Why Your Business Shouldn’t Ignore Management Liability Insurance

Management liability insurance (MLI) refers to a set of commercial insurance types that are specifically meant to protect the controlling members of a company. When allegations of breach of fiduciary duty, labor law violations and more are filed against managers, directors and officers arise, MLI policies will pay for legal costs.

Keep reading to learn how management liability insurance works, as well as what costs you can expect.

Key Takeaways Management liability insurance (MLI) can combine various insurance types, including directors and officers, fiduciary liability, professional liability and commercial crime, in one policy. Directors, officers, trustees, administrators and investment managers are covered by MLI. If somebody in a leadership position is sued for breach of fiduciary duty, mismanagement, employment practices or some other labor law, MLI will cover the legal defense, settlement and judgment costs. MLI policies do not protect day-to-day operations or claims of bodily injury or property damage. The cost of MLI will vary depending on if it’s a bundled policy or if coverage is purchased individually.

What Is Management Liability Insurance?

Management liability insurance pays for expenses related to claims filed against managers, directors and officers within a business. MLI policies usually bundle several commercial insurance types into a single policy, often including directors and officers liability insurance, employment practices liability insurance, fiduciary liability insurance, professional liability insurance. 

When combined, MLI safeguards against costs related to allegations of breach of fiduciary duty, misrepresentation and more.

Without coverage, the business would have to pay for legal expenses out of pocket, which can put a business with little financial reserves in the red.

How Does Management Liability Insurance Work?

To demonstrate how management liability insurance policies work, let’s say you, the director of your business, are accused of violating a labor law. Here’s an overview of the claims process.

1. A former but disgruntled employee sues you because they claim that you violated a labor law.
2. You file a claim with your insurance company.
3. Your insurance company investigates the claim and confirms it is valid and covered under your MLI policy.
4. To help you prepare for the lawsuit, your insurance company pays for your attorney and legal defense fees.
5. The lawsuit settles and your insurance company pays out the agreed settlement amount.

As with any insurance policy, any claim against your coverage will cause your rates to go up.

Who Is Protected by Management Liability Insurance?

Management liability insurance typically covers upper-tier management, such as directors, managers and executives. MLI can be a single package or each coverage type can be purchased individually.

What Types of Management Liability Coverages Are There?

Management liability insurance is largely customizable and you can adjust your coverage based on your business’s specific needs. Below you'll find common protections included in an MLI policy, as well as individual costs.

Commercial Crime

Monthly Cost: $54 to $208^[1]

Commercial crime insurance is a type of policy that safeguards your business against damages resulting from the actions of employees or third parties. This coverage generally applies to losses associated with theft, fraud, forgery, burglary and other forms of financial or physical asset losses.

For instance, if an employee manages to steal data collected about any customers you have, this coverage could help protect your business.

Director and Officers Liability Insurance

Monthly Cost: $87^[2]

Director and officers liability insurance (D&O) is a type of insurance that provides protection for directors and officers of a company from legal action taken against them for alleged wrongful acts committed while performing their duties.

The policy covers legal fees, damages and other costs incurred in defending against lawsuits filed by shareholders, employees, customers, creditors or other parties claiming financial loss due to the wrongful acts or negligence of the directors and officers.

Wrongful acts can include breach of fiduciary duty, violation of laws or regulations, misrepresentation and other similar acts. D&O insurance is typically purchased by companies to attract and retain qualified individuals to serve on their board of directors or as officers.

Employment Practices Liability Insurance

Monthly Cost: $67 to $250^[3]

Employment practices liability insurance (EPLI) is a coverage option that can shield your business from claims made by employees regarding potential breaches of labor laws. This type of insurance generally applies to claims associated with wrongful termination, discrimination, sexual harassment and retaliation.

For example, if an employee asserts that they were denied promotion opportunities for unlawful reasons, EPLI coverage can help mitigate the financial consequences of a potential lawsuit.

Fiduciary Liability Insurance

Monthly Cost: $42 to $208^[4]

Fiduciary liability insurance is a type of insurance that protects individuals and organizations acting as fiduciaries from financial losses resulting from claims of breach of fiduciary duty. Covered claims typically involve negligence, mismanagement of investments, imprudent investment decisions or failure to diversify investments.

Professional Liability (Errors and Omissions)

Monthly Cost: $18 to $100+^[5]

Professional liability insurance, or E&O insurance, covers claims for professional negligence, misrepresentation, incorrect advice, and personal injuries such as libel or slander. It can help pay for legal costs in cases where your business is sued for misleading information, such as someone who claims your products are outsourced to a different country when you claim they are American-made.

For Non-Profits

Nonprofits should obtain management liability coverage to protect their directors and board members, who may have less experience than their for-profit counterparts. Allegations against nonprofits can come from various sources and be costly, leading to lost funding and a damaged reputation.

The D&O coverage within an MLI policy covers the organization, its current and former leadership, employees and volunteers, as well as their heirs and legal representatives in case of death or bankruptcy. EPLI coverage can also protect nonprofits against employment-related claims such as harassment and wrongful termination.

How Much Does Management Liability Cost?

According to Dennis Shirshikov, the head of growth at Awning, a real estate investing company, and a former professor of economics at City University of New York, the cost of management liability insurance for a large company with 500 employees can range from $50,000 to $150,000 per year — that is the equivalent of $4,166 to $12,500 a month. This particular policy will include coverage for D&O, employment practices, fiduciary liability, professional liability, and commercial crime.

The cost of an MLI policy will consider your industry because different industries face different risks.

“Technology companies often face higher professional liability and D&O risks due to the fast-paced nature of their business and potential intellectual property issues,” Shirshikov shared as an example with SmartFinancial via email. “On the other hand, manufacturing companies may face higher EPLI and fiduciary liability risks due to a larger workforce and potential labor disputes.”

Other factors will affect your premium, including the company's size, location, financial stability, and claims history, Shirshikov added.

What Isn’t Covered by Management Liability Insurance?

A management liability insurance policy is not designed to provide protection for day-to-day operations. Specifically, MLI will not:

• Protect you against claims of bodily injury or property damage
• Provide coverage for any commercial vehicles used by your company
• Offer you cyber security liability
• Protect any equipment or inventory you have

How To Get Management Liability for Your Business

To get management liability for your business, follow these common steps:

1. Identify risks, including the possibility of claims involving slander or libel, as well as whether your business utilizes commercials or sells products. Also, be aware if your company handles financial investments for third parties.
2. Research insurance options from providers who specialize in insurance coverage for board members, managers and company directors.
3. Obtain quotes and compare coverage and pricing. Don’t rush into coverage and take your time making sure you have the right protection for your business.
4. Purchase insurance and carefully review policy documents to ensure sufficient coverage. If there’s something missing, ask your insurance agent to help find the coverage you need.
5. Review coverage annually, as business risks can change over time. This includes if your business expands and gains more managers and directors as you may need to adjust your coverage amounts.