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Understanding Management Liability Insurance

The National Insurance Brokers Association takes a look at Management Liability Insurance.

It’s not just big businesses that face the prospect of long, drawn-out court battles over everything from unfair dismissal and regulatory discrepancies to occupational health and safety concerns. Small-to-medium enterprises are being drawn increasingly into the quagmire of litigation and business interruption – and the quickly escalating associated costs.

But, for as little as $500, those small-but-going concerns – and even the larger enterprises – can cover themselves against such potential problems, as well as the standard business insurances of fire, crime, and public liability.

“As soon as businesses start employing staff, have a director or shareholders, or handle monies on behalf of third parties, they should look into taking out management liability (ML) insurance,” says David Porteous, General Manager for Brooklyn Underwriting.

Porteous says ML has moved on from the traditional directors and officers liability insurance as Federal and State legislations and regulations became increasingly more complex, and leave not just ’bosses’ at risk of exposure, but employees as well.

“We are seeing the largest number of claims in the management and employment practices areas,” says Porteous. “Employment practices liability insurance can be taken out as part of a package for ML, and can cover things such as unfair dismissal, lack of advancement or even sexual or workplace discrimination.

“Anyone who operates a business is exposed to hundreds of pieces of legislation, and businesses are becoming more aware of the sheer breadth of exposures they face in the day-to-day operations of running their business. These days a ML policy can even extend to cover such things as crisis management, theft and fidelity and pollution defence.”

All business great and small

Grant Cairns, Financial Lines Manager Australia and New Zealand for ACE, says prior to ML being available, small business owners would often choose to go uninsured instead of purchasing separate policies for directors and officers liability, employment practices liability and employee crime risks.

“Management liability has incorporated many of the areas covered by these standalone policies and other extensions into one convenient policy,” he says. “Management liability insurance is now designed to meet specifically the needs of the SME market across the vast majority of industry classes.”

Cairns says when it comes to ML, underinsurance is an issue across Australia. Surveys have shown that a low percentage of businesses adequately protect their owners, directors and management from the legal consequences of liability risks that may arise from their daily actions.

In the global business environment managing business risks is critical to the overall performance of a business.

John Ward, National Portfolio Manager Casualty and Specialty at Lumley Insurance, says: “Most companies insure the tangible exposures of property damage and bodily injury but neglect to insure against economic loss. Any business can experience unwelcome surprises that could potentially threaten their financial position leaving their managers and owners exposed to personal liability, and putting the business under threat.”

According to Ward, the demand for ML insurance continues to grow, due to increased demands from regulatory bodies, recent changes made to work health and safety harmonisation legislation, coupled with high-profile cases reported by the media.

“We are also seeing more regulatory investigations in the media,” he says. “Recently we’ve seen high-profile employment practices claims, such as the David Jones sexual harassment case, employee theft in the form of the $20m employee fraud at Clive Peeters, and occupational health and safety actions.”

The fourth pillar

Ryan Thomas, Senior Technical Specialist at Suncorp, says that while most business owners understand the need for insurance cover for fire, public liability and business interruption, they are ignoring the  ‘fourth pillar’ of ML insurance: owners and directors insurance.

According to a recent industry survey conducted by Cameron Research, only 17% of business owners have chosen to protect their owners and directors with the appropriate level of cover.

“Many business owners are being held increasingly responsible for events that occur within the workplace,” Thomas says. “They are ‘chancing their hand’ by ignoring ML cover.”

An increasingly litigious business climate is placing a greater focus on this insurance category, with the variety of law suits being pursued against business owners by employees, shareholders, creditors or others on the rise.

Thomas says claims can involve unfair dismissal, sexual harassment, workplace bullying, occupational health and safety breaches, or general allegations of improper conduct.

“With SMEs facing an ever-rising rate of claims, including ML in an insurance package is no longer something that can be put off until tomorrow,” he says. “Most people are familiar with wrongful dismissal, discrimination and harassment, but have you considered the cost to your business of a simple regulatory investigation?

