Management LiabilityA rise in social engineering fraud and cyber crime has shone a bright light on the coverage gaps emerging under the crime section of Management Liability policies. 

“Hi John, just requesting that for our next invoice you change our bank account details to BSB123456 and account no.3456789. Cheers, Sam.”

At first glance, the email purporting to be from one of John’s regular suppliers doesn’t look out of the ordinary. The email displays Sam’s exact signature, complete with business logo and contact details.

But John, an overworked Managing Director of an SME, doesn’t notice the email address is slightly different. As a result, he sends a request to payroll to change his supplier’s bank account details to those of the social engineering fraudster.

“Social engineering and fraud claims under the Management Liability’s (ML) crime section are a growing concern. Sophistication levels are increasing,” says Mark Sinclair, Platform and Product Manager, Aon

In fact, over 2016-17, social engineering fraud resulted in losses of more than $20 million due to business email compromise. That’s up from $8.6 million in 2015-16, representing an increase of more than 230 per cent, according to ACIC’s Australian Cybercrime Online Reporting Network.

And Insurers are responding.

“With mounting pressure on a ML policy to respond, we’re seeing carriers increasingly exclude social engineering from their policy – potentially at a time when the client’s need for coverage may be at its highest.” says Sinclair.

Common Exclusions

Other common exclusions in ML policies are professional services, IPO capital raising activities and shareholder actions. Sinclair adds that ML policies also tend to exclude insolvency, unless specifically requested under the policy.

“It’s critical that the exclusion is raised with the client at the time of purchase, as most businesses tend to not account for a potential insolvency,” he says.

Then there’s cyber crime – another growing area of concern for SMEs.

Sinclair says with the advent of Cyber Liability policies, there has been a move away from offering cybercrime within a ML policy.

Matthew McPhee, National Underwriting Manager at Berkley Insurance Australia, adds: “brokers should recognise when clients need a stand-alone option to cover Cyber and Social Engineering claims”. “Some ML policies will cover Cyber theft whilst others will not cover Cyber theft.”

Emerging Risks and Trends

Ben Thompson, Financial Lines Underwriter at Solution Underwriting, says other emerging risks in the current ML marketplace include non-compliant cladding, major changes to privacy legislation, and social awareness of employment practices, such as the #metoo campaign.

“Strong products already exist in the market place, however, identifying which exposures will need to be remediated is crucial,” says Thompson.

Willis Towers Watson Placement Services Director for FINEX, Simon Carter, agrees that there’s been an increase in employment practices claims over the past 18 months, including allegations of unfair dismissal, discrimination and harassment.

“Employees are now more aware of their rights and are more likely to go to a lawyer. As a result, losses are on an upward trajectory,” says Carter.

Carter adds that closer attention is now being paid to policy excesses.

“In the past Employment Practices Liability (EPL) excesses of $5,000 or lower were common but we’re now seeing excesses of $15,000 or $25,000 being imposed on the same risks,” Carter says.

“When it comes to mounting a legal defence in this space, costs can ratchet up. Insurers are also looking at increasing premiums and selecting what they underwrite more carefully.”

Challenges Facing Brokers

Carter says brokers also need to ensure clients are aware of an insurer’s right to take over, defend, and settle claims.

“The insurer can quite easily say that they have been prejudiced and only offer to pay the amount that would have applied at their panel rates,” Carter adds.

“This can lead to a significant gap between legal fees incurred.”

Meanwhile, Sinclair says a large number of businesses today tend to feature complex entity structures that include different subsidiaries, holding companies, and trusts for holding assets – which brokers need to get their heads around.

He adds that frequently, trusts are proposed as the insured entity under a ML policy.

“In legal terms, trusts are not considered a legal entity, and do not employ staff, managers or appoint directors. This creates a number of issues with the policy response,” Sinclair says.

Getting the Right Cover

Carter says clients need to understand the importance of cover requirements and see beyond “price, price, price”.

Common ML extensions include Crime/Third Party theft, EPL, Fines and Penalties, WH&S investigations costs, Tax Audit cover, amongst many others.

Thompson adds that brokers need to gain an understanding of their client’s operational and business practices, along with their risk profile.

Brokers then need to identify the broadest possible coverages with the lowest excesses.

“They also need to take into consideration any dual insurance policy clauses – which may limit the broker and client  from choosing the most appropriate and favourable policy to claim on when multiple policies can respond,” says Thompson.

Opportunities for Brokers

When it comes to EPL claims, it’s important to both educate and mitigate, Carter suggests.

“Ensure they’re as savvy as they can be in approaching employment issues when they first arise – when an initial complaint of bullying is made, for example,” Carter says.

