Management liability - are you fully protected?
Rising regulation and an increasingly litigious society means that businesses and their directors are facing an ever-growing rate of claims. With associated legal costs, even winning a legal case can be an expensive process. With every decision potentially exposing directors to expensive claims and legal costs, they need cover that protects both their business and their personal assets.
Management Liability Portfolio (MLP) insurance is available to any UK based partnership, limited liability partnership, private limited company, unlimited company or sole practitioner. It is estimated that less than 15% of UK businesses currently purchase MLP or Directors' & Officers' (D&O) cover with even less purchasing Employment Practices Liability (EPL). This is somewhat surprising since there were over 183,100 employment tribunal cases in 2012.
The most common reasons for not purchasing this cover are a perception of it being expensive (which it’s not in relative terms), a lack of understanding of what it actually covers, a lack of understanding of the product by their insurance adviser, and how it sits with other areas of cover such as professional indemnity insurance, employers’ liability, public liability, legal expenses etc.
MLP incorporates 3 elements of cover:
Covers individuals for their personal liability for any decisions they make in their capacity as a director or trustee. It covers the costs of defending a claim against directors, officers or employees. It includes any awards or settlements but does not include criminal fines or penalties. Individuals are also covered for the costs of legal representation at any official investigation such as a health & safety, environmental or trading standards investigation.
Covers employers for employment claims including wrongful dismissal, discrimination and harassment from employees or third parties. It covers the costs of defending claims made against the company/organisation or their directors/trustees, officers or employees, and also includes any awards made as well as agreed settlements.
Company legal liability/corporate entity
This covers an organisation for claims from their shareholders, investors, regulators and other third parties against the company/organisation. It includes any awards made but does not include fines or penalties. The organisation is also covered for the cost of legal representation at any official investigation such as a disciplinary hearing, health & safety, or environmental or trading standards investigation. Company legal liability also includes cover for employee dishonesty.
Breach of fiduciary duty
A shareholder of a company made a claim against the directors alleging that they had breached their duty to the company in increasing their salaries even though the company was in financial difficulty. The directors incurred legal fees of £40,000 in successfully defending the claim.
In a prosecution by HM Revenue & Customs the directors of a company were alleged to have made false statements in an earlier tax investigation; legal fees in the case came to more than £40,000.
A company faced a claim from a former employee who had been made redundant. The employee claimed he should not have been selected for redundancy as he had taken a salary sacrifice in the last year. The legal fees in successfully defending the case were more than £8,500.
Disqualification - Hundreds of directors are disqualified each year with a potentially devastating impact on personal circumstances. Even after the disqualification period has ended there could be significant residual damage to the individual’s reputation.
Personal exposure - When a director is accused of personal negligence their private assets including their home, investments and pension funds are put at risk.
Family firms - Family firms can frequently face disputes both internally and externally. D&O cover can pay for legal expenses incurred in disputes between directors of the same firm.
Partnerships - Partnerships can be particularly vulnerable to employment related claims especially discrimination, harassment and failure to promote.
Mischievous allegations - Firms can often be troubled by mischievous or unfounded accusations which can be incredibly frustrating and time-consuming.
Criminal acts - Whilst it is against public policy to insure against dishonest or fraudulent acts, an MLP policy can pay legal defence costs up until guilt is established.
Investigations - The Department for Business, Enterprise and Regulatory Reform receives thousands of complaints every year and mounts further investigation in the majority of cases, which can be hugely expensive and time-consuming for the subject.
SMEs - Small and medium sized companies tend to be dynamic and entrepreneurial by nature but often have little in the way of risk management policies and procedures, which makes them particularly susceptible to employment related disputes.
Run-off cover - Resignation and retirement are not necessarily the end of any negligence claim and actions may even be pursued against the director’s estate after death.
Codified duties - The UK Companies Act 2007 introduced duties for directors which made them more accountable and placed the onus on them to be aware of their responsibilities under such law.