Management Liability Insurance

Transcription

1 Management Liability Insurance Issue 1: September 2011 What is Management Liability Insurance? What does Management Liability Insurance Cover? Some Pointers Management Liability Insurance - summary points Some Management Liability Claim Examples What is Management Liability Insurance? Who can bring an action against a company, its directors, officers and employees? Regulators (e.g. ACCC, ASIC & the ATO) Employees Competitors Creditors Shareholders (especially minority shareholders) Clients Liquidators/Administrators Most common types of claims under Management Liability Insurance Breaches of director's duties and/or fiduciary duties, including breach of trust False, misleading & deceptive conduct by directors/officers and Management Liability Insurance protects you and the company against the risks and exposures of running the company (i.e. your liability for mismanagement). Without adequate protection you could risk losing, not only your business, but also your personal assets. This insurance therefore protects you personally and therefore your wealth and lifestyle. The legal costs to defend allegations of wrongful acts alone can be financially crippling for businesses and individuals. Management Liability Insurance is not Professional Indemnity Insurance - why not? The purpose of Professional Indemnity ("PI') Insurance is to respond to claims from third parties in respect of the professional/specialist services (including advice) you provide NOT for claims that you mismanaged your company and caused loss to others. You have to take out separate insurance for this exposure. Where PI Insurance covers the 'activities' of the company, Management Liability Insurance focuses on the 'act of running a company'.

2 employees Actions alleging improper and illegal conduct Statutory breach of duty i.e. under legislation OH & S prosecutions and inquiries Employment: unfair/wrongful dismissal, discrimination, harassment, wrongful failure to employ or promote Defamation by directors/officers Breach of intellectual property rights by directors/officers Employee theft, including theft of money and property Statutory fines & penalties. Taxation investigation costs What does Management Liability Insurance Cover? Damages and claimant costs awarded against you Defence (i.e. legal) costs Investigation costs Civil fines & pecuniary penalties. Management Liability Insurance is a packaged product which will normally cover the following management liability risks: Directors and Officers Liabilities Will protect the past, present and future directors and officers plus anyone else involved in the management of a company for claims alleging a wrongful act and for which the company does not grant indemnification to such person. Employees can also be covered. - Unfair Competition - Fraud/Breach of Fiduciary Duty - Misappropriation of Trade Secrets - Insolvent Trading - Manslaughter Employment Practices Liabilities "When the insurer paid our legal bills and the amount to settle the claim, it really emphasised why I should always have management liability insurance in place." Provides cover to the company, directors, officers and employees for claims made by current, past and prospective employees for issues arising from employment practices, including harassment, unfair dismissal and other employment issues. - Bullying/Harassment - Unfair Dismissal - Discrimination Statutory Liabilities Covers certain individuals and the company for fines and penalties from operating the business including fines related to workers compensation and occupational health & safety. Source: A client of Austbrokers Professional

3 Services. HOW TO CONTACT US For advice and a quote call or Nick Codd General Manager nick.codd@professionalrisks.com.au Phone: (02) Mobile: OR Michael Joseph Professional Lines Broker michael.joseph@professionalrisks.com.au Phone: (02) Mobile: Website: Please note that we only advise clients on their exposure to professional risks and therefore only arrange professional indemnity and management liability (including Directors and Officers) insurance. If you wish to receive advice on other classes of insurance, please note that we can refer you to another Austbroker member firm. Postal Address: Locked Bag 2030 St Leonards NSW 159 Street Address: Level 10, 1 Elizabeth Plaza North Sydney NSW 2060 Austbrokers Professional Services Pty Ltd is a Corporate Authorised Representative of Austbrokers Sydney Pty Ltd ABN AFSL Occupational Health and Safety Penalties - EPA and Pecuniary Penalties - Other Pecuniary Penalties (Civil Penalties) Crime Cover A comprehensive crime section provides cover to the company for loss arising from dishonest acts such as theft and fraud by employees including theft of stock. - Theft by Employee - Theft of Inventory - Theft by Contractor/Consultant Corporate Entity Liabilities Extremely relevant for companies that are owned by the directors by providing cover to the company for actions arising from managerial matters. A claim against the company will cause the same financial hardship to the owner; therefore this cover is extended to provide protection to the company. Many of the same claims against the directors and officers will, typically, be brought first against company. - Wrongful Act/Fraud - Shareholder Dispute - Shareholder Employment Legal Representation Costs Legal representation costs that are incurred by directors/officers and the company for attendance at official investigations or inquiries are covered. - ASIC Enquiry Other Covers - Tax Investigation / Public Relations / Crisis Containment Additional management exposures can also be

