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.
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.
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.
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.
Claims for loss arising from any breach of a Commonwealth Act made by the company, or its directors or officers.
Claims for loss arising from any fraudulent or dishonest act committed by an employee or a third party.
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.