Safeguard Your Ministry: Demystifying Management Liability for Churches

At the heart of every community, our churches and ministries stand as beacons of support, compassion and guidance. Our churches are essential pillars of hope and play a central role in the fabric of their local communities.  

With this important position of influence comes a complex array of responsibilities faced by the leaders and management of local churches. Here we will explore our church organisations’ profound impact on their communities, their unique challenges, and the importance of including Management Liability Insurance in your Insurance package.

Understanding the Risks

The direction of the church or ministry is often guided by a board of directors, elders or management committee. 

The role of the board is to act as the rudder of the organisation, directing the course of the ministry and navigating the complex waters of finance, legislative compliance, workplace health and safety and employment practices to name a few.

A board of directors will consider important issues relating to the organisation including:

• Helping the church to define its objectives, establish major goals and stay focused on its direction over time
• Establish overarching policies and procedures for employees, volunteers and leaders
• Overseeing budgets and ensuring proper funding when important resources are required
• Ensuring the organisation is complying with its legislative obligations

The role of a board member carries great responsibility, and with responsibility comes risk.

Being asked to become a board member for your church or a not-for-profit organisation can be a great honour and allows you to work collaboratively with a group of people to see your organisation’s mission succeed.

Therefore, understanding a board’s role and the risks is paramount.

Management Liability Insurance is essential whether your organisation operates as an incorporated or unincorporated entity or a private or publicly unlisted company. It protects your organisation and its senior leadership, board of directors or eldership from potential legal challenges that may arise while fulfilling your mission.

Management Liability Insurance

A Management Liability policy for churches is a comprehensive insurance solution designed to protect faith-based organisations and their leaders from various risks associated with managing and operating their organisations. Some organisations may refer to it as Directors and Officers Insurance or Associations Liability. 

Quite often Board members become liable, not for what they have done, but rather for what they didn’t do, but should have done.

Here’s an overview of what a typical Management Liability policy covers for churches:

Directors and Officers Liability:

• Protection for church leaders, directors, and officers against personal financial liability arising from alleged wrongful acts in managing the affairs of the church.
• Coverage for legal expenses and potential settlements in case of lawsuits brought by employees, members, or other stakeholders.

Employment Practices Liability:

• Safeguarding the church against claims related to employment practices, including wrongful dismissal, discrimination, harassment, and other employment-related disputes.
• Coverage for legal defence costs and potential settlements arising from such claims.

Crime

• Coverage for direct financial losses sustained by the church due to theft, fraud, or other criminal activities committed by employees or third parties.
• Protection for tangible goods, such as equipment, stock, and materials, in the event of theft or fraud.

Statutory Liability and Workplace Health and Safety Cover

• Defence costs for the investigation of workplace health and safety incidents.
• Financial protection against fines and penalties imposed by regulators such as ASIC, SafeWork Australia, Australian Taxation Office, or the Australian Charities and Not-for-profits Commission.
• Coverage for criminal breaches, including alleged violations of Workplace Health and Safety Legislation and Pollution Laws.
• Protection against civil penalties for breaches of Civil Protection Laws.

Tax Audit

• Coverage for fees, charges, or expenses incurred by an accountant or registered tax agent when the church is issued a formal notice from the Australian Taxation Office.
• Optional cover may also extend to notices from state body authorities such as the Office of State Revenue.

A Management Liability policy will usually cover not just the damage caused by the breach, but also the legal costs and expenses associated with investigating the circumstances of the alleged breach, and if warranted, the defence costs which may arise. The cost of defending an allegation of negligence can cause significant financial pressure on an organisation. A Management Liability Policy can alleviate some of this burden.

Without Management Liability Insurance, the financial impact of legal defence and potential settlements could be significant for churches and ministries. The absence of coverage may jeopardise the financial stability of these organisations, potentially leading to disruptions in their vital community services.

When considering Management Liability Insurance for your church or ministry, it is essential that the product is tailored to the unique needs of the ministry.  Each religious organisation has distinct activities; the coverage should align with these specific services. Working closely with insurance professionals experienced in serving church organisations ensures that the policy is customised to address the specific risks associated with your faith-based organisation.

Common Management Liability Claims Examples

Some of the most common claims that we see brought against church organisations or their boards of management or directors are:

• Employment Practices Liability claims, mostly for alleged unfair dismissal claims, workplace bullying, harassment or discrimination.  Unfortunately, these are often the claims that churches and ministries believe can be “worked out” or might simply go away.  Proactive management, attention to employee grievances, and early notification to insurers can often result in a claim being avoided through appropriate mediation.  Unfortunately, sometimes this is not the case, and some employment-related complaints have seen settlements in the tens of thousands of dollars to the employee plus significant legal expenses incurred to investigate and defend the matter. 
  
