When business is going well you don't want to leave yourself behind by overlooking risks that have evolved along with your enterprise's growth. Your staff numbers, operations, offerings and management team may all have expanded, and you need your insurance protection to keep pace. Management liability cover is especially important for addressing the various risks in managing a business. Here's why.

Management liability insurance is a comprehensive policy that protects you, your senior managers and your business as a whole against key risks that can involve legal actions. These can be brought against a company, its directors, officers and employees by a number of parties including regulators, employees, competitors, creditors, shareholders, clients and liquidators — and executives can be held personally liable, meaning their personal assets can be garnished to pay damages.

A management liability policy protects a company and its directors and officers against such legal liabilities and statutory obligations across a number of specialised areas.

These include

  1. Directors and officers' liability (D&O) provides cover for costs associated with defending directors, managers and employees against claims arising from their actions and decisions. Legal claims and investigations may be brought by competitors, suppliers or customers or regulatory bodies
  2. Employment practices liability (EPL) covers employee-related claims including failure to promote and sexual harassment
  3. Statutory fines covers costs incurred in unintentional breaches of workplace health and safety laws
  4. Crime provides for employee fidelity issues such as fraudulent activity, and theft of money or property

Below we examine business considerations in each of these four areas.

1. Directors and officers' liability insurance considerations

Regulatory investigations and D&O claims are likely to be triggered by allegations of unsatisfactory management of cash flow and supplier agreements, risk management, workforce management and contingency planning. They may also arise from alleged breaches of compliance and governance requirements, including continuous disclosure of pertinent information to stakeholders for publicly listed companies.

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 specific circumstances.

When reviewing your risk management framework the key points to consider include

  • Maintaining financial and contractual obligations
  • Supply chains and the business impact associated with delays
  • Adhering to compliance requirements set out by ongoing legislative and regulatory change

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 personal liability for directors, who may be held responsible for debts incurred by the company if it is unable to pay.

2. Employment practices liability

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 by their perceived treatment or an omission of responsibility by the company or specific individuals within it.

Considerations for effective risk management should involve documented protocols outlining expected standards of behaviour and formalised procedures for responding to incidents or employee allegations. These should be broadly communicated across the organisation, be part of onboarding new hires and reinforced to managers and staff regularly.

Even with these guidelines 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 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
  • Breach of privacy

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.

3. 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 dangers.

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 dangerous conditions
  • Decisions and actions taken concerning the maintenance of a safe work environment
  • 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.

4. Crime

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.

Actions that can be taken to safeguard your business 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

Get expert advice

If your business is expanding or evolving it makes sense to get an experienced broker to review your insurance to ensure you are adequately covered and advise on how to update your management liability protection and risk management.

Disclaimer

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, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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