4 insured against under management liability insurance, to reimburse the company for certain costs incurred during a tax investigation by the ATO or to engage professional assistance in a crisis. - Taxation Investigation - Public Relations - Crisis Containment Some Pointers Austbrokers Professional Services Pty Ltd is a specialist wholesale broker that advises on and places professional risks products. What are the Professional Risks Products? Professional Indemnity Insurance Management Liability Insurance Directors and Officers Insurance Association Liability / Not for Profit Insurance Information Technology Insurance Financial Institutions Insurance Employment Practices Insurance Statutory Liability Insurance Crime (incl. Employee Theft) Insurance Kidnap & Ransom/Extortion Insurance The potential for the severity of loss grows as revenue in the company increases. The bigger the company, the bigger the claims tend to be. Not only can directors be held personal liable (exposing personal wealth) but also managers and employees. As the regulatory environment changes, directors are often unaware of their full responsibilities at law. Directors are responsible for the risk management of their company. ASIC has been on the front foot, putting directors on notice. A company's reputation can be damaged if they are investigated, not to mention the ongoing legal costs to defend claims. In the current economic climate - companies have seen an increase in: 1. Business failures 2. Regulatory investigations 3. Employment practices claims 4. Employee theft 5. Regulatory actions

5 Management Liability Insurance - Summary Points Management Liability Insurance covers the exposures & risks in managing a business. Directors and officers face both personal & corporate liabilities in managing a company and can be held personally liable. Claims can often arise from actual or alleged breaches of the Corporations Act, which regulates company law in Australia. Where PI Insurance covers the activities of the company, Management Liability Insurance focuses on the act of running a company. APPENDIX Note: Please read the relevant management liability policy wording for full terms & conditions including exclusions.

6 Some Management Liability Claim Examples Directors & Officers Liabilities Unfair Competition A CEO of a privately held company left to start a new software company and was subsequently sued individually as an officer of the new company by his former employer. The allegations included trademark infringement and unfair competition, as the former employer claimed that he had taken a corporate licence to market a particular software product. Fraud/Breach of Fiduciary Duty Mr. X purchased a minority interest in a new company on the recommendation of the president of the company, with the promise of a substantial return on the investment. After 3 years, Mr. X sued the company and the managing director alleging fraud, failure to comply with corporate by-laws, exclusion of minority shareholders from profits, squandering company assets and breach of fiduciary duty. Misappropriation of Trade Secrets A managing director of company X left to become the CEO of a competing company Y. After three months his previous employer sued the directors and officers of Company Y for allegedly stealing trade secrets, confidential business information, and employees. Insolvent Trading A chain of hardware stores was having a particularly difficult year due to new competition at its three locations. Two out of five directors knew that the company could not realistically avoid collapsing, but

7 they allowed the company to carry on trading. In the two weeks before the company went into receivership, the company borrowed $75,000 from a shareholder having a 30% stake, who was not made aware of the company's dire financial position. Proceedings were commenced by the shareholder to recover the $75,000 and ASIC sought to have the directors disqualified for 5 years for insolvent trading. The two directors who knew of the company's financial position were found guilty of trading whilst insolvent and were disqualified from being company directors for 5 years. The other three directors were found to have no knowledge of the insolvency and were acquitted. The innocent directors incurred defence costs of $92,000 which included both their defence of the shareholder claim and the regulator action. Manslaughter A father and son working for a construction company were working on the demolition of a tunnel. The tunnel collapsed during a difficult extraction exercise and the father and son were both buried under tons of rubble. The father died and the son suffered substantial injuries. A formal investigation into the accident was commenced and a number of employees were asked to attend and provide evidence to the inquiry. Each employee had a lawyer draft a witness statement on their behalf. After a thorough investigation, a number of deficiencies were identified including poor risk management and a lack of training. The Occupational Health and Safety Site Manager were charged with manslaughter and the construction company charged with breaching various offences under the Occupational Health and Safety Legislation. The son also sued the company for damages for his injuries. A court acquitted the Site Manager of manslaughter but he and the company were each fined $250,000 and between them they incurred defence costs of $42,000. The Company's defence costs for the injury claim amounted to $55,000. The directors were also acquitted but defence costs of $90,000 were incurred. Employment Practices Liabilities

