Ten years ago management liability insurance barely registered as a blip on brokers’ radars. Less than 1% of SMEs purchased any type of financial lines insurance product. While there were a multitude of innovative standalone products in the market to cover a range of management exposures, SMEs just weren’t buying. Why?
There were those SMEs that simply weren’t aware they could offset some of their management exposures with insurance. Others just didn’t see the value in taking out a range of standalone policies with elements of cover irrelevant to their operations. And then there was the paperwork! To purchase four or five standalone policies, they had to deal with four or five lengthy proposals. It was all too complex and confusing.
The advent of management liability insurance was a groundbreaking new way for SMEs to purchase financial lines insurance products. Today, management liability insurance is fast becoming a ‘must have’ policy for a growing number of SMEs. It has evolved as companies face ever-increasing compliance and regulatory burdens and complex stakeholder management frameworks.
Understanding the difference between management liability insurance and directors and officers (D&O) liability insurance can be confusing for some businesses – even for some brokers. Often thought to be interchangeable, they’re not. Even though management liability insurance did start as a spin-off of the public company-focused D&O insurance, it’s a much broader form of cover.
“Management liability insurance is designed for smaller and medium-sized companies and provides coverage for those accused of failing in their responsibilities as managers, in addition to some common business risks facing the company,” Steven Lau, National Manager Professional and Financial Risks at Vero, explains.
Estimates are that only 10% of SMEs have management liability insurance – so there’s a huge opportunity for brokers.
“The policy is a ‘blended’ product. It provides broad cover for the benefit of directors and officers, and the company.”
D&O, on the other hand, is intended for larger companies and provides cover for those accused of failing in their duties as directors and officers. “The policy is procured by the company, but it is essentially for the benefit of directors and officers only,” Lau says.
Common policy exclusions
While brokers should assess which policy is the most applicable to each client according to the size and nature of the company, it is widely acknowledged that management liability insurance is particularly suited to SMEs.
“Standalone D&O policies are usually more suitable for large private companies or publicly listed companies,” Callum McMillan, Commercial Manager for Financial Lines at Zurich Australia says.
“Flexible management liability insurance cover options reflect the unique nature of small to medium businesses, which face distinct and heightened risks when compared to larger businesses,” McMillan adds.
“It’s interesting to note that 60% of all cyber attacks strike small and medium sized businesses. This, in addition to general increases in unfair dismissal claims and penalties for work health and safety breaches, can have disproportionate impacts on SMEs.”
Callum McMillan believes that management liability cover has been propelled to the forefront of executives’ minds on the back of heightened risks attached to cyber security.
“Not only do today’s executives need to know about cyber crime – including malicious hacking, information theft and system shutdowns – they also need to know how to prepare and respond to it,” McMillan says.
“The frequency of recorded data breaches is continually escalating and so is the cost to deal with the impact on any business and brand. Any company that handles data, employees, customers, suppliers or business partners is exposed to potential business costs and lawsuits associated with a breach. So it’s important to protect against both the risks and the costs.”
While management liability insurance policies will generally contain cyber liability cover for certain business critical elements for SMEs, Emily Winwood, Commercial Manager at DUAL Australia, warns the cover is not necessarily comprehensive.
“It can provide a great base level of cover for clients who don’t have any form of cyber protection,” Winwood says. “However it’s important to note that it’s not as comprehensive in coverage or limit as a standalone policy.
“Any client who has a cyber exposure – which will be almost every client – should consider a standalone cyber policy.”
Cyber exposure is not the only risk on the increase in the management liability space. Vero’s Steven Lau says that the industry is experiencing a growing frequency of employment practices liability claims, which includes allegations of wrongful dismissal, workplace harassment, sexual harassment, discrimination and failure to maintain a safe workplace.
“Employees are much more aware of their rights at work and are prepared to pursue claims against their employers,” he says. “Brokers need to work with their clients to ensure they have the right policies and frameworks in place to identify, manage and prevent instances of bullying, discrimination and harassment. Having a positive workplace culture can also go a long way.”
Winwood agrees that employment practices liability claims are on rise. “Since the introduction of the Fair Work Act, we continue to see a high volume of unfair dismissal claims, as well as discrimination and harassment. To a lesser extent, but also on the increase, are bullying claims,” she says.
Also on the radar are crime claims. “These are largely employee theft of either money or tangible property,” she adds.
Employees are much more aware of their rights at work and are prepared to pursue claims against their employers.
Pointing out the risks
“The interconnectedness of business today and a changing regulatory environment around internet liability and cyber privacy in recent years has seen an increase in litigation,” Zurich’s Cameron McMillan says. “As a consequence, there’s been an increase in demand for management liability insurance.”
But even as risks abound, the vast majority of SMEs do not have management liability insurance. And to the savvy broker, that should spell out one thing: opportunity.
Steven Lau from Vero believes brokers are in the prime position to inform their clients of the risks they face and show them how they can protect themselves.
“These can be complex policies, so brokers can use their expertise to advise their customers,” he says.
“Brokers have a critical role to place in helping their clients understand how something like a cyber attack, wrongful dismissal or bullying claim could seriously impact their business and how they can take steps to minimise these risks.”
“Management liability insurance started in Australia just over 10 years ago and is now a $100 million market,” DUAL’s Emily Winwood says.
“Even so, estimates are that only 10% of SMEs have management liability insurance – so there’s a huge opportunity for brokers.”