There are a multitude of risks facing small businesses in Australia today. New legislation is always on the horizon; workplace accidents are now subject to high statutory scrutiny, employment disputes can be expensive affairs, whilst employee theft and commercial disputes are on the rise. Owners and senior managers of private companies can be held personally liable for the consequences of unintended errors arising from their daily actions, or even the actions of employees.
Why do private companies need Management Liability Insurance?
To operate a business effectively, managers and employees need the confidence that they are personally protected and the business is adequately covered from a wide range of potential liabilities. The cost of legal proceedings can have a catastrophic impact on the finances of a company, possibly sending the company into insolvency and leaving directors and managers financially exposed.
This is set against a challenging economic environment where companies can expect increased exposure to liability and fraud. Employees and the public are aware of their rights, have access to a disputes body and are becoming more litigious. Unfair dismissal and other employment related claims are not only bad publicity, but they are expensive to defend in Court.
In Australia, there is a strict legislative environment with stringent regulatory requirements. Certain laws can impose personal liability on individual directors and officers for misconduct even where they may not have had any personal involvement in a breach.
New legislation is regularly being introduced, such as Work Health and Safety legislation, which has placed an increased responsibility on directors and officers to ensure that their company complies with health and safety obligations. Failure to do so can result in substantial penalties against the company, with directors and/or senior managers also facing personal fines.
Are private company directors and officers really exposed?
There are over 700 Commonwealth, State and Territory statutory provisions which expose private company directors and officers to liability when their company is deemed to have broken the law. The Work, Health and Safety legislation is a prime example. The revised legislation provides that directors and officers must exercise due diligence to ensure the company complies with its obligations. Failure to do so could mean a company is fined up to $500,000 and personal fines to Directors and Officers of up to $100,000. If death or serious injury occurs as the result of a breach, the fines increase up to $3 million for the company and $600,000 for the individual.
The law also holds a wide definition of “director” or “officer.” Generally the terms are defined as a person who makes, or participates in making, decisions that affect the whole or a substantial part of the business. Not only can decision makers be held personally liable, but there are a host of regulators scrutinising them to ensure they act correctly and do not fall foul of the law. This includes APRA, ASIC and the ACCC. Some provisions apply strict liability to directors even when the situation is out of their direct personal control.
Claims can be brought against directors and officers from every angle; disgruntled shareholders, customers, employees, competitors and creditors all have a legal entitlement to launch action if they feel directors and officers have not lived up to their responsibilities. That’s why it is imperative to have a Management Liability policy that covers your business and its management team.
WHAT AM I AT RISK FOR?
The following claims examples illustrate the type of issues recently seen in Australia. Claims can affect a business and its employees, the well-being of an individual or group, or even the ability of a company to stay in business. Without the protection of a Management Liability Insurance Policy, the company and/or individuals may be liable for the financial exposures described below.
Directors & Officers Liability
1. A Company published a book which was authored by one of its employees and contained statements which referred to the claimant. The claimant alleged that the statements were defamatory and/or constituted a malicious fabrication. The Company bore the heavy financial burden of establishing the truth of the statements in order to defend the claim. The Company was entitled to defence costs that were covered by their Management Liability policy.
2. A customer database was illegally breached and personal information (names, dates of birth, addresses and credit card numbers) may have been compromised. The costs of advising the customers plus the legal representation at the privacy commission investigation were covered by their Management Liability Policy.
An employee was seriously injured at work following equipment failure. The company was fined for their breaches of Work Health & Safety obligations after entering guilty pleas on one count. The Defence costs and statutory penalty were covered by their Management Liability policy.
Under the Environment Protection Act, directors are liable for prosecution if their business is suspected of pollution damage. In a recent case, charges against a director went ahead – even though the company had confirmed their tanks did not even hold the contaminant identified in an adjacent stream. The defence costs were covered.
Corporate Legal Liability
1. The Company owned two businesses that provided tourism services. Over the previous two years, the economic climate had negatively impacted the profitability of both businesses leading to them deciding to sell one of the businesses. After the sale, the purchaser initiated proceedings alleging misleading and deceptive conduct by the seller in respect of the financial information provided. The defence costs for the insured were covered by the Management Liability policy.
2. A company was charged with four environmental offences due to activity at their business property that affected protected fauna. The proceedings were successfully defended at trial. Substantial defence costs were incurred that were covered by the Management Liability policy.
