what’s becoming a more and more litigious society, claims of wrongdoing are on the rise, and customers, shareholders, investors and even other employees seek to hold people accountable for mistakes and problems. Legal proceedings can set companies back by hundreds of thousands, or even millions, and if a senior member of staff finds themselves the target of a claim, they could have to fund the legal proceedings out of their own pocket.
A management liability policy is a comprehensive form of insurance that exists to cover allegations of wrongdoing, directed at the company as a whole or its managers, directors and officers. It can offer financial security for both businesses and individuals at the top, typically paying out for the costs of a wide variety of claims.
Policy Costs
There are several factors which determine the price of your management liabllity premiums. The principal factor is the indemnity limit on your policy. Other aspects which play a role in the price is the business’ annual turnover, the size of the company and where the company operates. Those operating abroad will need an international programme of insurance which can deal with claims made from customers or investors in other countries, which tends to bump up the price of the premium. Other factors include the company’s claims history, with higher premiums typical for businesses that have a history of employment-related claims.
How much you pay also depends on the level of cover you choose. Management liability insurance policies tend to include corporate legal liability, directors’ and officers’ liability and employers’ practice liability insurance as standard, though many insurers include extra levels of cover for free, or offer the possibility to extend coverage for additional premiums. You are likely to pay more for a policy with supplementary aspects included.
Protection Outside Directorships
Sometimes, company directors choose, or are asked, to sit on a board of directors in external companies or organisations. As an outside director, these individuals are still vulnerable to the same types of claims as in-house officers for any decisions they make in that role, which may cause an accident, injury, financial loss or other consequences for a third party. Whether an outside director has cover or not depends on the wording of the D&O cover in the company’s management liability policy.
Many management liability insurance providers offer outside directorship liability (ODL) as an optional add-on to their D&O liability protection. Sometimes, this feature will come as standard. There are often several conditions when it comes to ODL protection: some insurers will only top up the indemnity limit already provided by the outside company, for example, and some will only protect directors who were requested to sit on the board in question. Therefore, any directors looking to serve as an external director should check their policy carefully or seek professional advice to find out if they have protection.
People often confuse these two policies. While they work in a similar manner, they constitute a different insurance product. A shareholder protection policy provides a payout which shareholders, partners or directors can use to purchase the shares of another shareholder if they pass away or receive a diagnosis for a critical illness. This protection helps the remaining shareholders buy the shares and help the business return to normality if they would not usually have the funds to buy the equity themselves.
If a shareholder passes away, and there is no agreement in place for the distribution of equity, the business can enter a period of uncertainty, which can affect relationships with suppliers and customers. A shareholder protection policy also ensures that the family member of the deceased receives a fair sum of money agreed at the time the shares are purchased.
So, while shareholder protection concerns the ownership of the business, key person insurance protects the business against loss of profits following the death of any member of staff deemed intrinsic to a company’s success.
