Did you know that a director or officer can be held personally and financially liable for a decision made in the course of their duties, even when that decision was made in good faith?
As expectations placed on organizations continue to evolve, understanding the protection available to their leadership is more important than ever. Management liability insurance can help protect the personal assets of directors, officers and board members, as well as the assets of the organization, against certain claims arising from management decisions and responsibilities.
Learn what management liability insurance may cover, who can bring a claim and why now may be the right time to review your coverage.
Operating an organization comes with significant responsibilities. Certain decisions or alleged wrongful acts can result in claims against directors, officers or the organization itself. This is where management liability insurance comes in.
A management liability policy typically combines three key coverages:
Although these coverages may be included under the same policy, each one addresses different risks and sources of claims. Canadian insurers commonly use these terms when describing management liability solutions for private, public and not-for-profit organizations.
Even with sound governance practices in place, an organization and its directors and officers are never completely immune to legal action.
Let’s take a closer look at the three core coverages included in a management liability policy.
Directors and Officers Liability insurance is designed to help protect an organization and its directors and officers when they face a claim related to decisions or actions taken in their official roles. It can also help protect the personal financial interests of board members.
When a covered claim occurs, the individuals involved may not have to personally absorb all the costs of defending themselves. Depending on the policy wording, D&O insurance may cover legal fees and other defence costs. Canadian insurers also describe D&O insurance as protection against certain personal losses and organizational costs arising from lawsuits filed against directors and officers.
One risk that is sometimes overlooked is that a director or officer may be held personally and financially liable for an alleged wrongful act committed while managing the organization. This exposure may exist even when the alleged wrongdoing is attributed to the organization as a whole.
In these situations, personal assets such as a home, savings or investments may be at risk.
Even when a claim is ultimately dismissed or found to be without merit, mounting an appropriate legal defence can be expensive. D&O insurance is intended to help absorb covered defence costs and provide financial protection for the individuals involved.
Management liability risks are not limited to for-profit businesses. Volunteer directors serving not-for-profit organizations can also face significant personal liability exposures.
Unlike some well-capitalized companies, a not-for-profit organization may not have the financial resources required to indemnify its board members if legal action is brought against them.
For individuals volunteering on municipal, community, cultural or sports-related boards, D&O insurance can therefore provide important protection against personal financial exposure. Management liability coverage is available in Canada for private, public and not-for-profit organizations.
Some management liability policies also offer coverage for employed lawyers, sometimes referred to as in-house counsel or corporate counsel. This protection may be relevant for organizations that have legal professionals on their team.
If a lawsuit alleges an error or omission in legal advice provided by an employed lawyer in the course of their duties, this coverage may respond, subject to the policy’s terms, conditions, limits and exclusions.
Organizations should confirm whether employed lawyer coverage is included in their policy and whether its scope reflects the actual responsibilities of their internal legal team. Some Canadian management liability products specifically identify employed lawyer coverage as an available feature.
Managing a team comes with its share of challenges. Even the most conscientious employers may face allegations arising from their human resources practices.
Employment Practices Liability insurance helps protect an organization and its leadership when they face allegations involving, among other things:
These claims may be brought against the organization itself or against an individual member of management. They may originate from a current or former employee, a job applicant or another person who believes they have suffered harm.
Coverage may also extend to certain allegations of discrimination brought by third parties, such as customers or members of the public. As a result, the exposure is not necessarily limited to the relationship between an organization and its workforce.
Consider an organization that interacts with a large number of customers on a daily basis. A customer may believe they were subjected to discrimination during an interaction with a customer service representative.
Because the scope of this coverage varies from one policy to another, organizations should verify whether third-party claims are covered, as well as review the applicable terms, conditions, limits and exclusions.
Employment-related claims represent a significant portion of management liability exposures. Yet the cost of this coverage is often modest compared to the legal expenses and defence costs that an uninsured organization may be required to absorb.
Organizations that offer or administer employee benefit plans, including pension plans, have responsibilities toward plan members and employees.
Even when an external firm is retained to manage these programs, the employer may remain responsible for certain aspects of plan administration and for the information communicated to participants.
An organization could face a claim if an error, omission or inadequate communication prevents an employee from receiving a benefit to which they were entitled.
For example, suppose a new employee is not informed that they are eligible to participate in the organization’s pension plan. Two years later, the employee discovers that they could have contributed to the plan and received the associated benefits. They may then seek compensation for the financial loss they believe they suffered.
Fiduciary Liability insurance is intended to respond to this type of situation. It can help an organization manage the financial consequences of alleged errors, omissions or breaches of duty related to the administration of employee benefit and pension plans. Canadian insurers also describe this coverage as protection for fiduciaries, organizations and plan administrators against claims involving plan mismanagement, wrongful denial of benefits or administrative errors.
The risks facing directors, officers and organizations continue to change. Coverage that met your needs several years ago may no longer reflect your organization’s current operations, structure or exposures.
To assess your protection, consider the following questions:
The exact terms, definitions, limits, conditions and exclusions vary from one insurance policy to another and should be reviewed carefully.
Whether the goal is to protect directors and officers, respond to an employment-related claim or meet fiduciary responsibilities, each of these coverages plays an important role in protecting an organization and the people who lead it.
Our team can review your current insurance program, confirm whether the three core management liability coverages are included and identify potential gaps that could expose your organization or its directors and officers.
Speak with your insurance broker.
