Examples of types of claims

Management Liability Claims Scenarios

Examples of claims that can occur

Courtesy of Ace and Dual Insurance

Claim: Breach of duty of care

Insured: Privately held company with 7 employees and an annual revenue of $1.5 million.

Scenario: Company A specialized in liquidating troubled assets, such as inventory and fixed assets. It sold products to Company B. A third company (Company C) alleged Company A had already accepted an offer from them to purchase products for $1.45 million and they sued when Company A sold equipment to Company B. The plaintiff claimed the value was $10 million

Outcome: Company A paid $600,000 to Company C, and $32,000 in defence costs.


Claim: Violation of securities laws

Insured:Company processing fruit/produce from local markets to sell to retail supermarkets. Staff of 38 and an annual revenue of $4 million.

Scenario:A shareholder of the company alleged three of the individual directors and officers, their spouses, and the company’s accountants of making untrue statements of material fact in connection with the sale of stock, improper accounting practices including a misleading valuation circular prepared for the stock purchase transaction.

Shareholder sought damages of $3 million plus interest, costs and legal expenses.

Outcome: Settled via mediation with the Company paying $725,000 and the accountant defendants paying $375,000.


Claim: Unfair Competition

Insured: Privately owned Company, employing 20 people and an annual revenue of $650,000.

Scenario: CEO of privately held company left to start a new software company and was subsequently sued individually as an officer of the new company by his former employer. The allegations included trademark infringement and unfair competition as the former employer claimed that he had taken a corporate license to market a particular software product.

Outcome: Defendant settled for a payment of $250,000 and expenses of $130,000.


Claim: Against Directors

ScenarioA lender advanced moneys to shareholders in a private company to allow the shareholders to fund the company’s business. The lender took security over the shares held by those shareholders and later exercised the securities. The directors resolved to transfer the shares to the lender under the security.

The minority shareholders sued the directors for wrongful conduct.

OutcomeThe policy met the defence costs of the directors in ascertaining whether the shares ought to be transferred back to the minority shareholders.


Claim: Investigation

Scenario An investigation was launched by the ACCC into the pricing practices of a group of liquor retailers. Therewas no allegation of a wrongful act however the investigation required the attendance of the directors of the insured.

Outcome Ultimately the insured was innocent of any wrong doing however the policy paid for the legal fees incurred by the directors in obtaining advice for, and the legal representation required during, the investigation.


Claim: Fraud, Breach of Fiduciary Duty

Insured: Privately held company with 121 employees, and an annual revenue of $15.2 million.

Scenario: Mr X purchased a minority interest in a new company on the recommendation of the president of the Company, and with the promise of a substantial return on investment. After 3 years Mr X sued the company and the Managing Director alleging fraud, failure to comply with corporate by-laws, exclusion of minority shareholders from profits, squandering company assets and breach of fiduciary duties. In the companies defence they claimed there was no wrongdoing and no loss had been suffered.

Outcome: The parties settled for $140,000 with the defendant incurring $35,000 in legal costs.


Claim: Public Relations Expenses

Scenario After the successful conclusion of the investigation referred to above the directors consulted a public relations firm to advise on how best to restore the directors’ and the company’s previously strong reputation in the community. The public relations firm put together a media campaign in local publications which made it clear that the directors and the company were not in any way involved in any price fixing.

Outcome The policy paid for the costs of the public relations firm.


Claim: Employment Practices Claims

Scenario A disgruntled employee alleged that a manager sexually harassed her and sued both the manager and the company.

Outcome Ultimately the action failed however the legal costs of defence were paid by the policy.


Claim: Employment Practices Claims

Scenario The company retrenched a number of staff due to a downturn in business. The method of retrenchment used by the company was on the basis of those employees that had been with the company for the least amount of time were the first to be retrenched. The retrenched employees were all women who saw this as discriminating against them based on their sex. They brought an action against the company alleging that these employment practices discriminated against women.

Outcome The company was able to successfully defend the retrenchment policy however paid legal costs in defending the action. The policy indemnified the company for those costs.


Claim: Employment Practices Claims

Scenario An employee brought an action against his manager and the company alleging that they did not protect him from being bullied by fellow employees. The employee claimed that despite complaints, nothing was done to prevent the bullying and that as a result he was embarrassed, no longer able to work and that it had affected his relationships with his family and friends. Although the directors of the company were not aware of the bullying, the manager and company were both found liable for not providing a safe work environment.

