Management Liability Insurance: An Evolving Risk

When companies face existential crises at the C-suite level, they rely on management liability to fund their expensive court cases.

Management liability, also known as executive liability, policies typically fall somewhere under the property and casualty line, but recently have faced more headline exposure in cases that emphasize this insurance line’s unique political and social risks.

What is management liability insurance?

Management liability insurance is a form of business insurance in the property and casualty line that businesses buy to protect themselves from risks related to their executives or other leadership positions. Done correctly, it’s part of a broader enterprise risk management (ERM) strategy to protect businesses from a variety of threats. 

Who needs management liability insurance?

Small businesses, not-for-profit organizations, and privately owned businesses are more likely to have broad management liability insurance policies, while publicly traded companies are more likely to have a variety of executive liability coverages that protect them in more specific situations.

To put that another way, a business with a limited number of stakeholders has less risk, while a business with more stakeholders will face substantial threats from more avenues. For the sports people, lower risk businesses need a zone defense (a broad executive insurance policy), while a higher risk business necessitates an aggressive man-to-man strategy (multiple policies with different, specific management liability coverages).

What does management liability insurance cover?

Management liability insurance, or executive liability insurance, covers acts of the chief executives, directors, board members, managers, and administrators. Broadly, executive liability insurance protects business members from the cost of litigation, which in turn protects the company from having to pay for litigation, as well. 

Subsets of business risk liability include:

• Directors and officers insurance (D&O insurance)
• Employment practices liability
• Executive life or disability policies
• Fiduciary liability insurance
• Fidelity and crime insurance

We’ve covered D&O elsewhere, but to reiterate, D&O insurance is like malpractice for executives. A board member is accused of misrepresenting the financial stability of the company? The CFO is accused of negligence in their financial oversight? A middle director is facing charges of creating toxic work environments? Litigation costs will likely rest on some sort of D&O policy.

Employment practices liability insurance (EPLI) covers situations of internal policy or employment gone wrong. Wrongful termination, workplace harassment, discrimination, or retaliation suits all fall under employment practices liability coverage.

Executive life or executive disability policies compensate the company if something grim (death, dismemberment, etc.) happens to one of the people who are critical to the company’s executive functioning and well-being. 

Fiduciary liability insurance covers, as you might guess, fiduciary liability. A fiduciary standard of care means a person is required to act in their client’s best interest, to give them the same care they would give themselves. This fiduciary duty applies to people like financial advisors, attorneys, some insurance professionals, and also people like the chief officers of the company. Say your HR manager is tasked with selecting an insurance plan. Under the Employee Retirement Income Security Act (ERISA), they have a fiduciary standard of care. So, any shenanigans that cause employees or other stakeholders to accuse them of a breach of fiduciary duty could pose a costly court process.

Fidelity and crime insurance can make a business whole after theft or fraud. Also called fidelity bonds, businesses such as banks are required to carry policies to back up their reserves in case of forgery, fraud, theft, and Ocean’s 11. 

As we alluded to, smaller businesses are likely to have broad policies where each of these categories – employment practices, D&O coverage, fiduciary liability – is relegated to a clause of generic coverage. However, larger private companies or even small publicly owned companies likely cover these policies individually, with specific coverage limits tied to various scenarios.

One common misconception is that insurance won’t cover intentional acts. But, as this legal podcast explains, insurance policies are often tasked with paying for incidents that are entirely intentional. Many of these nuances depend on the intended event and the anticipated outcome, something that can make insurance cases for business violations quite difficult.

What does management liability insurance cost?

Broad management liability coverage and specific executive risk insurance policies aren’t exactly apples-to-apples comparisons. Online, carriers advertise small business management liability policies for as low as $25 a month. Yet, for large-scale operations, a single D&O policy could run at $10,000 for $1 million of coverage – although, often, the higher the coverage limit a business purchases, the less it will cost per million.

A single business’s cost and ability to find available management liability coverage depends on many factors, among them: 

• Industry – Some industries are easier to insure than others. Insuring your dry cleaning chain is going to be very different from setting up that Metaverse-only crypto scheme.
• Age of company – A company with a proven business record dozens of years old will fare better finding insurance than one that entered the space yesterday.
• Size of company – Do you have many managers who need coverage? Perhaps you only have one executive who holds all the power – and therefore all the oversight responsibilities and risks? A balance of managers and other execs who share oversight and responsibility without becoming a cabinet of tyranny will appropriately spread risk, ensuring a good balance for your insurance coverage, too.
• Executives’ personal histories – A CEO with a history of shenanigans, regulatory accusations, or litigation may pose a larger liability to insure than one with an un-checkered past. 
• Internal processes and procedures – Sticky notes and the honor system can get you by when you have a good exec team! (This is a joke – manual processes and data mismanagement is a huge problem, and we very much advocate upgrading to modern tech.) But if you don’t have something more sophisticated to provide internal controls, minimize the room for error, and note early red flags, then you’ll likely pay more for insurance.

The future of management liability coverage

Management liability will likely go through some shifts in the next few years as it adjusts to changes in social inflation and in court interpretations. Let’s be clear: Much of management liability is determined by attorneys and judges, people who cut deals over settlements and litigation. 

Those deals are getting trickier as new scenarios emerge. For instance, Sam Bankman-Fried (CEO of doomed bitcoin startup FTX) has petitioned courts to give him priority on his D&O coverage’s payout list. This means, of all claimants trying to get financial recompense from his D&O policy, he would be given first dibs. Estimates put his litigation total somewhere in the nine-figure range, what is technically known as “a crapton.”

The arrest of Uber’s Chief Information and Security Officer, Joe Sullivan, for his policy of secrecy and subterfuge in addressing massive security breaches sent shockwaves through many C-suite executives. It’s rare to see jail time associated with these violations, and this case will likely have many companies re-evaluating who is or isn’t covered by their D&O policies (often, CISOs aren’t included in coverage).

Nationwide, people are reporting more sexual assaults, as well. Perhaps there are more assaults. Perhaps more victims feel confident in our justice system. Perhaps societal understanding of what constitutes assault has changed over time. Regardless of the perhapses, the facts point to this posing a serious concern for E&O policies as victims point to individuals in management, or in cultures that protect or encourage toxic behavior.

One touchstone suit by a Delaware court allowed shareholders to sue the former chief global people officer of McDonalds Corp for perpetuating a culture of sexual harassment. While the judge ultimately dismissed the case, the court affirmed shareholders had grounds to make it in the first place – again, not something that should be taken lightly in the management liability coverage space.

Management liability insurance and executive risk coverage also applies to businesses in insurance – in addition to offering these policies, insurance carriers may also maintain them for their own management and directors. 

Not to put too fine a point on it, but if the cost of your insurance is partially informed by your internal controls, doesn’t it make sense to invest in compliance solutions? Making your producer licensing and appointment compliance automatic, and integrating that compliance-forward attitude into your other processes can only help! See what AgentSync can do to help you lower your organizational risk.