Read part one of our guide to management liability portfolio insurance.
What is a management liability portfolio (MLP) and what does it cover?
There are three key areas to a management liability portfolio:
- Directors and officers liability – This section of cover protects the personal wealth of directors, senior officers and any other management staff from the legal costs and awards in defending against civil, criminal and regulatory claims or investigations.
- Employment practices liability – This covers you, the directors and the business from claims from potential, current and former employees alleging breach of contract/employment law.
- Corporate legal liability – Claims can be made against the directors and officers and also the business itself in tandem. This cover protects the legal entity (business) from defence costs incurred relating to civil, regulatory claim or investigation.
What could happen to you without MLP cover?
Your company assets/funds will not be able to help you defend claims made against you personally, and it is very unlikely that your standard commercial insurance policy will have any protection for you either. In short, the personal ramifications for directors, senior officers and members of their families, and subsequently the business, can be catastrophic.
Possible outcomes of not being able to defend a claim include:
- Disqualification as director
- Criminal prosecution
- Custodial sentence
- Personal bankruptcy
- Loss of job and business reputation
- Family trauma and financial hardship
How, why and who?
Claims can arise from a wide range of circumstances and it is important to remember that a claim does not have to be justified and factual to initiate costly legal defences:
- Unfair dismissal or discrimination
- Libel and slander
- Breach of fiduciary duty to the company (common law)
- Breach of statutory duties (legislative breaches, including The Companies Act), misrepresentation / misstatement
- Trading whilst insolvent
- Acting outside a manager’s authority/powers
- Sexual harassment
- Anti-competitive behaviour
- Regulatory investigations such as the Health & Safety Executive and HM Revenue & Customs or the relevant regulatory body by industry
Litigation can come from almost anywhere - employees, shareholders, your company, creditors, regulators, customers, competitors, the Government, other directors and suppliers or anyone else who feels that they have suffered a loss arising from the director acting wrongly in their position, can potentially sue you.
We have seen a shifting landscape in recent years with directors facing increasing defence costs and bigger fines – read part two of this article for more information.
Management liability portfolio insurance and Covid-19
MLP cover is provided in the event a business director commits a 'Wrongful Act'.
'Wrongful Acts' are split between those that cover the general duties and those for employment. For general duties, our definition of 'Wrongful Act' includes any breach of duty or negligent act, error or omission. Covid-19 related issues could be included under this cover.
For employment 'Wrongful Acts', insurance coverage for “failure to adopt adequate workplace or employment policies and procedures” could lead to Covid-19 related issues being included under this cover.
MLP policies are capable of providing protection against these exact types of scenarios.
Coronavirus-related changes by the HSE
On 7 April 2020, the HSE made changes to RIDDOR, where the principal contractor/employer now has the legal duty to report the following;
- An unintended incident at work has led to someone’s possible or actual exposure to coronavirus. This must be reported as a dangerous occurrence.
- A worker has been diagnosed as having Covid-19 and there is reasonable evidence that it was caused by exposure at work. This must be reported as a case of disease.
- A worker dies as a result of occupational exposure to coronavirus.
These new requirements, particularly the requirement to report someone’s possible or actual exposure to coronavirus place huge responsibility on employers. Companies will likely want to include a specific section on Covid-19 to ensure compliance with the guidelines and to serve as due diligence in the event of an investigation and/or claims defensibility in the event of an incident.
Failure or alleged failure to meet the above could naturally lead to claims against the company.
Anticipated employment practices liability claims
Insurers anticipate there will be an upturn in claims, specifically in the employment practices liability section of cover, including, but certainly not limited to:
- Allegations of discrimination, unfair dismissal - employees might allege breach of contract in relation to the employment contract where for example employers have closed the business and have not dismissed people but are not paying them either. Alternatively, where the employee considers the employers’ response to Covid-19 was inadequate such that they consider the relationship has broken down to the extent they consider they are entitled to argue they are constructively dismissed.