OutcomeThe policy paid legal costs as well as damages in connection with the suffering incurred by the employee.


Claim: Against Entity

Scenario  In the claim scenario in ‘Against Directors’ above, the company was also joined as a party to ensure that any orders were binding on it.

Outcome It incurred significant costs through its participation in the litigation which were met by the policy.


Claim: Against Entity

Scenario A consultant sued the company alleging that it misrepresented that it would contract with the consultant, but failed to do so, causing the consultant to turn away other work and thereby suffer economic loss.

Outcome The company was found liable to the consultant and the policy met the company’s liability, including for the consultant’s costs, and the company’s own defence costs.


Claim: Employee Crime

Scenario An employee who prepared cheque requisitions forged the signature of the directors on a cheque. The cheque was made payable to the employee who used the funds to gamble. By the time the fraud was discovered the funds could not be recovered.

Outcome The policy indemnified the company for its direct financial loss.*


Claim: Employee Crime

Scenario The owners of a retail store had suspicions that an employee who worked on the counter was stealing from the takings so they brought in an expert to investigate. The investigator was able to establish who was committing the fraud, how it was conducted and the amount defrauded.

Outcome The policy indemnified the company for the loss as well as the cost of the investigator.*


Claim: Crisis Loss

Scenario A company sought cover under the policy for the costs of retaining a crisis management expert when there was suspected product tampering that threatened the major contracts with customers. The crisis management expert was able to convince the customers that the tampering occurred after the product had left the company’s premises and did not represent a fault in the company’s production processes.

Outcome The policy indemnified the company for the costs of the expert.


Claim: Occupational Health and Safety

Scenario An employee was killed in the carrying out of his work duties as a result of a live electrical wire in the employer’s premises. Workcover commenced an investigation and later a prosecution of the company and 2 directors for failing to have in place a safe work environment in breach of occupational health and safety legislation and regulations.

Outcome The policy met the directors’ costs of representation for the investigation and prosecution.


Claim: Outside Directorship – Non Profit Organisation

Scenario A company required one of its directors to sit on the board of an incorporated not-for-profit entity as part of its contribution to the activities of that entity. Some of the members then claimed that the board of the entity incorrectly disbursed the funds available to the entity for its objectives.

Outcome The costs of the company’s director were met under the Outside Directorship extension of its Management Liability policy.


Claim: Pecuniary Penalties

In the Occupational Health and Safety scenario referred to above, orders were made for improvements to the work place and systems for ensuring safety. When those improvements were not completed by the time a further inspection occurred (through an explicable oversight), proceedings were taken and pecuniary penalties were imposed on the directors for breach of provisions in the relevant OH&S legislation.

Outcome The policy met the penalties imposed on the directors and the defence costs of the proceedings.


Claim: Pecuniary Penalties

Scenario A manufacturing company accidentally had a spill of harmful waste from its factory. The Environment Operations Act (NSW) imposed liability on the company and its directors for spillage and waste disposal. Penalties of up to $500,000 were possible for the directors, but the penalty imposed was $200,000. The spillage also caused pollution to a nearby waterway, putting the directors at risk of a further penalty of up to $250,000 and $60,000 for each day the offence continued. A further penalty of $200,000 was imposed.

Outcome The policy indemnified the directors for the penalties.


Claim: Pollution Defence Costs

Outcome The defence costs of the directors in the pecuniary penalty proceeding under the Environmental Operations Act above were met by the policy. The policy also met the legal costs of the directors in obtaining advice during the investigation which preceded the penalty proceeding.


Claim: Retired Directors & Officers

Scenario A director retired from the board and sold his equity stake to the remaining directors. At renewal of the policy the remaining directors decided not to renew the policy in order to save on expenses. Five months later the company was placed in the hands of administrators who brought an action against the directors (including the retired director) for trading whilst insolvent.

Outcome Ultimately the retired director was innocent of any wrong doing however the policy paid for the legal fees incurred in successfully defending the allegation of insolvent trading made against him (and the legal representation expenses incurred in the examinations conducted by the administrators before the proceedings were commenced).


Claim: Theft of trade secrets

Insured: Privately held company with 212 employees and an annual revenue of $60 million.

Scenario: Company A sued directors and officers of competing Company B after three employees of Company A left to join Company B. Company A alleged that the three were still in the employment of Company A when they began sharing proprietary information with Company B. Company A claimed theft of trade secrets.

