Management liability insurance in Australia: what it covers and who needs it

A plain-English guide to management liability insurance in Australia: the sections commonly found in a policy, the exposures directors and managers carry, and how it differs from public liability and professional indemnity.

Management liability is one of the least understood covers in the Australian business insurance market. It is not generally designed to respond to a customer slipping over or to a faulty product. Instead, management liability is designed to respond to certain claims and investigations arising from the way a company is directed, managed and administered, subject to the sections selected and the policy wording.

For private companies, family businesses and farming entities with a corporate structure, those exposures exist regardless of size. Employment disputes, regulator investigations, statutory penalties and disagreements between directors are all part of running a business, and a general business pack is not designed to respond to them.

What management liability insurance is

Management liability is generally a packaged policy written for privately owned companies. It brings together several distinct covers that respond to the conduct of directors, officers, employees and the company itself, usually on a claims-made basis. That means the policy that responds is typically the one in force when the claim is made or the circumstance is notified, not the one in force when the conduct occurred, subject to the policy terms and any retroactive date.

Because it is a packaged product, wordings differ widely between insurers. Two policies with the same name can carry different sections, different sub-limits and different exclusions, which is where a considered comparison of wordings matters more than a headline premium.

“The exposure sits with the people making the decisions, not only with the entity that carries the trading name.”

The sections commonly found in a policy

Most management liability policies are built from a set of standard sections, and not every section is automatically included. The sections commonly seen are:

Directors and officers liability

May respond to claims alleging a wrongful act by a director or officer in that capacity, including certain defence costs, depending on the policy wording. Allegations can include breach of duty, mismanagement, insolvent trading or misleading conduct.

Company reimbursement and corporate liability

May respond where the company has indemnified its directors and, where corporate liability is included, to certain claims brought against the entity itself.

Employment practices liability

Is designed to respond to certain allegations arising from the employment relationship, which can include unfair dismissal, discrimination, bullying or harassment claims. For many small and medium businesses, this can be one of the more relevant sections of a management liability policy.

Statutory liability

May provide cover for certain investigation and defence costs arising from alleged breaches of legislation and, where legally insurable, some fines or penalties. What can be insured varies according to the legislation and jurisdiction. In some circumstances, including certain work health and safety offences, the law may prohibit insurance from indemnifying the penalty itself even though defence costs may still be considered under the policy. The wording and applicable legislation therefore need to be checked carefully.

Crime or employee dishonesty

Some management liability packages may include a crime or fidelity section covering certain losses of company money or property arising from dishonest acts by employees. Some wordings may also provide limited cover for particular forms of external fraud. Limits, definitions and exclusions vary considerably between insurers.

Superannuation and tax audit extensions

These covers or extensions may also be available under some management liability products, depending on the insurer and wording.

Availability, limits, sub-limits, exclusions and the basis of settlement depend on the particular insurer, wording and the risk being underwritten. Cover cannot be assumed until the schedule and wording are read together.

Who typically needs it

Management liability is most relevant where a company structure exists and decisions are being made by identifiable people. That commonly includes privately owned trading companies with employees, family businesses where family members sit as directors, incorporated farming entities and agribusinesses, professional practices operating through a company, and rma network Members running incorporated agency businesses.

Sole traders and partnerships without a corporate structure sit differently, and the conversation usually starts with whether a company will be formed or whether employment and statutory exposures are already present. Where a business employs staff, the employment practices section is often the most immediate reason to look at the cover, whatever the entity type.

How it differs from public liability and professional indemnity

The three covers are often confused because all of them involve a third party making an allegation. The distinction is in what the allegation is about.

Public liability is generally designed to respond to claims involving third-party personal injury or property damage arising from the business or its operations, subject to the policy wording. A visitor injured on the property, or damage caused while working on a client's site, sits here.

Professional indemnity is generally designed to respond to allegations involving a breach of professional duty in providing advice or professional services, such as an error in a valuation, a misstatement in a sale process or negligent advice.

Management liability responds to how the business itself is run: the employment decisions, the regulator's investigation, the statutory obligation missed, the dispute between directors. A farming company may hold farm property and liability cover but still have a gap around management-related exposures such as employment disputes or regulatory investigations. Whether another policy responds depends on the circumstances and wording held.

For a broader view of how these covers sit alongside the rest of a program, see Business Insurance.

Where the gaps usually appear

Because management liability is claims-made, gaps often appear around timing rather than around the section list. A late notification, an unreported circumstance known before inception or a policy allowed to lapse after a business is sold can all affect whether cover responds. Where a business changes hands, run-off arrangements need to be considered rather than assumed.

Other common areas worth checking are whether the limit is shared across all sections or allocated by section, whether defence costs erode the limit, whether the retroactive date has been maintained on any change of insurer, and whether newly acquired or newly incorporated entities are picked up automatically.

Want to review your cover before renewal? Contact RMA Insurance Brokers on 1300 650 254 or send us an enquiry to discuss your circumstances and insurance needs. We can help you review your current Management Liability arrangements against how your business is structured and operates.