Product Fundamentals: Management Liability Insurance
Management liability is a single insurance product comprising a suite of coverage sections. It was designed to protect privately held businesses (and their directors and officers) from a myriad of losses that they are exposed to in the course of operations.
At its core is traditional directors’ and officers’ liability (“D&O”). This cover is used by a company to transfer the risk of the indemnity it gives its directors and officers for managing the company. Publicly traded and large private companies are not intended to be underwritten on management liability policies. The policy wordings are not appropriate and aggregation risk exists.
The product evolved to cater for trends wherein plaintiff lawyers and regulators named the company (as distinct from directors) as defendants/respondents in compensatory proceedings and regulatory inquiries.
Management liability now incorporates various other coverage sections such as trustees’ liability, internet liability, cyber, kidnap, ransom and extortion. Each common coverage section that may be offered under a management liability policy is set out below.
Herein we conclude that management liability is becoming easier to transact via online portals and is readily available in the market. But the scope of cover is narrowing: some policies are not appropriate for businesses or their respective directors. Cover may be more appropriately procured on a stand-alone basis wherein the scope of that cover is wider and does not have the same exclusions as are found in most market management liability wordings. We traverse that issue further in our article: Why management liability may not be appropriate for your company and its directors.
What is covered by a standard management liability policy?
1. Directors’ and officers’ liability (“D&O”)
Side A D&O intends to cover natural persons (directors or officers) where allegations are made against them in connection with actual or alleged mismanagement of the company. Policies will ordinarily indemnify the beneficiary for legal defence costs and expenses, and if liable, damages and claimant costs.
Cover is ordinarily extended to cover regulatory inquiries, the indemnity available includes regulatory costs and expenses, and, if insurable at law, compensatory penalties.
The most important consideration with regard to this insuring agreement is that the indemnity is only available where the company cannot, for whatever reason, indemnify the directors (because it is conflicted to do so, the deed of access and indemnity does not permit the company to indemnify the director, or the company is impecunious).
There is ordinarily no excess payable in the event this indemnity is called upon. A key issue that has emerged with this cover is that under most management liability policies, insurers apply an insolvency exclusion. Ordinarily that exclusion will mean that where the company cannot indemnify its directors and officers under the deed of access and indemnity, indemnity offered by Side A coverage becomes very limited.
It is therefore important as a director to understand whether an “insolvency” or “financial impairment” exclusion is applied. Note these exclusions may be removed if a company presents suitable financial information – many smaller companies do not wish to disclose same and hence insurers automatically apply these exclusions.
In most cases the company will indemnify its directors and officers for wrongful acts arising from or in connection with their management of the company. The scope of such indemnity provided by the company is often very broad: it applies to the extent permissible at law (only intentional acts, fraud and dishonesty are primarily excluded). This is known as “indemnifiable loss” and will be ordinarily set out in the company constitution or under a deed of access and indemnity.
In that context then where allegations are made against a director – alleging they have breached their duties– said director will engage legal representation. The director will call on the indemnity provided by the company to pay for those defence costs and expenses, and, if liable, any damages and claimants’ costs.
Again, if an inquiry is brought by a regulatory authority, the company will pay inquiry costs and expenses, and where insurable compensatory penalties on behalf of a director. The insurer, under Side B will reimburse the company for these payments.
The distinction between Side A and Side B is that the insurer pays “non-indemnifiable loss” but the company pays “indemnifiable loss” on behalf of the director and is reimbursed the costs by the insurer. Under Side B coverage, there will be ordinarily be either a cost inclusive excess, deductible or retention payable by the company.
The risk of any liability the company may incur by offering a broad indemnity to its directors and officers may be transferred under an appropriate D&O policy under the Side B coverage section.
2. Employment Practices Liability (“EPL”)
- Unfair dismissal and wrongful termination;
- Unlawful workplace harassment and bullying.
- Workplace discrimination
- Sexual harassment
- Failure to promote or improper evaluation of an employee
- Wrongful refusal to employ an applicant for employment
It is important to note that statutory amounts payable by employers (including wages, leave accruals and superannuation, etc) do not form part of the indemnity provided by this cover.
3. Statutory Liability (“SL”)
SL covers the directors and officers and the company for inquiries brought by regulatory authorities against the company or its directors and officers alleging that the company or the directors’ conduct when operating the company has contravened legislation. The indemnity available includes regulatory costs and expenses, and where insurable at law, compensatory penalties.
Some fines and penalties cannot legally be insured (such as those issued under the Work health and safety legislation). A typical SafeWork NSW prosecution costs $300,000 to $400,000 in legal costs and expenses. For further information regarding statutory liability in particular Work Health & Safety please refer to our Statutory Liability: Work Health & Safety Risk Assessment guide.
Stand-alone statutory liability policies offer broader cover than what is offered by a statutory liability insuring agreement in most management liability policies. By way of example, an open market policy will cover costs and expenses from the date of an incident: under a management liability policy, cover will only usually enliven once the regulator compels the director, officer or company to attend a formal inquiry.
4. Fidelity and or crime cover
Crime insurance covers direct financial loss of “money” in a company’s care, custody and control arising from intentional and or criminal acts.
The scope of cover offered within this coverage section within a management liability policy varies significantly.
First, coverage may extend to criminal acts of employees (internal fraud) and third parties (external fraud). Where only the former is covered this is akin to a traditional “fidelity guarantee” cover. That insurance is nowadays somewhat redundant in the modern era of business transacting (where money is mostly digital). That said some businesses may still hold fidelity coverage if it principally collects cash.
Crime insurance is more appropriate. It extends to cover incidents involving both internal and external fraud. Therein the perpetrator of the “criminal act” may be an employee or any other third party (someone not inside the business).
- Fraudulent electronic transfer of monies from a bank account owned by the business.
- Credit card fraud by a third party.
- Theft of money from business premises or while in transit.
- Theft of property.
- Imitation/social engineering fraud causing the erroneous transfer of monies: given the frequency of claims insurers are starting to limit the scope of this cover, apply onerous conditions and higher excess structures.
5. Other common coverage extensions under a management liability policy form
- Tax audit: cover for reasonable professional fees incurred by the company in responding to a notice of audit as against the company.
- Internet liability: covers the company for alleged defamation, injurious falsehood, passing off, infringement of intellectual property or copyright on its website.
- Kidnap, ransom and extortion: covers the company for extortion threats made in connection with its employees or directors.
- Cyber: will cover the company for its own costs, expenses and liabilities following a cyber event.
Again, with each of the above coverage extensions, stand-alone policies may exist in the market that offer broader coverage. Alternatively, some of these covers may be offered under other insurances a company may hold.
Regard should be had to the size of a business, its share structure, maturity, the industry in which it operates and importantly its exit strategy. Specialist advice is required when selecting an appropriate management liability policy. We would also advise extreme caution when considering cover arranged via online portals, see our article here.
For further information and advice regarding Management Liability Insurance or to obtain a quote, please contact us via the form below.