In 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.
Find out everything you need to know about management liability insurance in the following sections:
- What is management liability insurance?
- What is covered by management liability insurance?
- Do I need management liability insurance?
- How much cover do I need?
- How much does management liability insurance cost?
- How to find a management liability insurance provider
- Final thoughts & FAQs.
What is management liability insurance?
Management liability insurance is designed to cover the costs of legal action from allegations of wrongdoing brought about by the actions of a company or its directors. It aims to protect the company and the individuals in management financially against their legal liabilities, commonly providing cover for legal expenses, damages and settlements against specific types of legal and criminal claims.
Management liability insurance polices are typically comprised of directors and officers liability insurance, corporate legal liability and employment practice liability cover. Overall management liability insurance is a comprehensive policy, offering protection against company liability as well as personal liability for those at the top from a variety of claims.
What’s the difference between management liability insurance and directors’ and officers’ liability insurance?
In the UK, many insurers use the terms management liability and directors’ and officers’ liability (D&O liability) interchangeably. In reality, D&O liability comprises one of three major parts to a typical management liability policy. Directors’ and officers’ liability, explained in detail further on, aims to protect the personal assets of those in management and supervisory roles, typically providing financial cover should they be sued for actions taken in their capacity as a director or officer.
D&O liability can also protect companies, but only in one specific instance. When directors and officers are found personally liable for wrongdoing, it is up to them to cover all associated costs, such as legal proceedings, compensation payouts and so forth. Occasionally, however, companies choose to protect their managers and pay for these costs on their behalf. In these cases, D&O liability can offer reimbursement to companies that have elected to bear the brunt of a personal liability claim against one of its own.
D&O cover is just one element of a management liability policy. Management liability insurance is also designed to protect the company against its liability as an entity. If somebody brings a claim against a business and the company is found liable, a management liability insurance can pay out for the costs.
What is covered by management liability insurance?
Management liability insurance (MLI) consists of three main areas of cover: cover for the individual, cover for the company and protection for the employee. This cover is encompassed in the three core areas detailed below.
Directors’ and officers’ liability cover
Those with significant amounts of responsibility can find themselves under fire if one of their decisions has negative consequences. If a person in a leadership position is accused of attempting or committing an act of wrongdoing, whether knowingly or unknowingly, they could be investigated, sued or prosecuted. Wrongdoings can include any of the following:
- breach of trust
- breach of duty
- misleading statements
- breach of legislation
- wrongful trading.
Almost anybody can bring a claim against a director personally. Parties that commonly pursue management liability claims include:
- investors or shareholders, if they suffer a loss and blame the director personally for misguiding them or withholding information.
- HMRC, if they suspect wrongdoing in tax reporting or payment.
- HSE investigations, such as if they suspect negligence from management which poses a threat to employee or public safety. HSE can also pursue legal action if they find evidence of negligence.
- creditors. If a company borrows money before going under, a lender may make a claim against the company for providing misleading information that results in the creditor’s financial loss.
- other employees. Claims could relate to an error made in an employee’s pension scheme which results in them losing money, or a health and safety claim where they have sustained an injury from lack of sufficient training from their supervisors.
- competitors. Defamation is a common claim from competitors, for example, if they find you have made an inaccurate statement about them.
- regulatory bodies. Financial regulators may investigate a director if they’ve made an error in the administration of a benefit or pension scheme. Other regulatory authorities may investigate if they suspect the director of non-compliance with EU legislation.
- the police, if they suspect fraud.
Many companies choose to pay for claims made against their directors and officers. D&O cover can reimburse a business for these fees, protecting a company’s balance sheet if they choose to shoulder the costs of wrongful acts committed by their valued members of management.
Corporate legal liability
Corporate liability refers to a company’s legal responsibility for criminal activities, such as if the company or its employees commit unlawful acts.
