What is Management Liability Insurance?

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According to a recent survey, one of every four private companies in the United States experienced a Directors & Officers (D&O) liability loss during a three-year period. Ranging from healthcare organizations to manufacturers to retailers, 96% of these companies state that they were financially affected by a said loss. With reported losses as high as $17 million for a single claim, the potential exposure warrants the attention of businesses of all sizes. With an average loss of nearly $400,000, small and mid-sized companies face an even greater threat from management liability claims when compared to well-capitalized larger corporations.

It’s clear that the risks and losses associated with management liability insurance are increasing, but many companies still aren’t insured for D&O exposures. Regardless of the size of your business, D&O coverage is becoming the must-have coverage for the modern business era.

By providing protection against specific types of liability that other policies don’t address, executive liability insurance can save your business the expense of costly litigation and claim settlements, as well help protect your company’s hard-earned reputation.

What is covered by a Management Liability?

From injury claims to property hazards and professional perils, the long list of unplanned situations and circumstances makes every business exposed to certain risks and liabilities. An insurance policy specifically designed to cover management liability picks up when General Liability policies leave off, protecting businesses and key officers against claims along with associated expenditures.

Management Liability is a combination of three different types of insurance:

Directors and Officers

D&O coverage is a type of liability insurance specifically made to protect directors and officers of non-profit, for-profit, and privately held businesses for liability that might arise while managing the business. Some of the risks covered include negligent acts, failure to comply with regulations, omissions or misleading statements, and other related risks.

With D&O policies, there are coverage elements called “sides”:

  • Side A – referred to as personal protection, provides coverage for the directors and officers who are not otherwise indemnified. Examples would include if a company is unable to indemnify management under its bylaws or if a company files for bankruptcy, preventing indemnification.
  • Side B – known as corporate reimbursement repays an organization or company for all expenses incurred when defending its management. Expenses paid by the company for a covered D&O claim can be reimbursed to the company by the insurer.
  • Side C – known as entity coverage, offers protection for the company when it is included in legal charges against its own directors and officers.

Employment Practice Liability (EPLI)

EPLI provides protection for the company, the directors, officers, and, employees for claims made pertaining to wrongful acts and issues arising from employment practices. Most claims covered include harassment, discrimination, termination, and
retaliation.

Fiduciary Liability Insurance

This type of insurance protects businesses against fiduciary related claims due to the company’s mismanagement of employee benefit plans.

Why do I need Management Liability?

Losses related to the actions of directors and officers are more common than many realize. A single loss could be devastating to a growing business. Without proper protection, including directors indemnity insurance, businesses face sizeable exposure that can affect cash reserves, working capital, or even personal assets.

In most cases, businesses face D&O related lawsuits from customers. But vendors, government agencies, regulators, partners, and shareholders can also file legal claims against your company. Costly litigations, lengthy court process, legal defense costs, and damage to your business reputation all wear on a business, causing a decrease in productivity and a decrease in morale. Without the coverage provided by management liability insurance, even a simple allegation, regardless if it’s true or not, can be costly, and time-consuming, and an unproductive distraction from the needs of the business.

Are there any coverage exclusions?

As with other types of liability coverage, an executive liability policy has its own limitations. Legal defense is generally covered, subject to declared policy limits, but some programs are structured to pay for defense costs, by reducing the amount of available coverage for liability settlements. Settlement fees, litigation expenses, and other related expenditures are usually covered.

Listed below are just some of the common exclusions under D&O policy:

  1. Breach of Contract – A breach of contract is deemed to be intentional, thereby excluding breach of contract claims from coverage.
  2. Personal Gain – Claims resulting in personal advantage or profit to which the insured was not entitled.
  3. Insured vs Insured – If the board of an association files claims against the association or other insured.
  4. Dishonest and Criminal Act – Conduct violating laws, statutes, and regulations will not be covered.
  5. Fines, Penalties, and Damages – Some states consider punitive damages as evidence of improper behavior, excluding coverage.
  6. Prior Acts – Since D&O is usually written on a claims-made basis, all claims must be filed “during” the policy period. The policy will only cover claims within the specified duration of the policy, regardless of when the event occurred.
  7. Intentional Wrongdoing – Claims due to willful or intentional acts would not be covered by the policy.

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Common D&O risks and claims

Officers and directors can become personally liable in a number of ways. Here are few examples of real-life scenarios that can lead to the filing of D&O related lawsuits:

Failure to comply with workplace laws A female employee was terminated at work due to gender discrimination, and the directors or officers and company were then sued on the basis of wrongful termination.

Theft of intellectual property A department head left his company to start a new firm. His former employer sued him, together with his new firm, presenting evidence of the former employee using proprietary software and corporate licenses that originally belonged to his previous company.

Misrepresentation One company closed a large contract with a customer. Stated in the contract, the company should present financial and human resource assets to satisfy work requirements. The board of directors misrepresented the company by altering revenues and workforce assets. The customer filed a lawsuit due to the misrepresentation.

Breach of fiduciary duty Investors sued a company for breach of duty after a project was awarded to a third-party contractor whom they believed to have personal connections to the officers and directors of the company. Pursuing their personal interest and not the company’s betterment, a lawsuit was filed for not properly investigating the qualifications of the winning contractor.

D&O liability statistics

Here are some related statistics courtesy of Chubb, demonstrating the importance of executive liability insurance.

  • More than 1 in 4 companies, or 26%, experienced D&O related losses within the past 3 years.

Of the private companies surveyed, the following percentages reported lawsuits of fines from various plaintiffs or entities:

  • 54% reported suits brought by customers
  • 37% were sued by vendors or suppliers
  • 27% faced lawsuits of fines by government agencies or regulators
  • 27% were sued by competitors
  • 23% faced lawsuits brought by a partner or other shareholder.

Of all surveyed private companies, 96% said that the legal action caused them financial loss and 42% reported a loss of productivity. Additionally, 36% believed the D&O loss had a negative impact on company morale and 31% said it influenced brand reputation negatively.

The top reasons given for not buying management liability insurance by companies that did not purchase coverage is that:

  • Coverage is seen as unnecessary for privately held companies (33%)
  • The companies have had no related experience in the past (33%)
  • 30% of companies without D&O coverage believed that coverage is not needed for family-run businesses.

Among companies that did not purchase D&O coverage and which had uncovered losses, the average financial loss was a reported $394,000.

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