  In one claim example, a childcare worker was dismissed due to an alleged breach of duty of care.  The employee lodged an unfair dismissal claim.  Compensation for the employee’s lost wages and the insured’s legal costs were covered. The claim costs were minimal due to early notification and mediation of the matter.
  
  In another example, an employee was terminated due to inappropriate behaviour.  The employee lodged a claim for unfair dismissal.  The insured had engaged their own lawyer to assist in managing the grievance, not knowing that their Management Liability policy could assist.  When the broker became aware of the situation shortly after, a successful claim to recover some of the legal expenses incurred by the insured was made.
  
  
• Crime: Unfortunately, churches and ministries are not immune from internal crime, and there are many instances where people in positions of financial responsibility have taken advantage of their position and embezzled funds from the organisation they work for.  Some losses are small and are quickly found out due to the unsophisticated nature of the crime, others however are very complex and can go undetected for a long period of time.  In one instance an organisation had over $100,000 syphoned from bank transactions over a two-year period.

• Investigations or audits by official bodies such as the Australian Taxation Office (ATO) or the Australian Charities and Not For Profit Commission (ACNC) can incur significant costs to engage accountants to prepare the necessary documentation to satisfy the investigation.  After an ACNC investigation into the set-up of a charity arm of a faith-based organisation, a claim for nearly $120,000 was paid to cover legal and accountant fees under the Tax Audit section of a Management Liability policy.

How does a Management Liability Policy work?

The majority of Management Liability insurance policies are offered on a “claims made and notified basis.” This requires that throughout the current policy period, the insurer must be notified of any claims as well as any fact, situation, or event that may give rise to a claim. 

If you do not notify of any matter that you may be aware of prior to the expiry of your policy period, a claim may be declined by the insurer.

Why you should notify all claims and circumstances

1. It prevents future policy issues

Failing to notify of a claim or circumstance that could result in a claim may impact the ability of your Management Liability coverage to respond to a potential lawsuit against you. The outcome may be greatly impacted if failing to notify your insurer of a claim causes the insurer to suffer from inflated expenses that could have been avoided had the claim been filed sooner.

2. Your insurance provider can help

The professionals in this field are insurers, who have teams dedicated to managing and arbitrating potential claims made against you. Both you and the insurance company have a stake in settling a claim on the most favourable terms possible.

Early expert involvement minimises the financial, administrative, and reputational damage that a claim may cause to your church or ministry.

Common misconceptions when a Management Liability claim arises

1. “We assumed it would disappear.”

This is true occasionally, but not frequently. Taking the “let’s try and manage this ‘in-house'” approach frequently results in the escalation of a claim and the start of legal procedures. If you don’t tell the insurer before reaching this point, your coverage has been compromised and you might not be compensated for your claim.

Your insurer will close your file if a situation is reported to them but never results in a claim.

2. “We do not think this claim is justified, and we have done nothing wrong.”

You and your board must notify your Management Liability insurer right away of any complaints or situations, regardless of how meritorious you think a claim against you may be.

Most Management Liability claims consist of defence expenses, frequently exceeding several thousand dollars. A claim cannot be declared unfounded unless the covered party receives a favourable judgment. Regardless of your opinion, if a claimant believes their complaint is justified, this can frequently lead to an extended claims procedure.

3. “The claim is probably less than my excess”

Notifying your insurer of a claim is still necessary, even if it falls under your excess. It’s hard to tell at first whether a claim will be less than your excess. Only the settlement of any claims will require the payment of an excess. 

The insurer will simply close their file if a claim or circumstance is resolved under the excess or disappears altogether. The risks of failing to notify far outweigh the possible rewards if the claim worsens and costs more than your excess and you have not notified your insurer. As a result, you might find yourself with an uninsured claim.

4. “Notifying will result in an increase in my premium.”

Although the rating system for your insurance and protection package heavily weighs your claims history, insurers are aware that many notified claims do not result in an actual claim. Insurance companies will evaluate each notification based on the position stated on it. It is unlikely that precautionary notifications will have a major effect on premiums.

The potential costs that the church or ministry could incur if Management Liability coverage is lost due to failing to report a claim or circumstance within the required timeframes would be far greater than the possibility of minor premium increases.

Protecting your board members

Due to the importance of the role, directors and officers can be sued as individuals and therefore have their personal assets at risk. If a board member commits a wrongful act during their duties, a Management Liability policy can respond in the defence of claims that may be brought against the individual as a result.

