Management Liability Insurance for Australian Residential Builders

What it is

Management liability insurance is a packaged policy aimed at private companies that bundles three covers most builders treat as separate. The package usually contains directors and officers (D and O) liability, employment practices liability (EPL) and crime cover for employee dishonesty. business.gov.au describes management liability as cover for directors, officers and managers against claims arising from their management of the company.

For a residential builder running a Pty Ltd, the directors carry personal liability under the Corporations Act 2001 (Cth) for the way the company is run. Management liability moves that personal exposure off the director and onto the policy, subject to limits and exclusions.

The three covers inside the package

Directors and officers (D and O)

D and O responds when a director or officer is personally sued for a wrongful act in the management of the company. Common triggers in residential construction:

• Insolvent trading claims under s 588G of the Corporations Act, where a liquidator pursues directors personally for debts incurred while the company was insolvent
• ASIC investigations into breaches of director duties under ss 180 to 184 of the Corporations Act
• Personal claims by shareholders, joint venture partners or minority investors
• ATO director penalty notices (defence costs only; the penalty itself is not insurable)

The policy pays defence costs, settlements and any award of damages against the individual director, plus the costs of attending regulatory examinations.

Employment practices liability (EPL)

EPL responds when an employee or former employee brings a claim against the company or its officers for unfair dismissal, discrimination, harassment, bullying or breach of employment contract. For a residential builder with site supervisors, office staff and apprentices, the most common trigger is an unfair dismissal claim at the Fair Work Commission combined with an allegation of bullying or discrimination. EPL pays defence costs and any settlement, and most policies extend cover to claims under state and territory anti-discrimination laws.

Crime cover

Crime cover responds to direct financial loss from employee theft, fraud and forgery. The classic builder claim is an office manager or bookkeeper diverting client deposits or supplier payments over a period of months. The crime section pays the direct loss up to the sub-limit, which is usually well below the headline D and O limit.

Why it sits separately from PL and PI

Public liability covers third-party injury and damage on site. Professional indemnity covers financial loss from negligent professional services. Management liability covers neither. It covers the way the company and its officers are run, not the work the company does. A builder can have a clean run on PL and PI claims and still face a six-figure management liability claim from a former site manager who alleges he was dismissed because of his age, or from a liquidator who picks through three years of trade-on decisions after the company folds.

How it interacts with the Corporations Act

Section 199B of the Corporations Act prohibits a company from paying a premium for insurance that indemnifies a director against conduct involving a wilful breach of duty, or a contravention of ss 182 or 183. Management liability policies are written to comply with s 199B by excluding cover for wilful or fraudulent conduct, with cover often reinstated if a court ultimately finds the director did not act wilfully. The practical effect is that defence costs are advanced for the contested matter, and any cover paid for a wilful act has to be repaid to the insurer.

Section 199A allows the company to indemnify and pay legal costs for directors in most other circumstances, which is why a management liability policy and a deed of indemnity between the company and its directors are usually paired.

What it does not cover

Management liability policies exclude bodily injury and property damage (PL territory), professional services claims (PI territory), known prior claims, deliberate fraudulent acts, fines and penalties imposed by regulators (defence costs only), tax liabilities of the company itself and contractual disputes with clients about the building work. Most policies also exclude any matter relating to insolvency of the company unless the director acts immediately on becoming aware of insolvency risk.

How to read your policy

Confirm the policy schedule lists every related entity (operating company, holding company, trustee, builder-licence holder). Confirm the policy includes automatic acquisition cover for any new subsidiary set up during the period. Read the insolvency exclusion carefully: some policies exclude all claims connected to insolvency, others only exclude claims by the liquidator. The difference is the gap between a covered ASIC defence and an uncovered one.