- Discrimination - against those who are vulnerable due to a pre-existing health condition, or disability, age, or pregnancy. Issues for parents when schools are closed. Potential for discrimination (direct and indirect) against people of certain racial background.
- Whistleblowing/retaliation - where an employee reports possible outbreak and failure to act.
Important: the nature of cover on a ‘claims made basis’
MLP policies are written on a ‘claims made basis’, meaning the date of the claim report is deemed to be the date of the loss event. Claims reported during the term of the reinsurance agreement are therefore covered, regardless of when they occurred. This means that as soon as your policy is cancelled any claim or intimation of claim which may be made against you as an individual or the company, even if spurious, will not be defended. Any valid claim will not be met by your insurers leaving you exposed.
If you have ceased trading and do wish to cancel your cover, we would strongly recommend that you consider arranging what is called ‘run off’ cover for a period of time (normally one, three, six or ten years), dependent on the perceived exposure.
Breach of contract
A company was accused of breaching an exclusive distribution agreement. The pleadings included international interference with the contract, tortious (wrongful) interference with business relations, and misappropriation of trade secrets. Defence costs had already exceeded £200,000 by the time the director involved was eventually removed from the action.
Breach of fiduciary duty
A claim alleging breach of fiduciary duty was made against the directors of a private company by a group of shareholders. The action claimed that the company was not being run for the benefit of shareholders. This is because when the company was performing well the directors received substantial bonuses, and only small dividends were paid.
Charges of corporate manslaughter
Two motorists were killed when a driver employed by a family run haulage firm fell asleep at the wheel. The court held that the employee’s operations manager should have ensured that the driver adhered to the relevant driving regulations and that the director to whom he reported failed to exercise sufficient control. Both incurred substantial defence costs before the organisation was convicted of corporate manslaughter.
Claims of sexual harassment
A claim was brought against two directors for sexually harassing an employee. The directors were found innocent, however this demonstrated that even if a claim is spurious, directors still have to defend themselves and personally fund their legal representation.
Divorced team take director versus director action
A husband and wife team equally owned a successful contract cleaning company. Following a messy divorce, the wife accused her husband of deliberately mismanaging the finances to distort the true worth of the business. This is commonly known as a director versus director action and is on the increase as business pressures mount. Total costs amounted to £75,000.
Breach of warranty of authority
A claim was brought against a director of a building company for breach of warranty of authority. Payment of the claim exceeded £500,000.
Property developer agreement to purchase land for development without shareholder approval
A property developer claim demonstrates director versus director action concerning breach of fiduciary duty plus two former directors acting outside their authority. They committed the company to an agreement to purchase land for development without approval of shareholders (fellow directors).
The evidence established that the claim was unlikely to succeed. Simply put this was a fallout between personalities with axes to grind; however, the insured still incurred legal costs to investigate allegations. Insurers defended the legal action until common sense prevailed with total legal costs of nearly £750,000.
Breach of health and safety regulations
A construction company suffered a near miss when a huge pane of glass fell from the fifth floor of a redevelopment project onto the pavement. Miraculously, no one was injured but the Health & Safety Executive made a site visit the following day. This revealed a number of legislative breaches. A variety of actions were subsequently brought against the directors resulting in costs of £45,000.
Company directors questioned over fatality
A client operated road sweeping services using motorised vehicles. Unfortunately, one of these vehicles was involved in a fatal accident. This resulted in police investigation of two company directors. One of the directors was accused of aiding and abetting the causing of death by dangerous driving. The case progressed to trial, but in view of the director’s health, proceedings were stayed. While this meant the director was never tried, insurers still incurred legal defence costs of over £121,000.
The information contained in this bulletin is based on sources that we believe are reliable and should be understood as general risk management and insurance information only. It is not intended to be taken as advice with respect to any specific or individual situation and cannot be relied upon as such. If you wish to discuss your specific requirements, please do not hesitate to contact your usual Towergate Insurance Brokers advisor.