Imagine a fast-growing company making an ambitious expansion into international markets, only to face financial ruin due to a single poor decision by one of its directors. A single misstep, whether it's a managerial decision, employment practice issue or fiduciary oversight, can potentially lead to lawsuits, financial losses, and reputational damage.
Despite this, the unfortunate reality is that many firms and directors are still dismissive of this type of cover. They’re confident that they know what they're doing and therefore don't ever see such a situation happening to them. “Why would I need that type of insurance? I'm brilliant at my job”.
While that may be true, relying on being perfect all the time is unrealistic for any business, as mistakes can happen. £13.6 billion is lost by SMEs each year due to failure to take care of their legal issues, with each firm encountering 8 legal issues per year on average.¹
In this article, we explore what management liability insurance entails and why it's a necessary safeguard for modern organisations.
Key takeaways
- Management liability insurance can protect businesses and their leaders from personal and financial risks related to claims of wrongdoing, including legal and regulatory challenges.
- It covers areas like Directors and Officers (D&O) liability, employment practices, and fiduciary responsibilities, offering protection from claims that may result in costly legal fees and settlements.
- Both large corporations and SMEs are at risk, and without adequate coverage, directors may face severe personal and financial consequences.
What is management liability insurance?
Management liability insurance provides protection to your company and its leaders if they are accused of any wrongdoing relating to their daily duties as a director, officer or partner of your business, including discrimination, unfair dismissal, and failure to consult.
A management liability insurance policy typically includes D&O (directors and officers’) insurance, covering the personal liability of directors and officers, while management liability insurance protects the business and the personal assets of management.
Additional coverage can be added, including:
- Employment Practices Liability Insurance (EPLI): Covers claims related to employment practices such as wrongful termination, discrimination, harassment, and retaliation.
- Fiduciary Liability Insurance: Protects against claims arising from mismanagement of employee benefit plans.
- Crime Insurance: Covers losses due to fraudulent acts committed by employees or third parties.
Who needs management liability insurance?
No matter the size or power of an organisation, a claim made against a director or officer can be incredibly costly to deal with alone. The average cost of a claim currently sits at around £10,000, but can vary depending on the type of incident.²
SMEs: Small to Medium Enterprises: smaller companies are exposed to the same level of legislation as larger corporations. Incidents and accidents can happen anywhere regardless of business size, and they’re treated exactly the same by authorities across the board.
Large corporations: To put it simply, the larger your business, the greater the scope for something to go wrong. Bigger companies could naturally be seen as having more to lose, including potentially much heavier fines and a more notable name and reputation to tarnish.
Why is it important?
Leaving yourself unprotected is a very dangerous line to walk, that can lead to disastrous financial and reputational implications for both you and your business should the worst occur.
Management liability insurance can help protect you by:
- Covering expensive legal fees
- Supporting you with expert advice
- Compensating the aggrieved party (or parties) if necessary (subject to conditions)
Why might you need management liability insurance?
1. A director’s personal assets may be at risk
Many business leaders may be unaware that they can be held personally liable for the business decisions they make. In this instance, it could be your own finances – not your business’- on the line. As a business leader, not only are your personal assets at risk in the event of a claim made against you, but personal liability is unlimited – meaning no cap on what you might be liable to pay out of your own pocket to settle a claim.
2. Even smaller businesses are at risk
The cost of defending allegations made against a director or the company can be extremely costly whether a small or large business. Even if your business doesn’t have a board of directors in place, you could still be at risk for breach of contract, health and safety issues or employment-related claims.