In some cases, corporate liability can also indicate a lack of action, where the company failed to take action necessary to comply with the law. Claims against businesses can come from almost any angle: business partners, employees, customers, suppliers, investors, competitors, shareholders. Here are some examples:
- Prosecution following a workplace accident. If a faulty machine causes an employee to sustain a serious injury, the Health & Safety Executive (HSE) are likely to investigate to determine whether better safety practices, training or equipment could have prevented the incident. If they discover evidence of this, HSE may charge the company with breaches of health and safety law.
- Pollution. The Environment Agency may prosecute companies responsible for polluting the environment. An underfloor heating system at a block of flats might be responsible for polluting a local water source. If the Environment Agency finds the commercial building company that constructed the building to be accountable due to negligence or incorrect installation, the company may be found guilty of breaching environmental laws.
- Copyright infringement. A competitor may sue a marketing company for copying an image used in its campaign. The company in question could be found liable for infringing copyright laws.
In addition to the above examples, almost any action, or inaction, might result in corporate legal liability, if:
- it’s deemed a result of negligence
- it was performed for the benefit of the company
- it came about due to a lack of proper management.
If these circumstances apply, the company may face prosecution, resulting in the financial threat of covering a costly lawsuit and absorbing other financial losses. If the prosecution is successful, the company may be punished in a court of law. Corporate legal liability insurance can cover costs such as:
- the cost of the company’s legal defence
- legal fees and court fees
- investigation costs
- settlement fees.
Employment practice liability
The third area of cover typically provided under a management liability insurance policy is employment practice liability. Sometimes, this form of cover is available as an extension to standalone directors’ and officers’ liability insurance. Employment practice liability insurance protects companies and their key managers against employment-related legal action. Commonly, these types of claims are brought by current or former employees where their rights have been violated.
Employment-related legal action can come about from all kinds of misconduct or negligence. The sorts of claims that this cover can typically support include:
- unfair dismissal
- pay inequality
- deprivation of career opportunities, such as failure to employ or promote somebody
- a breach of the employment contract
- emotional stress caused at work.
Employment practice liability insurance (EPLI) can cover both a company and its employees when they have to respond to allegations of employment malpractice. It can assume the following costs:
- legal defence and legal representation
- other legal fees
- settlements or compensation awards.
Other areas of cover
The three areas above constitute the building blocks of most management liability insurance policies. Depending on the provider in question, a management liability policy can also provide other forms of coverage. These tend to include:
- crime loss cover
- tax audit expense cover
- pension trustee liability.
Typical exclusions to a management liability insurance product
Companies, directors and officers do not have protection for any illegal acts they committed deliberately. Other instances which typically do not have cover under management liability insurance include:
- claims covered by other insurance policies
- claims made under a previous policy
- directors or officers who have committed intentional non-compliance
- claims made before the policy begins
- property damage
- bodily harm
- fines and penalties.
Do I need management liability insurance?
Management liability insurance is not a legal requirement, nor is any of the three areas of cover it provides. However, litigation against companies is becoming increasingly common. Claims of corporate legal liability are notoriously expensive: action deemed unlawful can result in a hefty lawsuit, with potentially devastating settlement fees. As there’s no upper limit to how much a compensation payout could be, these kinds of claims can bankrupt even the largest of companies. What’s more, some clients refuse to work with businesses without corporate liability insurance in place.
Similarly, liability has taken a severe shift in recent years from corporate responsibility towards personal responsibility, even when individuals have made decisions in the scope of their role within a company. This leaves more and more people exposed to claims of wrongful acts, and those with the highest risk are undoubtedly those occupying supervisory positions or leadership roles.
Emphasis on personal accountability means an increased risk for such individuals’ livelihoods and personal assets, leaving them to cover the costs of legal claims alone. D&O insurance is, therefore, of paramount importance to the financial security of those in supervisory roles, and companies should bear this in mind to protect anybody with managerial responsibility in their organisation.
