Who Needs Management Liability Insurance and What Does it Cover?
As a business owner, you’re likely aware of the importance of liability insurance, workers’ compensation, and other policies that cover costs related to accidents, injuries, and property damage, as you can face significant losses without coverage for these events.
But what about the costs of management mistakes? Not all business owners realize how expensive it can be to face a lawsuit over things like discrimination and mismanaged benefit funds. Mistakes, poor judgment, and even crimes committed by trusted managers, directors, and officers can cost you big time if you don’t have the right coverage.
Management Liability Insurance Basics
A management liability insurance policy is a package of coverage that extends beyond general business liability. It covers the costs associated with the risks of managing and running a business. The policy protects managers, directors, officers, administrators, and board members, and the company as a whole.
Not all businesses need all aspects of management liability insurance. The actual coverage you get is customizable and varies by the insurer, allowing you to choose the coverage that makes sense for your business’s size and scope and the nature of your industry.
What Coverage Can a Management Liability Insurance Policy Cover?
Management liability insurance is a package policy, allowing you to pick and choose the coverage you need. Generally, this includes five types of coverage:
- Directors and Officers Liability– This is essentially errors and omissions insurance for directors and officers. It covers directors’ and officers’ poor decisions or mistakes that lead to financial consequences. If someone sues over those decisions, the policy pays the associated legal fees and settlements. Insurers can customize this coverage to for-profit, private, non-profit, and educational companies and foundations.
- Employment Practices Liability– Employees may sue the company over mistreatments, such as harassment, discrimination, or wrongful termination. This part of a management policy covers the associated legal costs and includes legal actions taken by current, former, and prospective employees.
- Fiduciary Liability– The Employee Retirement Income Security Act (ERISA) holds fiduciaries liable for mismanaged employee benefits. Fiduciary liability insurance protects against mismanagement claims, covering the legal fees and settlement amounts when an employee sues.
- Crime Insurance– This insurance protects against business-related crimes and most types of fraud by employees and third parties. Several crime types are covered here, including forgeries, robberies, fraudulent transfers of funds, use of counterfeit currency, and hacking to circumvent funds. The policy reimburses the losses resulting from these crimes.
- Kidnap, Ransom, and Extortion Insurance– If an employee is kidnapped and ransomed, or if someone tries to extort your company, this policy covers the associated costs.
What Types of Businesses Need Coverage?
Not every company needs the coverage of all five of these policy types—this is why insurers customize packages. It’s essential to understand which types of coverage are necessary to protect your business, managers, employees, and assets. Though every business has unique needs, though there are industry trends and data that can help guide your decision:
- Directors and Officers Liability– Lawsuits over the negligence of directors and officers can bankrupt a business, and these types of lawsuits are on the rise. Employees and investors are increasingly holding companies accountable, so this type of insurance is important for all kinds of companies of all sizes.
- Employment Practices Liability– This is another type of insurance that most companies should consider buying. Employees know their rights, and many take legal actions when those are violated. The more employees you have, the more critical this policy becomes.
- Fiduciary Liability– If you don’t hire employees and work with contractors only, this policy is unnecessary because you do not offer benefits. Companies with benefits packages for employees should consider fiduciary liability coverage.
- Crime Insurance– No company is truly safe from financial crimes, but some are more vulnerable than others. Consider this policy if your employees can access cash and valuable assets, if you have a lot of valuable inventory, or if you engage in digital transactions and hold onto customer data.
- Kidnap, Ransom, and Extortion Insurance– Most businesses are at a low-risk for kidnappings and extortions. However, you may want this coverage if you have high-profile employees, particularly affluent managers and directors, or if your workers regularly travel to dangerous places where kidnappings are common.
Get Complete Protection with Management Liability
Many of the liability costs of a business are related to accidents and injuries, but managers are increasingly held accountable for mistakes and negligence. To make sure your company is fully protected, talk to your insurance agent about which types of management liability insurance make sense for your business.