“Even the most frivolous of cases can cost a great deal of money and time to defend.  SMEs are especially vulnerable to the cost in defending themselves and could go under as a result, even in the event of a positive finding. Anyone in business is a potential target – whether your business is a ballet school, a bottle shop or a butcher – no-one is immune.”

Simply the best

Jarrod Wilson, National Commercial Manager of CGU Insurance, says nearly all professional lines insurers provide some form of management liability.

“This is particularly important for SMEs as they can experience rapid business growth and contraction, employee numbers fluctuating, management structures changing and finances becoming more complex,” he says.

Stephen Bonnington, Head of Financial Lines for Zurich, says, in its simplest form, management liability is a combined ‘financial lines’ product designed for small to medium, private (non-listed) companies and includes six main areas of coverage or ‘insuring clauses’ that are typically sold as standalone products for medium to large corporations – insured persons liability, company liability, employment practices liability, statutory liability, commercial crime and internet liability (see box out).

“ML was developed as an alternative to purchasing these six separate policies, which were often too expensive for small businesses with high overheads and tight margins,” Bonnington says.

“And realistically, a company may only expect a claim to trigger any one of these policies infrequently, so having one policy which covers all of these areas means a more cost effective solution.”

One size can’t fit all

Bonnington says companies in the manufacturing, mining, construction and transportation sectors are generally seen as higher risk and may have a greater exposure to occupational health and safety risks.

“These companies typically have claims that trigger the insured persons liability, employment practice liability or statutory liability sections of the policy. In recent years, there has been an increase in claims alleging failure to provide a safe working environment. That has resulted in fines levied against directors and officers, as well as the company itself.”

In another area, claims for corporate manslaughter are more commonplace in industries with employees exposed to hazardous materials or activities, and these sectors usually attract higher premiums and excesses as a result.

“Companies that accept and process high levels of credit card transactions – like a retail business – may well have a higher exposure to the Commercial Crime section of the policy,” continues Bonnington. “The retail sector is also subject to claims for unfair dismissal and discrimination and these fall within the Employment Practices Liability section.”

Keeping pace with change

Cairns says a recent development in the area of ML risks has been the push to harmonise the various state-based occupational (workplace) health and safety laws to implement uniform legislation in each state and territory. In January 2012 the Model law was introduced in the Commonwealth, ACT, NSW, Queensland and NT governments, and from 1 January 2013 Tasmania and SA have also adopted this law.

“Among other matters, the laws place an onus on the directors and officers of a company to exercise due diligence to ensure the company complies with its health and safety responsibilities. Failure to do so can result in substantial penalties. Investigations by regulators are costly to defend and this is likely to have an impact on the claims environment in the ML market,” he says.

Wilson says exposures in the ML space have changed materially in recent years, in things such as the Fair Work Australia Act (2009) which placed new rules around employment issues such as unfair dismissal and sexual harassment.

“There is also increased ASIC, ACCC and ATO (audit) investigations,” he says. “Cover for legal costs in the event that there is no formal claim can fall under investigation/representation costs.

“And recent amendments to the Privacy Act also have had an impact. The key areas that are impacted are privacy policies and privacy collection statements, direct marketing and privacy compliance through procedures and systems. Poor management of increased volumes of personal data could lead to a claim.”

ML and D&O: what’s the difference?

Management liability and directors and officers insurance (D&O) are often seen as similar products.

However, D&O is a product designed to protect the personal assets of company directors and officers in the event they were sued while acting in their capacity as a director or officer. Management liability protects the company as well as its directors and officers against legal liabilities and statutory obligations.

Grant Cairns, Financial Lines Manager Australia and New Zealand for ACE, says across the market there are variations in management liability insurance offerings, and the critical thing is for policyholders to understand their coverage and the claims handling abilities being offered by their insurer.

