complexity of managing a workforce, there are a number of areas where businesses may be subject to legal actions brought by actual or potential employees. These can be based on real or alleged shortcomings by people disgruntled with their perceived treatment or an omission of responsibility by the company or specific individuals within it.
Employment practices liability insurance is designed to respond to claims that may include
• workplace bullying or harassment
• discrimination on any basis: gender, race, religious beliefs, sexual orientation, disability
• wrongful promotion or demotion
• breach of privacy
• breach of an employment contract.
Tips for optimising your employment practice risk profile
Risk factors of interest to insurers include but are not limited to
• documented protocols outlining expected standards of behaviour around equal opportunity, anti sexual harassment, discrimination, disciplinary action and privacy and confidentiality
• these should be broadly communicated across the organisation, be part of on-boarding new hires and reinforced to managers and staff regularly
• a human resources division and provision for ensuring managers have appropriate skills and knowledge of staff management
• processes and protocols for hirings and dismissals
• formalised procedures for reporting and responding to incidents or employee allegations
• any employment practices liability claims previously made
• whether the company has public liability and directors and officers liability insurance.
Even with these provisions in place an employee may act outside of protocol towards another or some individuals may feel they have cause for grievance, whether this has any valid basis or not.
Employment practice insurance cover can be purchased on a stand-alone basis as its own policy, or in some instances, an insurer may agree to incorporate as a coverage extension in a private company management liability policy wording or as an extension to a directors and officers' liability cover.
6. Responsibility for workplace health and safety
Most employment practices liability policies contain exclusions for loss related to bodily injury, however, there is generally coverage for claims relating to mental anguish or emotional distress.
In terms of workplace health and safety businesses have an obligation to do all that is reasonably practicable to provide a safe working environment. This means having an active risk management plan that addresses and provides protections against potential risks.
Directors of a company may be held personally liable under occupational health and safety legislation where the company is found to have contravened its duty if a legal action is brought as the result of an accident or other health threat.
In terms of liability, company executives need to be aware that they personally, as well as the company, have to be accountable for knowledge of potentially injurious conditions and errors or omissions in carrying out these duties.
For insurance protection that covers costs of statutory fines imposed for failures in meeting workplace health and safety requirements, breaches have to be judged to be unintentional.
Management liability cover for crime addresses the risk of loss associated with fraudulent or dishonest practices by employees, which may result in financial loss or reputational damage to the company. It doesn’t relate to crimes by external parties.
Internal security precautions are essential to managing risk of criminal activities by employees, and businesses should implement comprehensive risk management concerning access to items of value including intellectual property and information contained in data, as well as secured access both on the premises and across computer networks, covering off safeguarding clients, customers and business partners.
Tips for optimising your employee crime risk profile
Actions that would be viewed positively by insurers include
• ensuring comprehensive background checks are undertaken when hiring new employees and that employment contracts include explicit obligations to operate with integrity
• appropriate HR policies and procedures that set out clear expectations on employee conduct and handling of commercially sensitive information
• ensuring anti-bribery and corruption policies and training are in place that outline expected standards of professionalism and integrity
• a review of payment/money handling procedures.
Dishonesty/wilful conduct exclusions may remove cover for claims arising from specific acts, such as knowing breaches of statutes, dishonest conduct or deliberate fraud.
How management liability insurance differs from professional indemnity cover
Professional indemnity insurance covers your business for the services or advice that you provide to your customers or clients and management liability insurance relates issues arising from the running of your business. A management liability policy protects your business and personal assets against legal costs for allegations of mismanagement, misconduct or legislative breaches.
It’s important to understand the distinctions in the insurance cover and this is where your insurance broker plays an important role. As a trusted advisor, your broker helps identify what the indemnity amount should be, considering the type of business and the risks that might apply.
Be proactive about management liability risks
As your insurance broker, we can help to mitigate your risks and minimise what can be a significant financial blow to you or your business should the unexpected happen. If you would like to know more or discuss this further, please contact one of our experts.
Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective.