Running and managing a business comes with a number of risks as it relates to everyday business operations. From claims alleging employee discrimination to mismanagement of benefits plans to investor fraud, the potential for lawsuits and financial losses can seem unending.

For large companies with access to substantial financial resources and expert advisors, purchasing standalone policies to protect against the myriad of risks is straightforward and fairly common. But for smaller companies, investing in a multitude of individual policies may be financially difficult, and frankly, unnecessary. This is where Management Liability Insurance comes in.

What is Management Liability Insurance?

Management Liability Insurance is a combination of coverages that protects you from a variety of risks that arise when running and managing a business. This customized package of coverages is aimed at protecting directors, officers, board members, managers, and administrators, as well as the company, from lawsuits alleging mismanagement, and is intended to provide liability coverage beyond what a standard general liability policy covers.

While there is no standard Management Liability Insurance package, most insurance companies will offer some form of this hybrid policy, which tends to benefit smaller businesses the most.

What does Management Liability Insurance cover?

Coverage does vary by insurer, but here are the most common coverages offered for Management Liability Insurance:

Directors and Officers (D&O) Liability Insurance

Directors and officers liability insurance provides protection for the personal liability of directors and officers of a company while they are performing their roles as directors and officers. This coverage can protect directors and officers if they are accused of management errors or improper conduct by providing for the legal defense costs and potential losses suffered through lawsuits.

Example:

• Your software startup is seeking outside investment, and your CFO projects a healthy 40% growth in topline revenue for the next year. Because of this impressive forecast, investors buy in, and your company is able to successfully close its round of funding. However, the growth results never materialize, and your investors sue your company and its directors for misrepresenting the company’s revenues. D&O coverage would provide for any legal costs or settlements.

Employment Practices Liability Insurance

Employment practices liability insurance (also known as EPLI) provides financial protection for your business against lawsuits by employees accusing your business of wrongful treatment such as discrimination, harassment, or other employment-related issues. EPLI covers your company as well as directors, officers, managers, employees, and former employees as insureds. EPLI covers claims filed by your current employees, former employees, and employment candidates whom you did not hire.

Example:

• A woman at your construction company claims that she was the victim of sexual harassment over a two-year period. She presents evidence for her claim including specific incidences of harassment and her daily encounters with abusive language. The woman sues your company for damages. EPLI coverage would provide for any legal costs or settlements.

Fiduciary Liability Insurance

Fiduciary liability insurance is centered around protecting your business and employer assets against claims of mismanagement of your company’s benefit plans. Under the Employee Retirement Income Security Act (ERISA), fiduciaries are expected to act in the interest of plan participants and may be held personally liable for any mismanagement of employee benefit plans. Fiduciary liability insurance offers a layer of protection for your company and employees involved in fiduciary roles and covers legal claims arising from an allegation that a fiduciary has failed his or her duties.

Example:

• An employee at your accounting firm is nearing retirement and realizes she never enrolled in the company 401(k) plan. She sues your company and the plan’s administrators for failing to adequately inform her of the retirement plan options and educate her on how to enroll. Fiduciary liability coverage would provide for any legal costs or settlements.

Commercial Crime Insurance

Commercial crime insurance protects your business property against financial losses caused by dishonest employees or third-party fraud. It can cover your property, merchandise, cash, and securities against theft, embezzlement, or forgery by employees. Crime insurance can also protect you from non-employee third parties who commit forgery, theft, robbery, burglary, or fraud.

Example:

• An employee in your accounts receivable department altered customer checks to make them payable to himself, depositing this money into his own personal account. Commercial crime insurance would cover your losses from this theft.

Kidnap and Ransom Insurance

Kidnap and ransom insurance, also known as K&R Insurance, protects your business from financial losses as a result of kidnapping, ransom, or extortion demands. This type of coverage is particularly important for companies that frequently send employees abroad to high-risk areas.

Example:

• Your software company is selling to a business in Mexico, which requires an in-person meeting in Mexico City. The sales manager and sales representative on the deal travel to Mexico City to work out terms of the deal. During their trip, the sales manager and representative take a taxi that is suddenly hijacked. The hijackers take the passengers hostage and demand a ransom of $2.6 million from your company. Kidnap and ransom insurance would protect your company from the financial losses as a result of having to pay the ransom.

Do I need Management Liability Insurance?

Management Liability Insurance covers a number of very common risks that businesses and management teams are exposed to in the everyday operations of a company. For any business, having insurance coverage for some or all of these exposures is critically important.

For large enterprises, these risks are commonly dealt with via independent standalone policies on a large scale. But for smaller businesses that likely encounter far fewer claims, a hybrid solution like Management Liability Insurance may provide more cost-effective coverage as fewer claims from the insured pool can translate to lower premiums. Many insurers also offer the ability to pick and choose which coverages you want in order to create a more customized Management Liability Insurance package.

Management Liability Insurance can also offer higher levels of protection than offered via standalone policies. Because of the combination of multiple coverages, insurers can better close the gaps between policies and provide broader definitions of coverage. Many insurers offer more extensive definitions of employment practices claims, coverage for subsidiaries, and a broader definition of the insured, often including employees and contractors, not just directors and officers.

What are the key exclusions of Management Liability Insurance?

The exclusions for Management Liability Insurance depend on the coverages that are included, as each coverage type has its own unique exclusions. For example, D&O coverage commonly excludes intentional illegal acts and insured vs insured lawsuits, and EPLI coverage excludes intentional and dishonest acts and violations of various compliance regulations. Make sure to check with your insurer about the exclusions in your specific Management Liability Insurance policy.

Final Word

Running a business involves a number of common risks that expose not only the company but also those involved in everyday business operations. Management Liability Insurance provides a hybrid solution that packages multiple coverages into one convenient insurance vehicle, most commonly covering D&O liability, employment practices liability, and fiduciary liability.

Management Liability Insurance provides coverage beyond a general liability policy, centered around financial losses stemming from legal defense costs, judgments, or settlements from lawsuits alleging a variety of mismanagement or wrongful acts within the context of operating a business. For small and medium-sized businesses, Management Liability Insurance is a good alternative to purchasing multiple standalone policies, potentially saving you in premium costs and providing overall broader coverage.