Finally, employees are becoming more aware of their rights, and employment tribunal cases appear to be on the rise. Acts of discrimination or harassment can go unnoticed even by a company with extensive protocol in place, leaving it exposed to instances where their employees have acted unethically, unfairly or unlawfully.
Management liability insurance can offer companies peace of mind that their business and management team can survive in the event of unexpected serious legal action.
How much cover do I need?
How much management liability insurance you need depends on how at risk your company is. There’s no hard and fast rule for this, but insurers tend to consider businesses in specific industries as carrying a lower risk. Similarly, smaller companies tend to need a lower limit than larger international corporations.
Typical indemnity limits start at £1 million and go up to £10 million. An insurance specialist, adviser or broker can offer professional advice on your company’s level of risk and help you determine the amount of cover you need.
Those considering management liability insurance should also consider the length of the policy they want to take out. Claims can come out of the woodwork years after the event in question took place. Whether that’s a breach of environmental law, a case of sexual harassment or a manager making a misjudged decision, companies and their staff remain potentially liable even years after projects have concluded or individuals have retired.
It’s therefore a good idea to consider extending your cover to include a run-off period. Typically, insurers in the UK can offer a run-off period of up to six years.
How much does management liability insurance cost?
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.
How to find a management liability insurance provider
Many commercial insurance providers offer a management liability insurance policy, comprising D&O cover, corporate liability and employment practice liability. Speaking to a professional adviser can help you determine your level of risk as a company, as well as the level of risk to your officers and directors. Using this information, they can advise you on an appropriate limit of indemnity. Establishing these factors can help you find a provider that offers the right level of cover for your business.
Approaching insurers directly
Typically, you can find policy information, including cover limits and features offered by a provider on their website, where you can generate a quote online or over the phone. Many insurance providers have specialist advisers who can answer queries about features of their cover and recommend products suitable to your business. Bear in mind that you cannot compare all insurers on a like-for-like basis, as some providers may have cheaper premiums but offer a lower level of cover.
Using a broker
Management liability insurance is one of the more complicated insurance products on the market. As such, many insurance providers only offer these types of policy through experienced brokers, who can match the coverage needs of their clients with an appropriate policy. Brokers have the relevant industry knowledge to understand the risks facing varying types of business, allowing them to offer a policy which accommodates for these. Brokers have access to a more substantial portion of the market than direct customers, as well as exclusive prices.
The best way to find the optimal deal for any insurance product is by comparing lots of quotes and policies from multiple providers. An efficient way to do this is by using a comparison website, which can generate quotes from numerous insurers and compile them in an easy-to-navigate list. You can filter your search results to find providers offering specific features of cover or order the results by price.
Final thoughts & FAQs
Companies have a staggering amount of responsibility, towards their employees, those they trade with, investors, shareholders and members of the public, among others. Even giant corporations with dedicated legal teams can find that something slips through the cracks, resulting in unexpected legal claims.
Similarly, with large amounts of responsibility comes significant rewards, but that’s not without high risk. Those at the top are under pressure to appease people from all sides, all the while adhering scrupulously to company policy, industry regulations and legal guidelines. Managers are under high levels of scrutiny, leaving them open to all kinds of legal claims.
A successful lawsuit against a company or its management team means court fees, defence costs and potentially a buckling payout. Fortunately, management liability insurance can protect both businesses and their managers from bankruptcy caused by professional mistakes.
Still have questions on management liability insurance? Find answers to common queries, below.
Can a management liability policy protect 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.
What’s the difference between professional indemnity insurance and management liability insurance?
Professional indemnity insurance covers claims of mistakes or errors made by employees or claims of poor-quality service. These tend to come from customers or clients for work they have paid for, which is not up to par. Management liability insurance covers wrongful acts carried out by a company, or by those in managerial roles, which have caused adverse consequences, whether that’s for an investor, shareholder, client, employee or an investigation made by a regulatory body.