Fire Safety Regulations
Directors were prosecuted by a local authority after consistently failing to comply with fire regulations. They claimed that the work required to their premises by the local authority was unnecessary. The directors eventually agreed on a settlement – defence costs exceeded $100,000 which was covered by their Management Liability policy.
Roof Company and director fined $100,000
A roofing company and its director were fined $100,000 after a worker suffered head and neck injuries when he fell through a roof.
The director pleaded guilty for failing to provide a safe work environment and, by that failure, caused serious harm to a contractor.
Occupational Heath and Safety
A Golf Club takes on a part-time worker to cut the rough alongside the first hole. Serious foot injuries are sustained when the worker alights from a ride on mower to retrieve 3 balls lying in the grass. An investigation finds breaches of workplace health and safety obligations and the Industrial Magistrate awards a 5 figure penalty. Once again, this was covered by the Club’s Management Liability policy.
1. A company implements a scheme to transfer all employees in one of its units to a subsidiary. The transfer means the employees are no longer covered by certain industrial instruments. The scheme is found to be discriminatory and in breach of disclosure obligations. Legal costs and penalties were insured in this instance.
2. An employee of an insured was made redundant and brought an employment claim for unfair dismissal on the basis of racial discrimination. An employment tribunal hearing took place and the defence costs were covered by the Management Liability policy.
1. A significant number of frauds were perpetrated by employees of a company by creating fictitious invoices for services not provided. The client sustained significant direct financial loss as a result of paying those invoices. The direct financial losses were covered by the Management Liability policy.
2. A company discovered that a senior accounts manager had been electronically transferring money from a subsidiary company’s bank account into her own account. The individual had been with the company for five years and was considered a trusted employee. The direct financial losses were recovered by the Management Liability policy.
HOW CAN YOU HELP YOURSELF AND YOUR BUSINESS?
A Management Liability Insurance policy will address the serious risks confronting private companies and their management teams. Management Liability Policies generally have six coverage sections each with their own limits, subject to a policy maximum limit of liability that covers the events detailed above.
Directors and Officers Liability:
• Provides cover for claims against directors and officers for any actual or alleged wrongful acts in the performance of their duties.
• Unlimited Run-off cover for retired directors and officers.
• Full limit for investigation and pre-investigation costs.
• No pollution exclusion for directors and officer liability section.
Corporate Legal Liability (entity cover):
• Provides cover for claims against the company for any actual or alleged wrongful acts.
• Specific public relations expenses extension.
• Breach of contract defence costs extension.
• Tax audit expenses extension.
• Provides cover for investigations, defence and possible penalties that may be awarded for a statutory breach.
• Emergency defence costs extension.
• Work health and safety extension.
Employment Practices Liability:
• Provides cover for actual or alleged employment related wrongful acts by or against employees.
• Contractual liability defence costs extension.
• Broad definition of employment related wrongful act.
• Provides cover for direct financial loss to the company resulting from a fraudulent or dishonest act of an employee.
• Full limit for investigator costs to determine direct financial loss.
• Worldwide cover excluding USA & Canada.
Kidnap & Extortion:
• Provides cover for loss arising from kidnapping, hijacking, wrongful detention, extortion, cyber extortion and political threat.
• Broad definition of insured person and loss.
• Cyber extortion expense cover for threats made against the company.
The importance of this cover to your business cannot be emphasised enough and should be a part of every company’s insurance program. The claims/circumstances detailed above are real and they will continue to happen in the future.
WHAT DOES IT COST?
The premium will vary based on the size of your business, number of staff, etc.
Example 1: Rental Income: $1.5M
Number of Staff: 4
Limit of Liability: $1M
Approximate Premium: $1,200
Example 2: Rental Income: $400K
Number of Staff: 3
Limit of Liability: $500K
Approximate Premium: $960
Example 3: Rental Income: $850K
Number of Staff: 4
Limit of Liability: $2M
Approximate Premium: $1,900
NOTE: These quotations are an indication only with some sections providing a lower limit than shown and are subject to an excess (deductible). The example premiums include all charges and fees. This is general advice only and should not be used in isolation. Ensure you consult a qualified insurance professional.
WANT TO KNOW MORE – PLEASE GIVE MIDLAND INSURANCE BROKERS A CALL.
Phone: 1300 – 306- 571 Email: firstname.lastname@example.org