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Management Liability and How to Reduce Your Risk

Posted by Paula Devaney on May 11, 2023 8:33:20 AM

Business owners and high-level employees carry a considerable amount of responsibility and regularly face legal risks. As the world evolves and adapts, so do the liabilities of business owners and employees. Whether it's wrongful termination, discrimination, or mismanagement, legal claims brought to your business, true or not, can cause significant financial repercussions. It's more important than ever to understand the risks you face and set procedures in place to protect yourself against them. Management Liability Coverage is a powerful way to protect your business from common claims and encompass a wide variety of potential lawsuits you could face involving your business's management. Whether you're a seasoned CEO or just starting your small business, these insights on mitigating your management liability risk will set you and your colleagues up for success.

What is Management Liability?

Management Liability is used to describe the combination of insurance policies that protect businesses from claims involving management as well as directors and officers. Management and director or officer positions face a much higher level of risk of lawsuit and litigation due to their role. This coverage is intended to protect them against these complex and often serious claims that would not be covered on a general liability policy.

The main coverages included in a management liability package are:

Directors and Officers

Directors and Officers coverage (D&O) is the most essential and sought-after coverage in the management liability package. This coverage protects those in the director or officer role from lawsuits alleging breach of fiduciary duties or wrongful acts relating to their role. For example, a claim could arise under this coverage if an officer failed to disclose information that would impact investors or put their investments at risk of a loss.

Employment Practices Liability

Employment practices liability (EPL) is becoming increasingly important for businesses to have. This coverage provides protection against claims arising from employees regarding workplace harassment, discrimination, and wrongful termination. This coverage can provide financial assistance during the litigation process and settlement. Without this coverage, businesses would need to pay to defend the case even if the claims were false. An example of an EPL claim would be if an employee believed they did not get a promotion or career opportunity due to a reason aside from their skillset such as race, gender, or personal bias.

Fiduciary Liability

Fiduciary liability protects your business from claims alleging mismanagement of 401K or pension plans. An example would be a claim of improper enrollment, errors that lead to loss of benefits, or poor negligent investment. While these claims are not as common as others, when they do occur they can be extremely costly and damaging to your business's reputation.

Commercial Crime

Commercial crime insurance protects your business against dishonest employees or third-party theft. For example, if an employee was secretly stealing funds from an account that they manage, this coverage would help litigate the claim.

How Can Businesses Protect Against Management Liability

Businesses will always face these risks because even under the best possible management false claims can arise. Separately, even under the best hiring practices, mistakes and poor judgment can occur. In order to protect your businesses to the best ability, there are a few steps to take.

Have Proper Management Policies and Procedures

Having proper policies and procedures in place will make sure everyone in the organization takes the best approach when handling all situations. First, your organization should identify all possible risks, and from there develop policies to follow closely based on the identified risks. For example, your business may develop a harassment and discrimination policy that outlines your business’s commitment to equal and fair treatment. All employees should be trained on these policies and the company should consistently enforce them.

Document Everything

Documenting everything in detail will provide evidence against the decisions and actions of your organization's leadership. This can include everything from general performance documentation to meeting notes, to the documentation of any instances that you think could lead to a claim in the future. For example, if you have an employee who you do not plan on promoting, ensure that there is viable and documented reasoning for this decision. If a claim does arise in the future claiming wrongful withholding of career opportunities, you will have clear evidence as to why the individual did not get the role.

Address Previous Claims

If your business has had previous claims of management liability, do not try to hide them from those within your organization. Instead, learn from these experiences and develop policies to train future employees on ways to avoid similar occurrences from happening again. It's key that your business is openly dedicated to a positive and inclusive working environment, and this type of atmosphere will make employees more comfortable speaking up if they feel there may be mistreatment or mismanagement.

Reduce Your Risk With Management Liability Insurance

The steps noted above will ensure you’re putting your best foot forward in protecting your business. Through proper policies and procedures, regular training, adequate documentation, and recognition of downfalls, your company can be resilient in its management practices. However, there are still instances where you could fall into a claim, and you want to ensure you are protected financially. Purchasing a strong management liability package will all necessary coverages and limits will give you peace of mind in the event of an unforeseen claim. ECBM has expert agents and consultants who can help identify your main risks and develop a policy package that addresses all vulnerabilities. For more information on how ECBM can help protect your business, contact us today.