David Porteous, National Underwriting Manager for Brooklyn Underwriting, says it became apparent about 10 years ago that, with the ever-changing landscape of State and Federal legislations and regulations, there were a number of exposures that were being left with traditional D&O insurance policies.

“Management liability on the other hand creates a blanket cover, not just for directors and officers but can also cover employees among other things,” he says.

Wrongful dismissal

This case deals with a small family-owned company performing finishing work for garments for fashion manufacturers.

The Managing Director of the insured company was advised by the Supervisor that one of the employees had stolen some garments.

The Managing Director accused that employee of theft and told her to leave.

On her way home, the employee consulted an employment lawyer who initiated proceedings against the company for unfair dismissal in the Australian Industrial Relations Commission.

The wrongful dismissal claim was defended and lost by the company.

No theft was found against the employee. The employee was reinstated to her employment with the company with full back pay of $9,000 plus costs of $15,000. The company’s legal costs (including barrister’s fees) came to $64,000.

Regulatory investigation

The insured company provided management consultancy to a large product/distribution company. The production/distribution company attracted media attention for involvement in fraudulent activities and was investigated by ASIC.

To assist in its investigations, ASIC issued notices to each of the directors of the insured company to produce certain documents and attend compulsory examinations.

The directors engaged solicitors to review their documents, advise them, and be present at the ASIC examinations. The directors were required to attend over a period of five days, and they incurred legal costs of $60,000.

The six components of management liability

Insured persons liability

Covers loss arising from claims brought against the directors, officers or employees acting in a managerial or supervisory capacity within the company.

Company liability

Loss arising from claims made against the company.

Employment practices liability

Loss arising from claims brought by past, present or prospective employees alleging discrimination, sexual harassment or failure to promote, for example.

Statutory liability

Claims for loss arising from any breach of a Commonwealth Act made by the company, or its directors or officers.

Commercial crime

Claims for loss arising from any fraudulent or dishonest act committed by an employee or a third party.

Internet liability

Loss arising from an actual or alleged electronic publishing claim. This includes claims made with respect to libel, slander, plagiarism, violation to right of privacy, or infringement of copyright.

Need More?

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The Top 6 In Australian Insurance

Insurance News takes a look at the Top 6 in Australian Insurance


Robert Kelly, Managing Director and Chief Executive, Steadfast

The founding father of Steadfast is realising his vision for the company at a bewilderingly swift rate. Since listing in 2013, Steadfast has become a company capable of dealing in practically any branch of insurance, including personal lines and life. It has around 304 brokerages and about 750 offices around, Australia, with its consolidated revenue growing 80+% in the 12 months to June 30 to reach close to $6billion in Insurance Premium.

Kelly is building a juggernaut that has an increasing capacity to provide straight-through services for clients via its force of directly owned and affiliated brokerages, underwriting agencies and specialist services. Maintaining a pace that would exhaust much younger men, the industry’s ultimate wheeler­ dealer shows no sign of slowing down as he adds new bits and pieces to the Steadfast operation just about every month.

Kelly has been one of the go-to people in the Australian insurance industry for many years, and that hasn’t changed. Despite the constraints imposed on him by virtue of his company’s listed status, he remains the insurance industry’s most candid advocate. Like a modern trade union leader, he’s as much at home talking shop with ordinary insurance people as he is hammering out agreements in the industry’s boardrooms.


Peter Harmer, Managing Director and Chief Executive, IAG:

He’s not likely to go slow in taking a new broom to the region’s largest insurer, because Harmer carries into the top role at IAG an attitude that’s savvy, sharp and challenging. Inheriting a solid and successful company from his predecessor Mike Wilkins, Harmer is well placed to exploit IAG’s large customer base.

His enthusiasm for Big Data and customer-centric development will see the market scrambling to keep up with what will almost certainly be new distribution strategies. There’s also room for greater efficiencies within IAG – from a rearrangement of IAG’s “silo” approach to much of its management, for example. Harmer is the right person to cut through internal resistance using precision and persuasion.

