In 2020, the onset of the Coronavirus pandemic saw the Australian economy experience turbulence unlike anything seen in the last century. Snap lockdowns placed businesses under immense financial pressure, and business leaders were forced to make fast, challenging decisions for which there was no precedence. Many found themselves out of their depth.

This economic environment has generated significant management exposures for many businesses and company directors, making it more important than ever to have Management Liability Insurance in place.

WHAT IS MANAGEMENT LIABILITY INSURANCE?

Management Liability is designed to protect Senior Management and the Company for the decisions and responsibilities involved in running a business (Dual).

MANAGEMENT EXPOSURE TRENDS THROUGHOUT THE PANDEMIC:

Below we have outlined some key management trends which have grown to prominence throughout the pandemic, and could see entities, business owners, company directors, officers and senior managers held to account for wrongful decisions and actions. All of these can lead to serious legal and financial exposures.

Employment practices trends

Despite various Australian Government support packages like JobKeeper, JobSeeker, and asset write-offs, many business exercised creative strategies in order to maintain their workforce and reduce impact on their bottom line.

• Some businesses temporarily ceased employee superannuation contributions. This was likely done to reduce payroll expenses, while not immediately impacting take-home pay for employees. While there may have been good intentions behind this i.e. to keep staff employed, this is an illegal practice.
• In some cases, companies targeted and mistreated certain individuals or groups of employees with inadequate or unfair policies relating to annual leave, sick leave or personal/careers leave.
• Fair Work employment practices claims skyrocketed, with Fair Work reporting a 70% increase in unfair dismissal cases alone. (Fair Work Commission, 2020)

Insolvency trends

• Lockdowns and government restrictions have created huge financial stress for businesses across a number of industries e.g. hospitality, tourism, arts and entertainment to name a few. This has sadly created a greater risk of bankruptcy, especially among companies that were only just keeping their head above water financially before the pandemic.
• Once the Australia Government’s JobSeeker and JobKeeper initiatives cease, the risk of trading while insolvent will increase even further. This is unlawful, and legal action can be taken against companies and their management who engage in this behaviour. https://www.grahamco.com/KnowledgeCenter/covid-19/impact-of-covid-19-on-management-liability-insurance-market/

Work Health & safety trends

• COVID-19 brought devastating consequences in some Australian healthcare and nursing home settings, where large outbreaks occurred, and for many caused loss of life. With loved ones looking for answers, there is still a greater risk of legal proceedings and/or class actions against individual companies, and their management, where complainants allege a failure to respond quickly and ‘appropriately’ to manage health and safety risks associated with the virus and its impact on those most vulnerable. https://www.grahamco.com/KnowledgeCenter/covid-19/impact-of-covid-19-on-management-liability-insurance-market/
• Businesses are under greater scrutiny when it comes to the work health and safety risks of employee working from home during the pandemic. If a management response is deemed to be inadequate and there is a failure to provide a safe workplace under Australian Work Health and Safety Laws, companies and business leaders could be exposed to litigation and Statutory penalties.

Employee theft / fraud

• SMEs are experiencing greater incidents of employee theft and fraud due to economic instability as a result of the pandemic and resultant job / financial insecurities.
• Fraud generally falls into three categories – theft, financial statement fraud and asset misuse.
  SMEs are thought to be exposed to a greater risk of fraud for a number of reasons e.g. employees tend to perform multiple functions across the business, business owners often have close relationships with staff, leading to a high level of trust and minimal scrutiny, minimal formal oversight procedures, less expertise on financial matters, and the large impact on cash flow that even small fraud event can have on the financial position of a business (CPA).

Misleading statements regarding company financial forecasts

• There is a greater onus on companies to disclose their strategies for responding to COVID-19 and forecasting how their business will perform. Businesses and senior management may knowingly or unknowingly be making misleading statements about their company’s financial situation that later are alleged to have been overly optimistic (Graham Company).
• Businesses that mislead or fail to meet the expectations of shareholders, employees and other key stakeholders could find themselves on the receiving end of litigation alleging misrepresentation or inaccurate disclosure (Iron Pro).

