Business Owners and their personal liability
Business Owners and their personal liability
Protect the business that you have invested so much time and money into
Think about all the laws! Australian Corporations Law, Australian Consumer Law, Privacy Laws, The Fair Work Act, Workplace Health and Safety Laws, Taxation Laws and Environmental Laws. These are just some of the main ones. Then, there are simply the common laws like a breach of a duty of care, negligence and defamation. Is this a risk we are capable of managing ourselves? Do you know all the laws?
It is easy to say that the best way for Business Owners or their Management to protect themselves from that risk is to fully understand and comply with their duties as Directors of a Business and protect themselves, but it is not that simple. We all occasionally make mistakes, or mis-judge situations or make hasty decisions that with hindsight could have been different. Therefore having and understanding the cover provided under a Management Liability Insurance policy, will give you peace of mind that your personal situation is protected. When these duties are breached, and it could be innocently, negligently, or deliberately, a director is at risk of being held personally liable.
You may have some protection if you are part of a legal entity such as a private or public company of which you are a director, but only if found innocent. If not you can be held personally liable. When deciding whether a director's duty has been breached, courts may consider the business judgment of the director.
There is a business judgment rule contained in section 180(2) of the Corporations Act, which provides a defence to the requirement that a director exercise their powers and duties with a degree of care and diligence.
- Under the business judgment rule, a director is taken to have met their duty, and its equivalent duties at common law and equity, where they:
- Made the judgment in good faith for a proper purpose
- Did not have a material personal interest in the subject matter of the judgment
- Informed themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate
- Rationally believed that the judgment was in the best interests of the company
- This rule has been adopted by the courts and is applied to varying degrees to the other director's duties.
What does it mean to be personally liable?
Being personally liable means you have a financial obligation for which you are responsible and which may be satisfied out of your own assets. This means your house and car and personal effects, along with any money in the bank. You can say, I will just go bankrupt then, but I can tell you undischarged bankrupts have a very difficult time getting anything on credit, borrowing money, starting a business or being a director of a company. Becoming personally liable for a debt is the worst financial position to be in.
What is the solution then?
We aim to protect your personal liability with a Management Liability policy, as well as protect your business. At one stage we could only obtain this cover for incorporated bodies, but now we can also get limited covers for sole traders and partnerships. There are also many other considerations that should be taken into account when seeking to understand what a Management Liability policy provides. One is how much cover do I need? If a director or company is unsure about the adequacy of the cover they have in place, they should consult us as their Insurance Broker. There are other reasons to consider a Management Liability policy than just your exposure to Personal Liability cover. There is cover for your business for Employment Practices Liability, Statutory Liability that can include fines and penalties, Crime cover that can include not just internal fraud, but external theft. Some policies automatically include Tax Audit cover. There are certain industries considered high risk, such as the Finance, Construction and Property Development. Unfortunately Insurance Brokers are also on this list. But for most of us this is a very useful cover for those Management Liability risks we just take for granted.
Over the coming months CPR Insurance Services will be contacting most clients who do not presently have this cover with costs and details of such insurance. We urge you to seriously consider taking out this important 'peace of mind' protection for your business - which you have likely invested so much time and money into. You really do need this Insurance cover.