3 reasons why directors and officers cannot afford to ignore management liability insurance

Directors and officers (D&Os) shoulder considerable responsibility to make decisions in the best interests of a company’s clients, employees and investors. But even when arming themselves with the most information possible, and exercising good faith, due diligence and caution, there is always a risk of mistakes and oversights. 

And whether or not an allegation of error or wrongdoing by you is proved or a crime intentionally committed, as a director or officer you are held personally liable, putting them at risk of significant personal financial costs for defending or settling claims. This can be devastating to the directors themselves and their families, as well as their company.

What many company leaders may not know is that D&O insurance cover has limitations which can leave directors and officers exposed. Its lesser-known alternative, management liability insurance, is a worthwhile cover to consider if you are seeking comprehensive protection.

Here are three aspects of D&O coverage which you may not be aware of: 

1. Regardless of lack of intentional wrongdoing, your personal assets could be on the line over any erroneous decisions you sign off on

As a company director, you can be held personally culpable for any wrongful act executed by a decision you made in a professional capacity, which could lead to criminal charges but also personal financial loss, to pay out legal fees, settlements and damages.

If you have management liability insurance in place you would have the peace of mind of knowing these costs are covered.

The business areas in which unintentional wrongful acts could occur include:

• Contract breaches – how familiar are you with the agreements and contracts you sign your name to? 
• Financial records maintenance – are you 100% confident that your company staff are compliant with regulatory requirements on keeping accurate financial records?
• Health and safety incidents – can you vouch for the due diligence deployed by your teams to protect the wellbeing of employees and clients?
• Environmental offences – are you certain that your company is not breaking any environmental regulations or causing damage to the environment? 
• Technological breaches – with digital advancements evolving at a rapid pace, are you confident that the practices you have endorsed are up to date and adequate to protect the privacy of employees and clients? Government proposals to reform technological surveillance under the Privacy Act could place company directors at further risk under the proposed changes to surveillance law.

Management liability insurance can help protect you from oversights or errors made within all of these critical business areas. It also covers intentional criminal acts committed by a company director – which often involve a jail sentence – such as tax evasion or fraud.

2. Common crimes, such as employee fraud and embezzlement or unfair dismissal claims, are not covered by directors and officers (D&O) insurance

Relying solely on D&O insurance to cover you against employee wrongdoing? You may be surprised to learn that some of the most common corporate crime and claims cases are exclusions under a D&O insurance policy. Management liability insurance cover offers important protection enhancements to cover you against these, including:

• Employment practices liability to cover such things as discrimination, unfair dismissal or workplace harassment.
• Criminal acts, e.g. embezzlement and fraud
• Statutory liability, e.g. workplace safety and health breaches.

The recent high-profile Brittany Higgins trial illustrates the limitations of D&O coverage. Although charges were dropped and the case abandoned, the Brittney Higgins sexual harassment trial could have resulted in significant loss for a former government employee, had the case proceeded to retrial and found in Higgins’s favour. And regardless of the outcome, hefty legal defence costs would have been incurred by the defendant.

3. You could be missing out on enhancements and cost savings

With so much on the line for directors and officers, detailed advice is critical to successfully navigating the market to make the right decision about insurance you need for your unique situation, at the best price point.

This is where the services of specialist brokers can prove essential, as they collaborate with you and your company to accurately assess and valuate your specific risk scenarios and exposures. Those who have a long history in the field, including a world-wide reach and reputation, will often have deep established relationships with insurance providers and can negotiate:

• Broadest possible coverage for you and your D&O colleagues 
• Competitive market rates. 

And, as any time-poor company leader will appreciate, a broker will speak plain language and explain the terms of policy options without using jargon. 

More comprehensive than traditional directors and officers insurance, management liability insurance ought to be a key consideration for companies who would like comprehensive protection for their leaders and enhancing their confidence in a decision-making capacity.

As a director who may be considering insurance as part of your company’s risk management strategy, don’t put your and your family’s financial future at risk. A no-obligations conversation will help you confirm whether you’re covered for some of the most common errors you may make in your D&O role.

LCPA 23/090

Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.

Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.