Outcome: After one year of legal proceedings the case settled with Company B paying Company A $160,000 settlement and incurring $355,000 in defence costs.


Claim: Misappropriation of Trade Secrets

Insured: Privately held company with 48 employees and an annual revenue of $8 million.

Scenario: A Managing Director of Company X left to become the CEO of a competing Company Y. After three months his previous employer sued the directors and officers of Company Y for allegedly stealing trade secrets, confidential business information, and employees.

Outcome: Parties settled for $390,000 and Company Y agreed to restrictions on hiring Company X employees.


Claim: Negligent Misrepresentation

Insured: Privately held company with 18 employees and an annual revenue of $2.7 million.

Scenario: Company A and Company B reached a contractual agreement for the sale and acquisition of Company A by Company B. Several months after the agreement was made, Company B filed legal proceedings against directors of Company A for breach of contract, fraud, and negligent misrepresentation, alleging them of manipulating its accounts receivable and account payable. The damages claimed were for $5 million. Company A counter-sued alleging that Company B owed money from earlier dealings with the company.

Outcome: Both parties withdrew their claims and cancelled the sale of the company. Legal fees incurred by Company A were $200,000.


Claim: Shareholder Dispute

Insured: Privately held company with 6 employees and an annual revenue of $2.5 million.

Scenario: Mr X and Company A of which Mr X was a director and officer, where both minority shareholders in Company B in which they were seeking to purchase the assets and business. Upon completion of the sale, Mr X and Company A sought damages, based on allegations that Company B and the directors and officers of Company B had made misrepresentations in connection with the purchase and sale of Company B.

Outcome: Mr X and Company A sought $800,000 in damages and subsequently agreed to a settlement of $400,000 and Company B incurred $150,000 in defence costs.


Claim: Shareholder Dispute

Insured: Privately held company with 76 employees and an annual revenue of $30 million.

Scenario: Shareholders claim damages when they lost their investment in stocks they purchased in the Insured company. The shareholders sued directors and officers of the company for allegedly making untrue statements of fact and omitting material facts in connection with the stock sale, including press releases and other information relating to claimed patents, products, experience, prior ownership, employment history, and promises of grants from government agencies.

Outcome: The company negotiated a settlement of $740,000 and paid $978,000 in defence costs. The original cost of the stock to the shareholders was $850,000.


Claim: Shareholder Employment

Insured: Privately held company with 28 employees and an annual revenue of $14 million.

Scenario: Company A buys business of Company B and establishes Company C. Company A employs previous managing director of Company B as a manager in Company C (Manager) and is given shares in Company C under a Share Sale Agreement as part of his remuneration package. A year later, Company C purports to terminate the services of the Manager for lack of performance. The Manager believes he was unfairly terminated and that the price that he is being paid for his shares in Company C is too low. He claims his employment agreement was unfair and also sues for breach of Shareholder agreement. Claims against Company C and also Company A, including for misrepresentation on both employment and share acquisition aspects.

Outcome: Company C was ordered to pay Manager $275,000 and paid $128,000 in defence costs.



Claim: Employment Practices Liability – Wrongful Termination

Insured: Privately held company with 19 employees and an annual revenue of $3.7 million.

Scenario: A supervisor was terminated by his employer for smoking in a restricted area of the building. The terminated employee sued his employer for wrongful termination based on age discrimination from comments made by his supervisor such as “you’re too old”. The employee further alleged he could only be terminated for good cause, although he had a history of poor performance issues. The dismissed employee sought back pay, front pay, damages, and legal fees totaling an estimated $275,000.

Outcome: The employer settled with the dismissed employee for $350,000 and the employer also paid $130,000 in defence costs.


Claim: Employment Practices Liability – Sexual Harassment

Insured: Privately held company with 242 employees and an annual revenue of $210 million.

Scenario: The company had legal proceedings against it after a woman they dismissed alleged sexual harassment by a senior manager. The dismissed employee had complained during her employment to her immediate supervisor of unwanted advances and continuous sexual harassment by a senior manager. This was alleged during a meeting with her supervisor for her poor performance. Based on this the supervisor provided the woman with another position in the company at a different location. Although agreeing to this new role the woman failed to show up for work and did not attend scheduled meetings with her supervisor. After further interviews with managers and employees it was discovered that the female employee and the senior manager had been involved in a consensual romantic relationship over the two-year period in which the woman had been employed by the company.

