Do I need Management Liability Insurance?

24 Apr 2023


Do I need management liability insurance?

If you are a director, officer or senior manager, you may be subject to a legal action against your company or yourself. Many people ask how they can protect their business and personal assets. In the following sections, we will discuss management liability insurance in more detail.

Management liability insurance: what is it?

In addition to small and medium-sized businesses, management liability insurance is also aimed at limited liability partnerships (LLPs). The policy provides financial protection for senior management and the company against allegations such as discrimination, unfair dismissal, and failure to consult.

One single policy can cover three areas of risk:

  1. Directors and Officers Liability (D&O)
  2. Employment Practice Liability (EPL)
  3. Company Legal Liability (CLL)

How does directors and officers insurance work?

During the course of their employment, directors, officers, and employees may receive claims against them. This kind of insurance protects their wealth against claims of wrongful acts made against them.

The coverage provided by directors and officers insurance varies depending on the policy.

As a general rule, D&O insurance covers the following types of claims:

  1. Violations of securities law, such as insider trading or securities fraud.
  2. Company mismanagement, such as failing to manage finances or operations properly. Even personal involvement in pension administration.
  3. Discrimination and harassment
  4. Protecting directors from claims brought by shareholders, including other directors.
  5. A breach of fiduciary duty, such as self-dealing or conflict of interest.
  6. Regulatory investigations, such as failure to comply with environmental or trading standards laws and regulations.

A person who has acted in good faith and who has complied with their responsibilities is generally protected from personal liability under the law. Failure to meet legal obligations can, however, result in personal liability for those who fail to comply.

In what ways is directors and officers insurance beneficial?

A D&O insurance policy provides the following benefits:

  1. Financial protection: covering the cost of defending against claims and any damages awarded to the plaintiff.
  2. Legal representation: access to experienced lawyers who can defend against claims and negotiate settlements.
  3. Reputation protection: effective dispute resolution limits the possibility of negative publicity.
  4. Attract and retain top talent: demonstrates the company's commitment to protecting its leaders.
  5. Peace of mind: knowing they, and their personal assets, are protected against claims.
  6. Encourages ethical behaviour: provides protection against claims for wrongful acts committed in their capacity as leaders of the company.

What is employment practice liability?

Insurance against employment practice liability (EPL) protects employers against legal expenses and financial awards resulting from employee disputes.

How does employment practice liability insurance work?

An employee's or applicant's claim generally includes the following types:

  1. Protection against claims of illegal termination, such as discrimination or retaliation.
  2. Covering allegations of discrimination based on race, gender, age, religion, or any other protected characteristic.
  3. Protection against claims of sexual harassment, racial harassment, or other forms of workplace harassment.
  4. Compensation for retaliation against a person who reports illegal or unethical behaviour.
  5. Overtime violations: Protection against claims of violations of wage and hour laws.
  6. Claim related to employee benefits, such as non-delivery of required benefits.
  7. Employer negligence: Protection against claims that an employee was unqualified or dangerous.

Why is employment practice liability insurance a good idea?

If an employee believes that they have been treated unfairly, they have enforceable rights under the law. It protects their interests regarding sickness, holidays, having a baby, sexual orientation, and flexible working hours.

It is therefore common for employee-related disputes to be highly emotive. When internal procedures are not followed correctly, you can put yourself at risk for a successful employment tribunal claim, resulting in significant financial and resource disruptions.

As a summary, EPL offers:

  1. In the event of an employee-related claim, employment practices liability insurance will cover the cost of defending the employer and any damages awarded to the employee.
  2. Having access to skilled employment lawyers who can defend against and negotiate EPL claims is essential to your legal defence.
  3. Effectively resolving employment-related disputes minimises potential negative publicity, thereby protecting your reputation.
  4. Support and assistance with employee lawsuits, allowing more time for business operations and growth.
  5. Assisting businesses to maintain compliance and avoid potential claims related to employment law and regulations.
  6. A greater degree of peace of mind: protection against claims related to employment.

Corporate legal liability insurance: what does it cover?

Similar to directors and officers insurance (D&O), corporate legal liability insurance defends claims against companies, not individuals.

Claim types include:

  • Pension maladministration
  • Benefit claims by employees
  • Data breaches
  • The theft of corporate identity
  • Regulatory claims related to health and safety, taxation, or other issues.

Be sure to check the details of your corporate legal liability policy, as sometimes it can only be purchased together with D&O insurance.

Is management liability insurance necessary?

Small and medium businesses have not always purchased management liability insurance, but the following factors are causing it to become increasingly important:

  1. The Covid-19 response;
    Several stakeholders, including employees and shareholders, may take action against directors and officers if they are found to have made mistakes in developing appropriate risk management and preparedness strategies.
  2. Small and medium-sized businesses are just as vulnerable as large corporations;
    Directors and officers claims do not exempt SMEs. The risks and regulations they face are the same as those faced by larger companies, but they often lack in-house HR and legal teams.
  3. The personal assets of directors are at risk;
    A director is personally responsible for defending a claim alleging a breach of duty. As a result, if they are not adequately covered, their personal assets could be at risk.
  4. Legal defence can be expensive;
    Tens of thousands of pounds can often be spent on legal defence when allegations are levelled against a company or its directors.
  5. Directors remain vulnerable to employment practice claims;
    It is not uncommon for employment practice allegations like discrimination, unfair dismissal, or failure to consult to result in very high settlements in a society where litigation is the norm.
  6. Bankruptcy and insolvency protection;
    If directors fail to act in creditors' best interests during bankruptcy or insolvency, creditors may pursue legal action against them.

Do I have to worry about being sued?

A director, officer, or senior manager who believes they have suffered because of a shortfall in your duties may attempt to sue you.

Included in this are:

  • Employees
  • Shareholders
  • Creditors
  • Regulatory agencies
  • Families or individual service users
  • Competitors
  • Government.

A false claim must still be defended.

Protect personal and business assets

You could be putting your personal assets at risk if you don't carry management liability insurance. The definitions of management liability insurance can vary, so it's important to consider the terms to determine what cover is right for you.

If you would like to speak with one of our expert brokers about your firm's requirements or to obtain a competitive quote, please do not hesitate to contact us on 0800 180 4203 for a personal and professional service.