It’s a myth that only big businesses face the threat of lengthy legal battles over everything from unfair dismissal to sexual harassment claims, employee fraud to occupational health and safety concerns. Small-to-medium sized businesses are increasingly being drawn into legal action, at considerable cost, which can be financially devastating for both the business and its executives.
Running a company is a big responsibility, and if not managed correctly, can create significant liabilities. Business owners, directors and managers are subject to more than 700 federal, state and territory laws that hold them personally liable if something goes wrong. This means that your own personal assets, like your family home, could be at-risk if something does go wrong.
The management risks of operating a business, known as management liability in the insurance world, is an area that has historically lacked attention by private and not-for-profit businesses. However, in today's environment with considerable business, industry and employment regulations, there are too many areas of potential management risk to leave this to chance.
Lack of risk management and insurance protection for management liabilities potentially leaves business owners, directors and managers vulnerable to the legal consequences that might arise out of their daily responsibilities.
“Unfortunately, things can and do happen to good businesses, even small, warm family businesses who sometimes feel they are immune to certain kinds of risks."
Robert Loveday, Gallagher Client Manager
"All businesses have management liability exposures," says Robert Loveday, Client Manager for Gallagher who specialises in professional and financial risks. “These policies are traditionally built for SME businesses allowing a cost effective way to access broad coverage.
"If a private business employs staff, a critical section of a management liability policy provides protection for things like alleged bullying and unfair dismissal claims, what we call employment practices, and other areas of dealing with staff.
"Additionally, any business that has directors or shareholders, physical property or financial assets, an exposure to pollution of work, health and safety risks, should view this insurance cover as a critical part of their risk management.
"Unfortunately, things can and do happen to good businesses, even small, warm family businesses who sometimes feel they are immune to certain kinds of risks. If an employee decides to sue over unfair dismissal or sexual harassment - even if this is completely unfounded - the leaders need to respond legally and this takes time and money, which are scarce resources in any business," says Loveday.
With these risks impacting more businesses and as regulators seek to take a collective approach to enforcement, which includes an increased focus on fines and penalties, it is vital that small businesses protect themselves through good risk management and the right insurance policies. That’s where management liability insurance comes in.
What is management liability insurance and what does it cover?
Management Liability insurance protects the individual directors and managers and the organisation itself in relation to the exposures associated with managing a business. It is a hybrid insurance policy, and bundles together several standalone insurances into the one policy to offer protection for a variety of risks or liabilities that a business might face, including
Directors and Officers' LiabilityCover for the costs of defending directors, managers and employees against claims arising from their actions and decisions as managers.
Corporate LiabilityProtects the business more broadly from unexpected claims brought against the business entity itself.
Employment Practices LiabilityProtects the business from employment practice related claims. This can include unfair dismissal, discrimination by past and present employees, customers or suppliers.
Statutory LiabilityProtection for both individuals and the business entity against fines and penalties.
Tax AuditCover for the fees and charges for an accountant or tax agent to respond to an audit notice from the Australian Tax Office (ATO).
CrimeProtects the balance sheet form fraud, theft and dishonest activities carried out by employees and third parties.
This insurance policy is intended to cover a wide variety of risks and be well-rounded to ensure protection in the event the company is the subject of a legal action seeking damages, a penalty imposed due to non-compliance with regulations, a claim for money owed or an investigation by the Australian Tax Office (ATO) and covers businesses and their senior managers against the expenses involved in paying compensation, fines or penalties, legal costs or service fees.
These could include
- legal representation and advice across multiple policy sections
- investigation costs and forensic investigation costs
- civil fines and penalties
- damages awarded against you
- reputational loss and crisis containment
- ATO response costs
Even if claims made against you and your business are baseless, the legal costs of defend these claims can be financially crippling for businesses and individuals. Managers and owners can also be held personally liable, even after they have left the business, which puts your own personal assets at risk. Management liability insurance protects your wealth and your family’s security, not just your company.
Who needs management liability insurance ‒ does size really matter?
The bigger your business, the higher the sums involved in claims tend to be, but when it comes to management liability it doesn’t matter if you are operating a small or medium-sized company: your obligations under law are the same. If you’re a business owner or senior manager it’s your responsibility to ensure that your business meets them.
Be aware also that as your business grows the scope of your liability will likely increase in kind. You will need to stay abreast of the legal developments occurring that may impact your business and the insurability of these developments.
Protection for management and directors is critical for all businesses, given the responsibilities you take on as a business owner or director. Management liability insurance is designed to help bridge the gap between sound risk management and potential pitfalls that can impact even the most prepared and well-run business.
No two businesses are the same and neither are the risks they face from a management liability perspective. It is recommended that you to speak to your insurance broker. They will partner with you to understand the unique risks your owners, directors and management team face and can then recommend the management liability insurance policy that best meets your needs.