The importance of management liability insurance in a challenging business environment

Darren Ross, Development Executive in the Belfast office of insurance broker Gallagher, considers the management liability risks that companies and directors may face as a result of the pandemic, and the actions that can be taken to help protect themselves and their business.

Throughout the pandemic, thousands of Belfast businesses, directors and management teams have had to react swiftly to rapidly-changing restrictions, and make critical decisions regarding business operations and management of staff. As the impact of decisions businesses have taken becomes clearer, it is likely that the next few months will bring a wave of management liability claims – regarding, for example, how companies managed employee or customer safety, or how they communicated with customers or shareholders during periods of lockdown.

According to research we conducted among claims management firms in December 2020, seven in 10 (70%) have already had COVID-19 related claims registered and predict claims will cause a 40% rise in litigation in 2021 compared to previous years[1]. Among those that have not yet received pandemic-related claims, three-quarters (76%) anticipate an increase in over the coming months, starting from spring 2021 and continuing into summer.

So far, claims management companies are most likely to have received claims related to employees and customers contracting COVID-19 on an organisation’s premises (employees 14% of all claims registered so far / customers 11%); medical negligence (13%), and poor working conditions, including a lack of suitable PPE (9%).

Claims (12%) such as staff feeling overworked, or unsupported – as well as discrimination cases (8%) and unfair dismissals (4%) also appeared frequently. There is also a predicted rise in complaints from other stakeholders, such as shareholders, as the long-term impact of decisions made by business leaders during the pandemic become clearer.

Our research found that the average claim value submitted by employees so far is for £5,500 and for customers £7,500, which are likely to include compensation for illness and any subsequent losses. However, the legal fees businesses face to defend themselves against claims often exceed claim values significantly, with the potential to run into tens of thousands of pounds.

[1] Research conducted by 3Gem, between 1 December and 15 December, among 3,200 respondents including 200 claims management companies

Luckily, there are steps that can businesses take to protect themselves against COVID-19 related claims.

As well as keeping their risk strategy and the measures they are taking under continuous review due to the changing nature of the pandemic – including closely monitoring current Government advice and any changes in the law and regularly reviewing risk assessments – businesses need to ensure they have insurance in place which will cover the legal costs of defending allegations.

Management Liability insurance protects businesses and their directors and key managers (officers) against claimants who allege wrongful acts. There are three components – Directors & Officers Liability (D&O), Employment Practices Liability (EPL) and Corporate Legal Liability – with each having its own role to play in protecting the assets of the individual directors and of the company itself from the costs of legal actions.

Directors’ & Officers’ Liability (D&O)

A company’s status as Limited offers financial protection for the shareholders only, and does not protect the company’s directors from the consequences of their business decisions and activities. D&O insurance covers the cost of compensation claims made against a business’s directors and officers for alleged wrongful acts, which in the case of COVID-19, may include allegations that their contingency planning was unsatisfactory or that inappropriate decisions were made.

Corporate Legal Liability (CLL)

Corporate Liability cover is similar to D&O insurance but defends claims made against the company as opposed to individuals. Cover includes legal fees, and in some cases the value of awards and damages, as a result of claims and prosecutions made against the company including breach of trust or duty, neglect, and breach of contract.

Employment Practices Liability (EPL)

In terms of employment practices, businesses may also find themselves exposed to claims as a result of the steps they have taken, or have failed to taken, to protect employees during the pandemic. EPL insurance provides cover for claims such as discrimination, harassment, or wrongful termination. In terms of COVID-19 related claims, we are likely to see a rise in allegations related to furlough and redundancies; employer’s adherence to official ‘COVID-secure’ workplace guidance and disputes around flexible working.

As Belfast businesses navigate their way through the aftermath of COVID-19, how they and their directors and officers have reacted during the pandemic will be a key area of focus in the coming months and years. Engaging the support of a specialist insurance broker will help ensure businesses have appropriate insurance in place to cover them in the event of a management liability claim, as well as being able to access risk management advice to help prevent any potential claims, and validate any risk assessments that have been taken to ensure they are suitable and sufficient.