Running a company is a big responsibility – and it’s also a big liability. Business owners, directors or senior managers are subject to more than 700 federal, state and territory laws that hold them personally liable if something goes wrong, but management liability is often overlooked. Here’s what management liability insurance covers and why this is essential protection for leadership teams of both established and growing businesses.
Not to be confused with professional indemnity insurance, which covers the activities of a business, management liability relates to running a private company and the legal obligations of owners, executives and senior managers (i.e. your liability for mismanagement).
Management liability insurance covers the costs involved with dealing with unexpected and potentially expensive situations such as
- alleged wrongful acts by managers
- dishonesty by employees
- employee issues
- statutory fines and penalties
- company tax matters.
Legal claims can be brought by statutory authorities and regulators such as the Australian Securities and Investments Commission (ASIC), or the Australian Prudential Regulation Authority (APRA), your own company or its shareholders, employees, creditors, competitors or, in a worst case scenario, administrators or liquidators.
The legal costs of defending these claims can be financially crippling for businesses and individuals. Even if the claims are groundless responding to them involves outlay, and if a business owner or manager is found liable they can be held personally accountable and their assets garnished, and this can apply after their role with the business has ended.
Without adequate protection you could risk losing, not only your business, but also your personal assets. Management liability insurance protects your wealth and your family’s security, not just your company.
This is why this comprehensive policy is essential for private companies of any size. It not only safeguards the business’s bottom line and liquidity, it also protects its past and present decision-makers from claims arising from oversights or mistakes.
What management liability insurance covers
Management liability cover provides protection for a business’s assets as well as those of its managers, ensures continuous cash flow and provides a resource for defending or paying claims.
It comes into play if your 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.
- legal representation and advice
- investigation services
- civil fines and penalties
- damages awarded against you.
Businesses can claim under management liability cover for reputational damage control in the form of crisis containment and public relations services, and for your accountant to provide information to respond to a proposed audit by the ATO.
It also recompenses losses due to criminal acts by employees, such as fraud or theft, including stealing stock.
Other common management liabilities
This is an area where claims can be made by past, present and prospective employees relating to:
- unfair dismissal
For example, an unsuccessful job applicant might claim to be the subject of racial discrimination after the appointment went to another candidate with identical qualifications and experience.
Whether or not you choose to defend these claims in court, they involve unexpected outlays which can be covered by a management liability policy.
Businesses must comply with the regulatory frameworks governing their activities across their industry sector, which encompass competition law, environmental and data protection, and employment practice requirements. Inadvertent breaches and oversights can incur penalties.
Gradual pollution is a case in point. This environmental issue can arise months after demolition work, for example, from the slow release of soil, silt or sediment into a waterway, without the knowledge of the construction company involved.
Who needs management liability insurance ‒ does size matter?
The bigger your business, the higher the sums involved in claims tend to be, but when it comes to 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, and this can apply retrospectively.
Be aware that as your business grows the scope of your liability will probably increase as well and you will need to stay abreast with the requirements of who among your senior managers needs to be covered. And if you or another director are using your personal assets or a loan to back up your enterprise it’s critical that you have management liability protection in place.
Not sure of your business’s obligations?
There are exclusions and also often a deductible or excess and limits on management liability cover, so it’s always best to talk to an insurance broker with specialist understanding of your industry sector for advice about the protection that you need.
You can also visit the ASIC website or consult a lawyer, and consider joining a business group to share their learnings.