His experience at the top of Aon’s UK operations and his transformation of CGU from a ponderous traditionalist into a commercial insurance market leader – all the time while juggling with the integration of Wesfarmers Insurance’s business into the mix – is a fair example of the sort of dynamism he can bring to the whole IAG group. Expect the unexpected.


Mark Milliner, Chief Operating Officer­ designate, IAG:

This was a tough one to call, but every insider Insurance News consulted had the same thing to say: The decision in November by Milliner, the chief executive personal lines at Suncorp, to quit the group and join Peter Harmer at IAG is a game­ changing event in a market where Suncorp and IAG are tough competitors.

Milliner built his reputation as the mastermind behind the Brisbane-based insurer’s back-office overhauls, its auto repair revolution and his willingness to go head-to-head with powerful politicians over mitigation issues. Passed over this year to replace Patrick Snowball as group chief executive at Suncorp, Milliner is tipped to be a masterful deputy for Harmer, bringing 22 years of change management experience with him when he starts at IAG in mid-2016.

His industry nous and his straight-shooter attitude have earned Milliner high status in our Top 20 over the past few years, and we reckon nothing much will have changed, except his place of work. Suncorp’s loss is a very significant gain for IAG. Game on.


Ajit Jahn, President, Berkshire Hathaway Insurance:

Another out-of-the-box choice, perhaps, but Ajit Jahn has the ability to change the Australian insurance industry, if he’s inclined to.

Jahn shook up the local market twice this year – once with the arrival in Australia of Berkshire Hathaway Specialty Insurance, an insurer with the financial and technical wherewithal to disrupt the market in pretty much any way it sees fit – and then with the acquisition of 3.7% of IAG for $500 million. That deal carries some unprecedented side-deals.

The media-shy Jahn is often tipped as a successor to Warren Buffett. He wields considerable influence in the industry through his management of Berkshire’s massive reinsurance operations.

This year he has had to drastically tweak or cancel some deals in his empire to counter falling revenues, and there has been some change in strategies as well. That’s what makes the IAG deal so globally interesting. It was a one-off, and is seen as the spearhead of Jahn’s typically innovative – but untypically late – charge into Asian insurance, where IAG is very nicely placed.


Mark Searles, Chief Executive, AUB Group

Even though the reputation of AUB – until last month Austbrokers – for consistently increasing returns to shareholders may have lost a little lustre recently, Mark Searles shrugs it off as he adds greater ability and flexibility into his partner brokers’ armouries.

Searles is focused on diversification, building new support services that will increase the range of services brokers can provide their clients. That has seen Austbrokers taking up stakes in companies specialising in workers’ compensation, injury management and ancillary risk management activities over the past year.

His diversification drive is assisted by the growth of the New Zealand broking arm and the continuing success of Austagencies, whose underwriting agencies continue to pump out increasing amounts of revenue. Austbrokers now derives 23% of its profit from non-broking sources.

Searles is confident he and his team will be in the right place if/when premium rates recover through 2016.

His bold strategy is being closely watched by partners – some of whom are wary – and the wider market. With broking under assault from emerging alternative distribution systems, he might just have hit on a solution others can emulate.


Heinrich Eder, Managing Director, Munich Re Australasia

When reinsurance takes a bath, it often does it in spectacular style. But in a year of disappointing reinsurance returns, Eder can count on the increasing influence of his general insurance operation, Great Lakes Australia, to counteract some of the other side’s negative results. Great Lakes has been around for long enough for insurer clients of Munich Re to get used to a subsidiary that competes with them.

It’s underwriting an increasing amount of new business, most recently Sports Underwriting, Solution Underwriting and Calliden spin-off Calibre. Eder has been around the local market for 12 years – 10 of them as MD responsible for all Munich Holdings’ life and general operations in Australia, New Zealand and the Pacific Islands. He’s totally immersed in the market’s issues and associations, is well-liked and, as you’d expect, totally trusted.


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