8 Bullying/Harassment A claim was made by four former employees against certain directors, managers and supervisors for bullying, harassment, abuse and sexual harassment. Claims were made against the entity alleging that it failed to respond to those allegations. The employees claimed combined compensation of $500,000. After protracted litigation, the matter settled for payment by the company of $80,000 per claimant ($320,000). In addition to this, the company incurred over $150,000 in defence costs. Unfair Dismissal An employer dismissed an employee for accessing certain websites and sending inappropriate s during office hours, in breach of the employer's internet and IT policy. The employee complained to Fair Work Australia that the dismissal was unfair. Fair Work Australia found that the dismissal was unfair because the decision to dismiss was too harsh, taking account of the employee's previous good behaviour and the fact that the internet and IT policy was regularly breached by other employees without any consequence. The employee had also not been given the opportunity to respond to the allegations before they were dismissed. The employer was ordered to pay $50,000 in compensation and was also responsible for paying its legal bill of over $40,000. Discrimination An employer decided that it needed to make a redundancy in its workforce. After a period of consultation, an employee was selected and made redundant. The employee later made a claim under the general protections provisions of the Fair Work Act, in which she stated that she had been selected for redundancy because she had told her manager that she was pregnant a week before her dismissal. Fair Work Australia was not able to conciliate the matter and it resulted in a hearing in the Federal Courts, which the employer lost. The court found against the employer and awarded the employee compensation, including legal costs of over $250,000.

9 Statutory Liabilities Occupational Health and Safety Penalties Example 1. During the construction of a commercial property, an employee was severely injured and left paraplegic when a pile of debris accidentally fell on him. The company was subject to a full Occupational Health and Safety investigation and prosecution. The Company vigorously denied and successfully defended most of the allegations. Despite their attempt, the Company was fined $250,000 and incurred $200,000 in legal costs. Example 2. A team of 25 factory hands were contracted by the insured manufacturing company to work on the production line in the lead up to the Christmas period. The contractors received a speedy 2 hour course in safety and procedure. Unfortunately, on the first day of employment, two of the workers were seriously injured. One of the contractors suffered a deep laceration on his hand whilst the other contractor lost partial hearing in his left ear for failing to wear the safety equipment correctly. A full Occupational Health and Safety investigation began which eventually led to the company being prosecuted. Following a 2 day hearing, the company was found liable and was fined $120,000. Overall defence costs incurred were $60,000. EPA and Pecuniary Penalties The director of a manufacturing company along with the company were charged with 6 offences under the Environment Protection Act. It was alleged that the carbon emissions from the factory were incredibly high over a period of three days. This was a direct result of a mechanical breakdown in the factory which took three days to repair. Following a 1 day hearing, the director was found liable and was fined $50,000. Overall defence costs of $15,000 were incurred over the duration of the investigation and prosecution. Statutory Liability (Civil Penalties) A company was fined $14,000 from the Department of

10 Infrastructure for failing to have the correct permit affixed to the site they were working on. Crime Cover Employee Theft Over a period of 9 months, an employee misappropriated $400,000 of client's money by pocketing cash from sales which was to be banked into the client's trust account. The employee had a gambling problem and admitted to stealing the funds. The employee was prosecuted by the police but was unable to pay the stolen funds back to their employer as the funds were gambled away. The Insured made a fidelity claim on their management liability policy. They were able to provide the insurer with documentation pertaining to the loss and were paid $400,000 less the amount of their excess. Theft of Inventory A manager of the company and an employee together manipulated inventory supply numbers of raw material to defraud the company. Both raw products and finished products were stolen and sold by the manager and employee over a two year period. The loss to the company was $500,000. Theft by Contractor/Consultant A management consultancy company specialising in change management advice was asked to provide advice to a computer company following their merger with a competitor. The project involved a consultant working at the computer company's premises over the period of a month and the consultant was given unlimited access to the premises and generally worked back after most of the staff had left for the day. During this time the consultant, in collusion with an employee, stole a number of expensive laptops, computer equipment and computer parts. An investigator was called in and determined the loss to be $175,000. The consultant admitted to having stolen the goods but had sold them to support a drug habit and was unable to assist with any recovery. The investigation costs amounted to $18,000.