Outcome: Company settled with the employee out of court for $250,000 and paid $120,000 in defence costs.


Claim: Employment Practice Liability – Age Discrimination

Insured: Privately held company with 52 employees and an annual revenue of $18 million.

Scenario: The company dismissed a 59 year old manager due to poor performance including alienating employees and customers, and a general lack of interest in his job. The dismissed employee alleged he was dismissed due to his age after a younger employee replaced him, with comments by senior management about needing “to get rid of the old guys”. The employee had received regular pay increases based on performance, and poor performance was not noted on the termination form as the reason for his dismissal.

Outcome: The company felt they were innocent of the allegations but decided to settle out of court rather than defending in court due to the high cost. Settlement was $250,000 and legal expenses totalled more than $60,000.


Claim: Employment Practices Liability – Sexual Harassment

Insured: Privately held company with 111 employees and an annual revenue of $37 million.

Scenario: A former employee who was retrenched as part of a company wide reduction in work force commenced proceedings against the company and two managers alleging sexual harassment, intentional infliction of emotional distress, wrongful termination, retaliation, and sex discrimination. The employee had made allegations against a supervisor for abusive and sexually explicit comments towards her prior to her termination. Employer stated that her employment record showed poor performance, conflict with management and termination was part of a general reduction in workforce. Furthermore it was stated that the former employee had made vulgar comments of a sexual nature within the workplace, and management had tolerated sexual jokes around the office assuming no was offended.

Outcome: Company was ordered to pay the former employee $100,000 plus her legal fees. In addition the company paid $31,000 in defence costs.


Claim: Trustee Liability

Insured: Privately held company with two directors.

Scenario: One director fraudulently misappropriates money earmarked for employees’ superannuation contributions. Upon discovery, employees claim against directors (including innocent director) and also the Company. The claims involve not only loss of the superannuation contributions but loss of opportunity and profits the employees would otherwise have made with the benefit of those monies.

Outcome: Director found liable for $128,000. In addition the company paid $87,000 in defence costs.


Claim: Occupational Health & Safety

Insured: Privately held company with 40 employees and annual revenue of $9.5 million.

Scenario: During a busy time, the Company employed a part-time contractor who caught his hand in a machine and lost two fingers. This resulted in a full occupational health and safety investigation.

Outcome: Company was found liable for $100,000 plus paid $45,000 in defence costs.

 Another OH&S Claim – click here

Claim: Crime – Altered Cheques

Insured: Wholesaler with a staff of 86 employees and an annual revenue of $15 million.

Scenario: A debtor clerk misappropriated $200,000 by altering cheques received from debtors. The clerk named themselves as the payee, and continued a cycle of paying debtors accounts with funds from other debtors over a period of eighteen months. This continued until her absence from work when the fraudulent scheme was discovered.

Outcome: Total loss to the wholesaler amounted to $300,000.


Claim: Negligence / Fraud

Insured: Privately held company with 16 employees and an annual revenue of $10 million.

Scenario: Company’s sales representative has been falsifying sales to make commission, but the sales never actually occur. The sales representative is fired. [Claim 1 by employee – unfair dismissal] [Claim 2 by entity – Crime] Due to bookkeeping and process faults, these false sales were recorded in the accounts as real sales, and the sales representative’s fraud was not fully disclosed. Investors invest in the company on the state of the accounts provided to them by the Company. [Claim 3 – misrepresentation by Company as to financial condition]

A lender loans funds to the Company based on the accounts which overstate the sales and therefore profit. Claim 4 – lender claims misrepresentation and misleading and deceptive conduct, and sues the Company for return of the loan, loss of use of the funds and unspecified damages.

Outcome: Company liable for $188,000 and paid $220,000 in defence costs.


Claim: Crime – Theft of inventory

Insured: Wholesale products distributor, with a staff of 500 employees and an annual revenue of $10 million.

Scenario: A manager of the company and an employee together manipulated inventory supply numbers of raw material to defraud the company. Both raw products and finished products were stolen and sold by the manager and employee over a two year period.

Outcome: Total loss to the distributor was in excess of $1.6 million plus costs of a private investigator to uncover the scheme.

*In both cases it would be up to the insurer to seek recovery against the employee who committed the fraud.

 $150 Million law suit against former owners of a Family Business in the USA