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Why is Management Liability Insurance SO Important?

April 21, 2017

protect your business with management liability insurance

When you’re running a business the last thing you want to think about is what could happen if something goes wrong. However, management comes hand-in-hand with risk, and in the event of mismanagement, you want to know that you’re protected financially.

You wouldn’t think twice about insuring your business against theft, fire and personal injuries, but a surprising number of businesses still don’t have adequate Management Liability insurance, which is a big concern.

If you don’t have Management Liability insurance and either yourself, or one of your senior staff members make a mistake or engage in misconduct that negatively impacts a third party, your business will be hit financially.

The legal costs of defending allegations of wrongful acts alone are enough to severely affect your company’s bottom line. Plus, if you’re only operating a small to medium-sized business, your personal assets could also be put at risk.

So, as you can see Management Liability is pretty important.

The Benefits of Management Liability Insurance

Apart from the obvious benefits of having a financial safety net if a member of your management team does put your business at risk, the below examples illustrate the significance of misconduct allegations, and how expensive situations can get.

Scenario One: A member of your management is accused of sexual harassment.

An employee of a sports club is suing the company for sexual harassment, after claims her supervisor had sexually harassed her over a number of years. Her supervisor allegedly touched her inappropriately and made inappropriate comments.

Once she thought one of the incidents had been caught on camera, she filed her complaint and stopped coming to work on the grounds she was suffering severe depression as a result of her treatment.

She made a workers’ compensation claim and lodged a complaint against the club and her supervisor with the Australian Human Rights Commission. She was asking for compensation to the value of $160,000, plus any future legal fees.

The claim was settled for $75,000, and the club had to pay $30,000 in legal fees. Thankfully, the company had proper insurance and weren’t majorly out of pocket.

Scenario Two: A company director was accused of trustee liability

An accounting firm with four company directors and 45 employees was under fire for misappropriating employee superannuation benefits. One director was responsible for fraudulently misappropriating superannuation funds, and upon discovery, the employees made a claim against both the company and all of the company’s directors (including the three innocent ones).

The employees were fighting for both the lost contributions, as well as the loss of opportunity and profits that the employees could have gained from that money.

After proceedings took place, the responsible director was liable for $230,000 and the company spent $90,000 on defense costs.

Scenario Three: Upper management are accused of misappropriation of trade secrets.

The company in question has 45 employees and annual revenue of $3 million. However, they don’t have Management Liability insurance.

Five former employees of Company A went to work for Company B. Company A then proceeded to sue Company B for $700,000 claiming the employees in question started sharing trade secrets/proprietary information with Company B while they were still employed by Company A.

The claim went through a two-day hearing and was settled for the amount of $305,000. However, Company B also accumulated legal costs totalling $380,000. This money came out of their business and significantly reduced their net profits for the year, and resulted in staff cut-backs because they didn’t have the appropriate insurance.

Each of these situations have the potential to be financially crippling, if comprehensive Management Liability cover isn’t in place. While many large companies might have the collateral to cope with high legal fees and any losses, most small companies would not be able to shoulder these costs.

To learn more about Management Liability insurance, and what would best suit your business, contact Sydney Insurance Brokers today!