Avoid the pitfalls of management liability claims
Is your client sufficiently covered against management liability claims? Directors and line management staff can all be vulnerable to fines and lawsuits in the course of performing their roles; but there are traps in the products available, so brokers need to understand the implications of different products available.
Management liability cover is a relatively new class of insurance that is becoming increasingly important for small to medium sized enterprises (SMEs) as Australia’s regulatory framework grows ever more complex.
“There has certainly been a significant increase in the amount of regulation and legislation that Australian directors and officers have to deal with over the last decade,” says Mike Pryce, who is the Regional Manager, Financial Lines, Chartis Australasia.
Australia’s Corporations Act (2001) is one of the nation’s largest statutes, running to over 2000 pages. According to the Australian Institute of Company Directors, there are 663 State and Territory laws that impose personal liability on individual directors for corporate misconduct – even where involvement in a breach.
The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) already play a significant role in the conduct of business in Australia. That’s likely to increase, according to Pryce, as the UK and US are even more heavily regulated than Australia in some areas and a tighter regulatory framework is likely. While publicly traded companies usually hold significant directors’ and officers’ liability cover, despite the risks, few smaller entities have such protection.
“We estimate that between 80 and 85% of SMEs don’t buy any form of management liability policy,” Pryce says. As regulations tighten, these businesses are facing far greater financial risks.
Pretesh Patel is the National Underwriting Manager, Professional Liability for Wesfarmers. He says, “In some ways management liability can be more critical for SME businesses rather than their larger counterparts, as smaller businesses may struggle more to absorb the expense of a costly action, which could potentially lead to financial ruin.”
The hundreds of State and Territory laws that impose penalties on individual directors are dwarfed by the regulatory framework imposed by various industry groups. Businesses operating in the construction industry, for example, must satisfy not just the Building Code of Australia and the Plumbing Code of Australia, but also State and Territory legislation, which will often vary or add to the national codes. Local Government planning by-laws and enforcement activities add to the complexity of the industry regulations.
“While these covers were once seen as a luxury for large businesses, the heightened corporate governance requirements and regulatory surveillance applying to smaller businesses have made Management Liability a key product for all businesses,” Patel says.
While any policy is a good start, Mike Pryce from Chartis says that the insurances that cover the greatest exposures for smaller businesses are crime insurance (which includes first- and third-party theft, as opposed to the first-party only theft of fidelity cover) and employment practices cover.
“If you’re operating a small business like a florist, with no debt and you own the business, then your directors’ and officers’ exposure is likely to be minimal,” Pryce says. “But if your business grows and you hire a few staff, you increase your risk substantially in respect of Crime and Employment Practice liabilities.”
The biggest exposure includes employee theft from the company and disputes over employment practices – for example, if you need to dismiss a staff member.Check the wording of the policy to find out if the cover is for legal costs only, or if it covers compensation or fines, he warns.
Grow the cover with the business
Grant Cairns is the Financial Lines Manager Australia and New Zealand for ACE Insurance. He agrees that as a business grows, brokers need to ensure that the risks are covered.
“Management Liability Insurance delivers protection for managers, directors and companies from the legal consequences of unintended errors. For leaders in fast-paced, high pressure roles, it is an important part of the professional toolkit,” he says.
“Across the market, there are variations in the way management liability insurance works. The critical thing is for policyholders to understand their coverage and the claims handling abilities being offered by their insurer.”
Exclusions are an area where brokers can be trapped, Cairns says. “For example, insolvency is commonly seen as a standard exclusion.”
Check the wording
With some underwriters, technology allows brokers to pick and choose inclusions and exclusions to tailor a policy that covers what a business needs (tempered by what the business can afford to pay).
Mike Pryce says that tailoring the policy to the business is usually going to be a better option than picking up a standard package, if only to make sure that the appropriate risks are covered. For example, even in the SME market, some businesses will have multinational operations that they want to make sure are covered by more bespoke insurance programs.
“Brokers need to be careful of the depth and quality of the cover, along with the claims handling service that is provided by the insurer and their policy wording,” Pryce says.
But while the emergence of Management Liability as a mainstream product has created significant new revenue for brokers, it has also significantly increased the Professional Indemnity exposure of brokers in offering this insurance to their clients.
These risks have evolved from the initial risk of not offering the insurance to their clients, to ensuring they offer the right cover to their clients. As there is significant variability in the covers offered, it has increased brokers’ PI exposures significantly.
“This is a huge issue for brokers,” says Damien Coates, Managing Director of DUAL. “One major example is the crime cover offered under these policies, which can vary from a small first-part fidelity cover for stolen money at the narrowest end, through to a broad crime covering first- and third-party theft of both money and property with a significant sublimit owing to the balance sheet exposure for an SME as a result of the crime exposure.”
Coates says DUAL has seen some very large claims for theft by third parties, including suppliers and customers of property, as well as money. There has also been a number of exotic claims such as the theft of tomatoes, alcohol and even lobsters.
“Ensuring that brokers have offered their clients a comprehensive cover is arguably a greater PI risk for a broker than not offering the cover at all, such is the complexity of the differing levels of cover available in the market,” says Coates.
Full article published Jun-Jul 2011 – http://insuranceandrisk.com.au/c42faedc/Avoid_the_pitfalls_of_management_liability_claims