Why Every Business Needs Management Liability Insurance

Given the complex nature of modern business operations and today's business environment, Management Liability insurance has become a crucial component of a company's risk management strategy. Management Liability ensures that the company and its leaders are protected against unforeseen liabilities and can continue operations even in the face of legal challenges.

The reality is that the probability of an incident is unpredictable no matter how good a company's work culture or operations are, and could include claims such as bullying, breach of duty, defamation, harassment, discrimination and fraud. Adequate insurance is key to safeguarding against the devastating financial and reputational outcomes for businesses and their top leaders.

Essential reasons businesses need Management Liability

1. Financial Costs

The costs associated with defending against lawsuits or regulatory actions can be substantial. Management Liability insurance helps ensure that a company has the financial resources to cover these costs without draining its assets, thus maintaining financial stability. There are several costs that may arise from legal actions brought against managers or directors for alleged wrongful acts in their managerial capacities, including:

Investigation costs
Legal fees
Reputation management and PR costs
Damages and claimant costs awarded against you
Civil fines and penalties

Minimising the financial impact on the company and individuals also allows access to substantial legal defence, as well as top-level public relations representation. These can be the difference in whether a company survives such a crisis.

2. Personal Asset Protection

For individuals in management positions, personal liability can be a significant concern. This insurance helps protect their personal assets from being used to settle business-related legal disputes. Without such protection, personal financial assets like homes, savings, and investments could be at risk in the event of litigation.

3. Attracts and Retains Talent

Further to the above point, not having such protection in place could deter talented individuals from leadership positions due to the fear of personal financial loss. Not to mention, the lack of this insurance might inhibit decision-making, as managers could become overly cautious to avoid any risk that might lead to personal liability. This insurance not only safeguards personal assets but also supports a culture of bold and innovative leadership by removing the fear of personal financial repercussions.

4. Protects Leaders Past, Present and Future

Management Liability insurance typically provides coverage for past, present, and future leaders (directors, officers, and sometimes managers) of a company against certain risks associated with their roles and responsibilities in the organisation. In many cases, the alleged wrongdoing occurred some years ago and the employees involved may have already moved on from the company, but this doesn't evade the company's responsibility. Knowing that there is protection in place can provide peace of mind for all stakeholders, allowing management to focus on the core activities of running and growing the business without being overly preoccupied with potential legal liabilities.

5. New Laws and Regulations

There is no company or industry immune to operational and management risk. With leadership comes responsibility and the daily decisions that business leaders make can have unforeseen consequences, whether ill-intentioned or not. Considering that new laws continue to be introduced, creating stricter regulations, as well as a workforce that is increasingly aware of their rights, Management Liability has never been more important. Having such cover in place can help ensure the company is protected while making changes to meet new legislation or to evolve the company's work culture.

Examples of Management Liability Claims

Management Liability claims could arise from risks including but not limited to, bullying, harassment, unfair dismissal, occupational health and safety, employee theft or fraud, and mismanagement by directors.

For example, an employee alleges that they were wrongfully terminated based on discriminatory practices. The employee claims that they were let go because of their age, despite consistently positive performance reviews. The former employee files a lawsuit against the company, alleging age discrimination and wrongful termination. They seek damages for lost wages, emotional distress, and punitive damages. The company incurs legal defense costs and may potentially be required to pay a settlement or judgement if the court rules in favor of the employee.

Another example would be a company that is investigated by a regulatory authority for non-compliance with industry-specific regulations. The investigation reveals that the company's executives were aware of the compliance issues but failed to take corrective action. The regulatory authority imposes fines and penalties on the company. Additionally, there may be civil lawsuits filed by affected parties claiming damages due to the company's non-compliance. As a result, the company incurs legal defense costs, fines, and penalties.

Current Workplace Statistics

Workplace bullying costs Australian employers an average of up to $24,000 per case⁴
Corporations found guilty of an offence face penalties up to $15.65M or 10% of annual turnover, capped at $782.5M²
62% of Australian organisations experienced some form of economic crime¹
Directors found personally liable for breaching their duties face penalties up to $1.565M²
In the last 5 years, 1 in 3 people have been sexually harassed at work (33%) in Australia⁵
Workplace bullying and harassment costs the Australian economy up to $36B annually⁴
In 2023, there were 7,686 unfair dismissal cases in Australia, down from 2022 which had 9,299 cases ³
Unfair dismissal cases can cost manager and directors up to $83,750 per case and this figure goes up every year³
37% of economic crime cases involved an internal perpetrator¹

Even with good workplace practices, there are still risks

While Management Liability insurance is not mandatory, it is highly recommended for most businesses due to the significant protection it offers against various legal claims. Some businesses, especially those that have never faced a legal claim, might underestimate the likelihood and potential severity of management-related claims. They may believe that good business practices alone are sufficient to protect them from legal action. We like to think the best of people but unfortunately, people can make mistakes, they can be unpredictable, and some are litigious. Even with good practices in place and a great defence team, management risks are never completely eliminated.

How Coverforce can help

We understand the risks that directors, officers, managers and businesses face. Our expert insurance brokers will work closely with you to provide tailored risk advice, ensuring you have the right Management Liability cover to protect your personal and business assets. Contact your local Coverforce Office today and gain peace of mind with reliable and competitively priced coverage.

The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact Coverforce directly.

REFERENCES

https://www.pwc.com/gx/en/forensics/gecsm-2022/pdf/PwC%E2%80%99s-Global-Economic-Crime-and-Fraud-Survey-2022.pdf
https://asic.gov.au/about-asic/asic-investigations-and-enforcement/fines-and-penalties/
https://www.fwc.gov.au/job-loss-or-dismissal/unfair-dismissal/possible-results-unfair-dismissal-claims/compensation-unfair
https://www.aph.gov.au/parliamentary_business/committees/house_of_representatives_committees?url=ee/bullying/report/chapter1.htm
https://humanrights.gov.au/time-for-respect-2022

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