Financial mismanagement

• The pandemic has seen business owners and directors faced with difficult situations and decisions, which accordingly has led to increased legal and financial exposures for entities and their management teams
• If it is perceived boards and or senior managers failed to prepare adequately for a pandemic or prolonged periods of reduced income, they may find themselves in legal hot water, facing allegations from employees, shareholders and other affected parties (Allianz).

WHAT CAN HAPPEN TO YOU OR YOUR BUSINESS WHEN FACING ALLEGATIONS OF WRONGDOING?

In the case of COVID-19, if a business faces claims alleging contingency planning was unsatisfactory or that inappropriate management decisions or judgements were made, serious legal and financial consequences can ensue.

It is important to note that there are potential exposures to both the business and it’s directors personally.

Potential consequences for the business:

• Legal action brought against the entity
• The need to engage a legal defence, where costs can reach into hundreds of thousands of dollars
• Losses associated with settlements or any compensation payments ordered
• Statutory fines & penalties imposed
• Lost funds due to crime e.g. fraud or misappropriation of funds

Potential consequences to the individual i.e. business owner, directors, officers and senior managers:

• Legal action brought personally against directors / officers of the business
• The need to engage a legal defence, where costs can reach into hundreds of thousands of dollars
• Losses associated with settlements or compensation payments ordered
• Statutory fines & penalties imposed
• Personal asset exposures e.g. home, valuables can be compromised if the business is unable to pay legal fees / compensation ordered payable or suffers fraud.

MANAGEMENT LIABILITY CLAIM EXAMPLES:

Employment practices claim (Dual)

• Company profile:
  Food manufacturer, with 7 staff and an annual turnover of $4 million
• Claim scenario:
  An ex-employee of a food manufacturer lodged an application for Unfair Dismissal with the Fair Work Commission. The Claimant alleged they had been unfairly dismissed from their job because they had not been involved in any misconduct during their employment and the termination process they went through was unfair. The Insured faced reputational damage if the claim proceeded to a public hearing at Fair Work. DUAL engaged Lawyers to defend the claim who were able to resolve the dispute through a settlement agreement. The Insured was able to claim under the EPL section of the Policy for settlement and legal defence costs.
• Claim payment:
  $56,000

Employee Crime Claim

• Company Profile:
  Leisure industry with over $5 million in annual revenue
• Claim Scenario:
  The Insured hired a part time accounts officer but within 12 months the employee was terminated due to unsatisfactory work. Three months later company employees reported that their superannuation had not been paid. The finance manager discovered 271 suspicious transactions to one bank account. During a forensic accounting investigation, it was found that the bank account belonged to the former accounts officer and 740 payments had been made totaling $819,000. To make the payments, the accounts officer circumvented dual sign off controls by gaining an additional security token for the company’s internet banking portal.
• Claim payment:
  Total loss to the business was over $800,000 which was covered under the Crime section in the Management Liability policy.

COVID-19 AND LONG-TAIL CLAIM EXPOSURES

To date, insurers have only reported a handful of management liability claims related to COVID-19, however management liability claims are generally long tail. Therefore, the impact of COVID-19 on claims may not be evident for some time. Claims will likely lag behind occurrences or actions as the pandemic continues, and even more so when government support ceases e.g. insolvencies, layoffs etc. (Iron Pro).

With this in mind, it is prudent to ensure your business has management liability insurance, to protect you from the potentially significant exposures.

Did you know? Regardless of whether you or your business is found to be ‘at fault’, following allegations, the legal defence costs incurred to fight a claim can amount to hundreds of thousands of dollars.

MAKE MANAGEMENT LIABILITY INSURANCE PART OF YOUR RISK MANAGEMENT STRATEGY

The risks associated with managing a business do not just apply to large corporations. They apply to businesses of all size, even SME’s and sole traders.

Management Liability Insurance is designed to cover a broad range of financial exposures that come with operating a business. It can protect you or your directors, officers and employees against alleged claims for a breach of directors duties, dishonest acts by employees, harassment, unfair dismissal and statutory fines and penalties.

For professional advice and Management Liability Insurance placement solutions for your business, connect with a CBN Authorised Broker.

Connect with a CBN Broker

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