Management Risk: A Guide for Businesses

 

Management Risk has become an area of increasing importance for businesses. A cultural shift towards personal liability has left many directors, officers and other senior professionals potentially liable for alleged errors or poor decisions. In particular, decisions made by Directors and Officers that lead to financial losses for investors and shareholders, or result in regulatory investigation, are at risk of a liability claim.  

This article provides an overview of Management Liability, Professional Indemnity and Directors & Officers insurance and how these covers can protect businesses, directors and senior employees.

 

What kind of liability insurance does my business need? 

Every business has its own structure and unique risks; however, three main areas of liability cover are Professional Indemnity Insurance, Directors and Officers Insurance and Management Liability Insurance.  

 

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Professional Indemnity Insurance 

Any business or sole trader that provides professional consultancy services, advice or design work to clients is strongly advised to take out Professional Indemnity (PI) insurance. 

Professional Indemnity insurance protects against financial losses incurred from legal defence and compensation claims. A PI policy will typically cover a wide range of risks including professional negligence, errors in work, medical malpractice (healthcare providers), copyright infringement, libel and slander, employee dishonesty and loss or damage to client documents.  

PI insurance is mandatory for members of some professional bodies and is required by some regulators. This includes solicitors, surveyors, financial advisers, accountants, architects and some healthcare professionals. 

 

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Directors & Officers Insurance 

Directors, Officers and any individual with significant responsibility can find themselves liable for investigation, civil action and even prosecution if they are accused of a wrongdoing. Directors and Officers insurance (sometimes known as Directors indemnity) can be invaluable when facing a liability claim – for example, if regulators launch an investigation into the business, or if investors or shareholders blame the decisions of a director for their financial losses. 

Directors and Officer’s (D&O) insurance offers cover for a wide range of scenarios: from legal fees and damages awarded to claimants, through to the costs of legal representation throughout lengthy and expensive official investigations. D&O insurance also gives access to the insurer’s expert legal and professional advice on how to manage the situation, ensuring the business is able to continue its normal activities without diverting more valuable management time and resource to the impending case.  

Note: Many insurers now offer a ‘broad definition’ of directors and officers, offering cover to key people (sometimes known as Key Person cover) who are at most risk of claims being made against them. To offer businesses greater protection some policies also offer cover for all types of past, present and future directors and officers. 

Cover typically includes: 

• Breach of trust 
• Breach of duty 
• Errors and Omissions 
• Misleading statements 
• Defamation 
• Negligence 
• Breach of legislation 
• Insolvency 
• Wrongful trading 

 

Exclusions 

Common exclusions for a D&O insurance policy include property damage, fraud and other illegal actions committed intentionally by a company, director or officer. Policies will also exclude any legal action brought against the insured before commencement of the policy. A standalone D&O policy also won’t provide cover for other areas covered in a broader Management Liability policy including Company Legal Liability and Employment Practices Liability.  

 

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Management Liability Insurance 

Management liability insurance aims to protect against the costs of legal action being taken against a business, Director or other senior management. Unlike a standalone D&O Liability policy, Management liability covers a broader range of liabilities. A Management Liability policy will often include Company Legal Liability insurance and Employment Practices Liability insurance to provide more comprehensive cover for claims made against the business. 

 

Who is covered by Management Liability Insurance? 

Policies can provide protection for both the business and many key people in positions of responsibility. Where previously a Directors and Officers policy may have only covered Directors and those in the highest positions of leadership, there has been a growing recognition among insurers of the need to offer more comprehensive protection (key person cover) to businesses and the individuals operating within them.  

It’s important to consider both the risks associated with your sector and your business’s structure to identify which individuals in your business could potentially be held liable in the event of a claim. 

Management Liability policies can provide protection for many individuals within the business including: 

• Partners 
• Directors 
• Trustees 
• Compliance Officers for Legal Practice (COLPs) 
• Compliance Officers for Finance and Administration (COFAs) 
• Money Laundering Reporting Officers (MLROs) 
• Co-defendant Employees 
• Anyone acting in a managerial or supervisory capacity 

 

What are the typical exclusions of a Management Liability Insurance policy? 

Every policy will vary slightly with covers and exclusions, so it’s important to check your policy carefully and ensure that key areas of risk for your business are covered.  

Companies, directors and officers will not be covered for any illegal actions that were committed intentionally. Policies also typically exclude property damage, claims covered by other insurance policies, claims made under a previous policy or before the policy begins.  

 

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Directors and Officers insurance vs Professional Indemnity 

Whereas D&O cover focuses on key senior leadership, a Professional Indemnity insurance policy can offer protection for any individual who provides professional consultancy services, advice or design work.  

Some industries have a particularly high risk of liability claims (for example, construction, legal and healthcare) and it is also strongly advised that business owners, contractors, and self-employed designers, architects and consultants take out a comprehensive PI policy. 

 

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Management Liability insurance vs Directors and Officers 

D&O Liability cover offers protection specifically for liability claims against directors, officers and sometimes other key people within the business whereas Management Liability Insurance offers broader protection against liability claims. 

If your business currently does not have comprehensive Company Legal Liability insurance and Employment Practice Liability insurance, a Management Liability policy can provide protection for key individuals within the business, CLL and EL cover under one policy.  

 

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Speak to an expert 

If you are unsure of which policies your business needs, speak to an experienced Tysers broker who can advise you on the best cover based on your individual requirements. This may include a review of your existing policies, sector risks and other risks that may be unique to your business to provide a full picture of the potential liabilities your business may face.  

 

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