11 Corporate Entity Liabilities Wrongful Act / Fraud A company's sales representative was falsifying sales to make commission, but the sales never actually occurred. The sales representative was fired. [Claim 1 by employee - unfair dismissal] [Claim 2 by entity - Crime]. Due to bookkeeping and process faults, these false sales were recorded in the accounts as real sales, and the sales representative's fraud was not fully disclosed. Investors invested in the company on the state of the accounts provided to them by the Company. [Claim 3 - misrepresentation by the Company as to financial condition] A lender loaned funds to the Company based on the accounts which overstated the sales and therefore profit. [Claim 4 - lender claims misrepresentation and misleading and deceptive conduct, and sues the Company for return of the loan, loss of use of the funds and unspecified damages]. Shareholder Dispute Mr. X and Company A of which Mr. X was a director and officer, where both minority shareholders in Company B in which they were seeking to purchase the assets and business. Upon completion of the sale, Mr. X and Company A sought damages, based on allegations that Company B and the directors and officers of Company B had made in misrepresentations in connection with the purchase and sale of Company B. Shareholder Employment Company A buys business of Company B and establishes Company C. Company A employs previous managing director of Company B as a manager in Company C and is given shares in Company C under a Share Sale Agreement as part of his remuneration package. A year later, Company C purports to terminate the services of the manager for lack of performance. The manager believes he was unfairly terminated and that the price that he was paid for his shares in Company C was too low. He claims his employment agreement was unfair and also sues for breach of the Shareholder agreement. The manager claims against Company C and also Company A, including

12 misrepresentation on both employment and share acquisition aspects. Legal Representation Costs ASIC Inquiry ASIC launched an investigation into ABC after receiving an anonymous tip off that ABC and a rival have been engaging in anti-competitive behaviour (price fixing of the cost of parts). ASIC immediately launched an inquiry and compelled the attendance of the directors of ABC and the rival to an inquiry. ASIC also raided the premises of ABC and seized all documents and computers from the premises. The investigation by ASIC took several years to complete. After receiving another anonymous tip off ASIC abandons the investigation. The directors of ABC were separately represented. Costs of approximately $250,000 were incurred. Other Covers - Tax Investigation / Public Relations / Crisis Containment Taxation Investigation A financial planning company received a notice from the ATO advising that they intended to review their income tax, capital gains tax and superannuation payments tax records for the periods ending 31 March 2007, 31 March 2008, 31 March 2009 and 30 June The insured then retained specialist tax auditors and accountants to prepare an audit report. The entire process was arduous and took over 9 months to complete. The ATO deemed that all was in order and did not impose any penalties. The insured, however, was left to pay auditor's costs totalling $88,500. The management liability insurance covered this claim. The costs incurred were deemed to be necessary and reasonable and the insured was reimbursed the full amount less its excess. Public Relations Complaints were issued against a valuer in relation to alleged negligent valuations it had performed on several apartments in an apartment complex in a

13 major city centre. The valuer denied any wrongdoing and, with the help of its insurers, were able to successfully defend the claim. The valuer had become aware that its reputation may have been tarnished by the negative experience and had experienced a marked dip in its business activity since the claims were made. A public relations firm was appointed to work with the insured to counter any adverse consequences in relation to this claim. Three months later, the insured reported an increase in their business and that it was once again being retained by a previous valuable client. Crisis Containment A cookware manufacturing company became aware that it had produced a 30cm saucepan lid which was susceptible to cracking when exposed to high temperatures. The company sent out a press release to recall the faulty product. Although the recall of this potential product was only 5% of the company's revenue, the whole experience had the capacity to lead to a chain of events which could set in motion the recall of up to 50% of the company's annual revenue. The company incurred $45,000 in retaining the services of an external crisis management company to oversee the recall and to ensure that any damage to the company's reputation was minimal. In the circumstances, the insurer deemed that the crisis containment extension of the policy was triggered and reimbursed the company the amount of $45,000. END OF NEWSLETTER Austbrokers Professional Services Pty Ltd, Level 10,1 Elizabeth Plaza, North Sydney, New South Wales 2060 (02)