Management liability lines are feeling the strain after the global downturn precipitated a surge in new claims.

Large insurers such as Vero and Ace Insurance have noted a marked increase in exposure, with Ace reporting a 50% rise in notifications, and last week insuranceNEWS.com.au reported underwriting agency Dual Australia recording a 400% increase in management liability claims in the past 12 months.

Management liability policies typically cover the actions of directors and officers and employment practices. Industry experts say it is no coincidence that claims in this area have risen in the wake of the global economic downturn.

“There is a direct correlation between the exposures these policies cover and the state of the economy,” Dual MD Damien Coates told insuranceNEWS.com.au. “In uncertain economic times there is an increase in the number of business failures, regulatory investigations, employment disputes, and employee theft, with a high connection to gambling.”

The costs can be considerable. Delving into the case files, Dual reveals the example of the theft of $300,000 worth of tomatoes later unloaded onto the black market after a third-party truck driver convinced a warehouse employee to provide access.

By the time the law caught up with the criminal concerned, gambling had swallowed up the proceeds leaving the management liability policy as the only form of recourse for the organisation.

It’s not an isolated case, with Vero spokesman Sue Repanellis confirming rising claims.

“Claims are most prevalent in the areas of employment practices and fidelity, with insolvency and financial distress-related actions also showing an increase,” she said.

“We have seen an increasing frequency of notifications related to employee dishonesty.”

Ace Insurance Professional Indemnity Product Head Neil Sheppard concurs.

“There is an underlying increase in claims given the growth in our management liability portfolio, but we have also noticed a higher than previously expected increase in notifications over the last 18 months.

“We expect this trend to continue into 2010 given there is still some uncertainty in the recovery of the economy and given it takes some time for claims to be made,” he told insuranceNEWS.com.au.

So far rates haven’t dramatically risen to accompany the surge in risk, but increasing exposure means they may not stay that way. Vero’s Ms Repanellis points out that heavy competition between insurers is still a feature of the small and medium-sized enterprise market.

“These pressures are arising from both the insurer and broker,” she told insuranceNEWS.com.au. “Broker competition is often overlooked as a factor in rate movements, but as brokers compete for clients prices tend to move downward. This in turn exacerbates market conditions.”

Vero says the only management liability premiums on the way up are financially distressed accounts or those with notable losses. The rest remain steady. 

Ace is maintaining a watching brief, according to Mr Shepherd. “We are now even more careful with the professions we write, as some industries are more vulnerable in a financial downturn than others.

“We are also looking more carefully at the financial performance of businesses, and if there is some distress we ask for information as to what they are doing to turn things around.”

While management liability policies are an obvious safeguard for businesses, not all are created equal.

When it comes to risk mitigation, Dual’s Mr Coates says it’s crucial to put in place a “well-constructed” policy. Using the tomato heist as an example, he says theft for items other than money is not always covered, and neither is crime by a third party.

It’s a salient point as insurers continue to clean up in the wake of the downturn, but there is some consolation that an improving economic outlook should return spiralling exposures to normal levels.