Why management liability insurance is essential in Australia

What is management liability insurance?

Management liability insurance protects managers and employees (directors and officers of the business as well as the company) against any claims that are the result of their actions or decisions.

A management liability policy offers broader coverage than a traditional Directors and Officers liability insurance policy (D&O) and generally consists of a combination of coverage sections including D&O, employment practices liability, crime, statutory liability to name a few.

Why do you need management liability insurance?

There are few industries where companies can afford to ignore the legal and regulatory risks of their operations.

As risks continue to evolve, companies face complex challenges. Business failures, regulatory investigations and actions, employment practices claims, commercial disputes, and employee theft are becoming more prevalent. As a result, directors and officers of Australian companies are increasingly vulnerable.

For the next few years ahead, it is expected current macroeconomic conditions will create difficulties for companies attempting to hit already challenging financial, social, and environmental goals. Directors and officers continue to face heightened personal accountability, and regulators will continue scrutinising companies’ actions both at home and overseas.

A potential recession and cyber and Environmental, Social and Governance (ESG) concerns top the list of key risk trends for directors and officers in 2023, according to a new survey by Allianz Global Corporate & Specialty (AGCS).

Cyber concerns such as data security and information protection are top areas to watch for directors, AGCS said. Investors are increasingly considering cyber risk management as a critical component of boards’ oversight responsibilities. Board members are expected to develop and maintain accountabilities for IT security before, during and after cyber incidents, AGCS said. Failure to do so can be seen as a breach of duty.

“Around the world, directors have already been called to account, including in derivative and direct litigation, due to their alleged failures to institute appropriate governance and protection against cybersecurity risk,” said Rishi Baviskar, global cyber experts leader for AGCS’s Risk Consulting team.

Directors and leaders of large businesses are not the only ones that need to be protected. SME’s also need to consider management liability insurance, as the defence costs if a business ends up in court can mean financial ruin.

Environmental, social and governance issues

Environmental, social and governance issues are another top concern among boards, with regulatory action or litigation due to ESG issues being driven by increased reporting and disclosure requirements. This could trigger claims in cases of inadequate response or non-compliance, AGCS said. Companies and their boards also face the risk of increasing litigation from environmental groups, activist investors or their own employees.

Climate change litigation is on the rise, with more than 1,200 cases filed globally in the last eight years, compared to only about 800 cases between 1986 and 2014. Whilst most of these cases were filed in the US, filings are increasing at international courts or tribunals. 2021 posted a record-high annual number of recorded cases outside the US.

Another rising risk is “greenwashing” – the misrepresentation of ESG credentials or achievements. This can lead to regulatory action, litigation and shareholder suits, AGCS warned.

What does management liability insurance cover?

Management liability insurance can cover:

• Employment practice liability: Cover for the cost of paying claims of employment breaches, such as wrongful dismissal, bullying or discrimination
• Directors’ and officers’ liability: Protects your proprietary limited company’s past, present and future directors, officers and managers against claims of wrongful acts, such as misrepresentation or breach of duty (subject to business size)
• Crime: Protects your business against claims such as employee or third-party fraud (not all criminal activity is covered)
• Corporate liability: Covers costs that your business would incur if you need to defend and settle claims from outside parties alleging wrongful conduct, as well as investigation into the affairs of the company
• Statutory liability: Covers the cost of defence, fines and penalties under some statutes e.g. Work Health and Safety (fines under Work Health and Safety cannot be covered by insurance in NSW)
• Defence costs: Covers your legal costs if your business ends up in court

Do I need management liability insurance?

There are few industries where companies can afford to ignore the legal and regulatory risks of their operations.

Management liability is mostly intended for incorporated entities such as private companies, unlisted public companies, clubs and charities limited by guarantee and incorporated associations.

Most Management liability policies are not designed for unincorporated businesses such as partnerships, trusts, SMSF unless the policy has been specifically structured to respond in that manner.

How much does management liability insurance cost?

The cost of a management liability policy depends on a range of factors, including the type of industry you work in, the size of your business and whether you’ve made any claims in the past.

The average management liability policy in Australia for SME business costs between $2,000-$5,000 annually.

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