“Effective dispute management avoids escalation of HR issues and  expensive litigation.”

McPhee agrees that there will always be opportunities for a broker who can use claims examples – such as social engineering fraud examples to demonstrate the need for ML.

“Claims will highlight the potential exposures clients have and a knowledgeable broker will win

business based on their ability to talk risk and assist with risk management steps,” says McPhee.

Management Liability vs Directors and Officers Liability

One of the main differences between Management Liability (ML) and Directors and Officers (D&O) liability Insurance (D&O) is simply the target audience, plains Ben Thompson, Financial Lines Underwriter at Solution Underwriting.

“Publicly listed companies require a specific policy with appropriate coverage and function suitable for larger companies with investors and shareholders, which is the D&O market,” says Thompson.

“The ML Insurance primary market is private small to medium sized companies.”

Thompson adds that ML Insurance is a comprehensive package, which provides broader protection and coverage than traditional D&O Insurance.

“This is ideal for small companies seeking a total solution contained within one policy,” Thompson adds.


Contact your Account Manager today to discuss how a Management Liability can protect your business.


This article, by David Barbeler, originally appeared in the September 2018 edition of NIBA Insurance Adviser.








Don’t think it can happen to you? Here are some recent real life claims examples provided by one of our insurance partners Prorisk Underwriting.

Real Estate Agent Claim 1

A Real Estate Agent sold a caravan park and business to the Plaintiff. After the transaction was completed, the Plaintiff discovered that the boundaries of the property were incorrectly described in the contract and that some of the caravan sites were not located on the land that had been sold.

The Plaintiff commenced proceedings against the Vendor, the Real Estate Agent and the solicitor that acted for the Plaintiff on the purchase of the property.

The Real Estate Agent argued that any representations that were made in relation to the land were those of the Vendor and that it merely passed on the instructions it had received from the Vendor.

There were however, allegations that the Real Estate Agent had represented the boundaries of the property when the Plaintiff inspected it.

The matter settled with the Real Estate Agent paying $40,000, but with defence costs of $80,000.

Real Estate Agent Claim 2

A Real Estate Agent managed a shopping centre. The lights to the toilet were controlled by a pre-set timer switch. The owner of the shopping centre had set the switch to turn the lights off at 6:30pm. The Plaintiff attended the shopping centre after hours to see his friend, who was a tenant of one of the shops. At 9:30pm the Plaintiff went to the toilet and on the way back to his friend’s shop he fell down the stairs and injured himself because the lights were not on. The Plaintiff sued the owner of the shopping centre and the Real Estate Agent.

The Court found in favour of the Plaintiff and awarded him $160K. The Court held that the owner was 100% responsible for the Plaintiff’s injuries because they had set the timer switch. The owner appealed this decision.

The Court of Appeal also found in favour of the Plaintiff, but reduced the award to $120K because the previous judge had incorrectly calculated the damages. The owner was held 40% liable and the Real Estate Agent was now held 60% liable on the basis that the Managing Agent was responsible to ensure the premises were safe. This decision was made despite the fact that there had never been a complaint or other incident in relation to the timing of the light switch.

The Real Estate Agent appealed to the High Court and the matter settled on the basis that the owner and the Managing Agent agreed to pay the Plaintiff on a 50/50 basis and to bear their own costs (which were significant).

Issues Faced By Real Estate Agents:

  • Has the Real Estate Agent done what it was contracted to do;
  • Has the Real Estate Agent acted to the standard of a “reasonably qualified” Real Estate Agent in performing its duties, or was it negligent;
  • Was the loss was caused directly by the actions of the Real Estate Agent.


Surveyor Claim

The Plaintiff entered into a contract with a builder to renovate her house. The renovation works included the re-stumping of the house. The builder sub-contracted the re-stumping of the house. The re-stumper requested the Surveyor to provide a building permit in relation to the re-stumping.

The Plaintiff claimed that the re-stumping works were defective and sued the builder. The builder joined the re-stumper and the Surveyor to the proceedings.

The case settled as the builder went into liquidation and the re-stumper had no insurance and no money. The Surveyor paid $20,000 as he had not adequately checked the depth of the stump holes for the re-stumping of the house.

Issues Faced by Building Surveyors:
  • Whether the Building Surveyor acted to the standard of a “reasonably qualified” Building Surveyor or was negligent;
  • Whether the loss was caused directly by the actions of the Building Surveyor;
  • Whether the Building Surveyor can rely on a statutory immunity. In some states a Building Surveyor/certifier is immune from liability where it has obtained a compliance certificate in the appropriate form.

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