Management Liability vs stand-alone Directors and Officers Liability Insurance
Each of the common coverage sections offered under a management liability policy were originally offered as “stand-alone” policies. For further details on what is covered under a management liability policy see Product Fundamentals: Management Liability Insurance.
These stand-alone covers were “condensed” to form separate sections of cover under management liability policy forms. In most instances, their “stand-alone” form offers much broader cover. There are less exclusions and each stand-alone section of cover will have their (most importantly) ring-fenced policy limit.
The intention of Management Liability Insurance was to package up common covers in a simple, easy to transact form that is competitively priced. As claims evolved and the market hardened, coverage has become narrower under each policy section. Premiums have increased but not commensurate to the extent coverage has waned.
Examples of more restrictive coverage under a management liability form
Recent trends observed within the directors’ and officers’ liability (“D&O”) coverage section of a management liability policy, suggest that there will be absolute exclusions applied for claims in connection with the sale of a company’s securities. In other words, there would be no cover for claims made against directors in respect of capital raising or wherein the company divests its shares. These are significant exposures to many small businesses and their directors.
Most insurers’ management liability wordings will insist on excluding coverage for natural persons where the company becomes insolvent: this renders the major risk sought to be insured under “Side A” D&O cover otiose.
Another example is statutory liability. A stand-alone policy will cover costs and expenses from the date of an incident. Under a management liability policy, the statutory liability insuring clause will only enliven when the regulator compels the director, officer or company to attend a formal inquiry.
Aggregation risk under management liability policies
Management liability policies are subject to one aggregate policy limit. The policies are underwritten on a claims made basis: all claims notified during one single policy period are subject to the one singular policy limit for all loss covered.
Given the number of insuring agreements, the nature of indemnity afforded (legal costs, damages, direct financial loss of money and compensatory penalties) and number of beneficiaries to the policy (the company and natural persons), the policy limit is at risk of being eroded.
Multiple claims in one policy period could mean a beneficiary (i.e. the company) is covered and other beneficiaries (such as the directors) are not.
It may also mean that one coverage section may enliven and erode the limit for another unrelated statutory liability claim made in the same policy period. For example, a construction company that holds a management liability policy with a limit of $1m may exhaust the limit as a result of a Work Health & Safety inquiry. In that same period of insurance claims may be made by employees alleging wrongful termination and further claims may be brought by minor shareholders against directors.
Caution should be had to the limit purchased with the knowledge that ‘aggregation’ risk exists for multiple unrelated claims made in the same policy period under each policy section and for each beneficiary.
Management liability has become commoditised. In many circumstances it should not be. These programs and the covers that are incorporated in them may need to be tailored depending on the company’s risk profile.
Many intermediaries have been offering the product as a solution for companies’ managerial risk. The product became easy to sell and later on, transact. As there has been a movement to a more commoditised “no-touch” underwriting methodology, as stated above, the scope of cover has narrowed and that presents, in many cases, some significant uninsured exposures to the policyholder.
Unfortunately, some online quoting systems issue quotations where those systems simply should not. On occasion that may be the fault of the system or a programming error, but more so those operating the systems are culpable. Underwriters are not minded themselves to second guess the systems, and in many circumstances, brokers are simply directed to reiterate “what the system says”.
It is becoming more prevalent that claims are being denied in the course of online transacting for reasons of misrepresentation, non-disclosure and fraudulent non-disclosure. We discuss this in our article “Emerging issues with online insurance transacting”.
Matters to consider when selection a management liability policy over stand-alone covers
- Review the deed of access and indemnity: what indemnities is the company giving natural persons?
- How is the ownership of the company comprised?
- Are there any international interests in the company, does it operate internationally?
- What is the financial status of the company?
- What is the sophistication of the board, how is it comprised are there independent directors?
- How does the board identify, address and continue to manage risk?
- How advanced are the policies, procedures and governance of the corporation? Have these been reviewed externally?
- How do you asses the stability of employees and company culture?
- What issues lie within the industry and to what extent will new regulation impact the company? How will it adapt to new rules and obligations?
- To what extent is the company exposed to regulators insofar as statutory liability (in particular, environmental and work health and safety?).
- How sophisticated is the company insofar as supplier selections?
- What authorisations are given internally insofar as deployment of resources, commitment of capital and payments?
- Does the company hold in its care, custody and control money?
- Is the company externally audited?
- What is the company’s sophistication with technology and cyber risk? Has it had a cyber maturity assessment, if so, when?
- What is the company’s exit strategy and are there imminent divestitures on the horizon?
For further information and advice on Management Liability or D&O Insurance, and to obtain a quote, please contact us via the form below.