Some of the most common types of claims we see brought against churches and their boards or elders include:

• Claims of unfair dismissal by an employee
• Claims of financial mismanagement
• Breaches of OH&S legislation

It should be noted however that these policies are not designed to respond to a criminal act.

Why Churches and Ministries Need This Coverage

Over recent years, legislative changes in some States have meant that not-for-profits and faith-based organisations may now be captured by the new laws and subject to fines and penalties.

Back on 1 July 2020, new industrial manslaughter laws came into effect in Victoria.  These new laws apply to not-for-profit organisations such as schools and charitable organisations.

The legislation seeks to prevent workplace deaths and provide harsher penalties against officeholders who fail to comply with their OH&S obligations.  Directors found to have failed in their duty to provide a safe workplace which results in the death of an employee or member of the public can be subject to fines of up to $16.5M (for corporations) whilst individuals can face up to 20 years in prison.

This legislation can be applied to incidents where

• employees, subcontractors or clients have knowingly been exposed to COVID-19 resulting in death
• an employee or subcontractor has been exposed to asbestos and subsequently develops a terminal asbestos related disease
• an employee commits suicide as a result of the employer’s negligent conduct

This new legislation applies to body corporate organisations, unincorporated bodies, unincorporated associations, incorporated associations and the trustees of trusts.

Furthermore, in November 2022, significant changes were implemented to the Privacy Act 1988 which meant that not-for-profit organisations or churches with an annual turnover greater than $3M may have obligations under the Privacy Act and the Australian Privacy Principles when collecting and handling personal information.  This could include information collected in relation to employees and/or volunteers, databases of member or donor contact and financial details, or information collected in connection with the delivery of services to clients or members. 

As claims for these types of breaches, or in fact other employment liability or crime claims could reach into the hundreds of thousands of dollars, the absence of a Management Liability policy could result in significant financial difficulties for your church organisation, and personally for the directors responsible for the organisation.

Inadvertent breaches of legislation of this nature and responses to claims may be addressed and defended under a Management Liability Policy not only providing financial security but also allowing you access to legal experts who are skilled in providing advice and management of these types of claims. Some Management Liability policies may even provide you with access to some initial free legal advice which could help avoid or reduce the likelihood of a claim.

Protecting the Mission

There is no doubt that churches and ministries will always seek to act fairly and justly, but unfortunately this is not always the case or the perception of others, resulting in claims against the church and their management.  When these situations arise, Management Liability Insurance will help protect those tasked with representing the organisation should a claim be made against them.

Churches and ministries who fail to purchase Management Liability risk exposing their board of directors to significant financial losses, including their own home or investments, causing considerable reputational damage to their ministry, and relational harm to their members, employees or volunteers.

Steps to Acquire Management Liability Insurance

It is important that faith-based organisations research reputable insurance providers experienced in serving religious organisations. Identifying insurers with a deep understanding of the unique risks faced by religious institutions is crucial.

Your organisation should seek to understand the underwriting process and provide accurate information during the application process as this is essential for securing appropriate coverage. Accurate and transparent communication ensures that the insurance policy is tailored to the specific needs of each church or ministry.

The role of insurance brokers in helping churches find suitable coverage cannot be overstated. Brokers serve as valuable partners in navigating the complexities of insurance, offering expertise and guidance to churches and ministries seeking comprehensive Management Liability protection.

Strategies to protect your organisation

Transferring risk by purchasing appropriate insurance products is only one strategy to protect your organisation and its Directors.

It is important as an organisation that you carefully consider the appointment of your board. Ensure that:

• those tasked with positions of authority have been chosen based on the skill set they bring
• they understand the position they represent
• they are dedicated to the review of existing policies and procedures and where applicable, the implementation of new processes
• they seek to promote a culture of safety in your organisation

Your board members should be trained in their roles and seek to keep abreast of legislative changes that may impact their roles.

Following are some key strategies to manage risk at the board level and avoid the possibility of a Management Liability claim

Segregation of Duties

Segregation of duties requires that you ensure that the individual approving the purchase of goods or services is distinct from the one responsible for making payments. Similarly, those tasked with maintaining and reconciling accounting records should not possess direct access to the payment process. This separation of responsibilities contributes to a robust and transparent operational structure, reducing the risk of errors or misconduct.

Implementing multi factor authentication on banking processes and placing limits on the financial decisions and approvals that can be made by individuals without a referral can reduce risk and create transparency and accountability.

Regular external auditing of your books is also helpful in quickly establishing if unusual financial transactions have occurred.

Regular Training

Passion is most often the thing that motivates people to serve on their church or ministry board.  But enthusiasm can only take you so far. It is not uncommon for board members, particularly in smaller church or ministry organisations, to have little or no knowledge or experience in governance matters. Therefore, it is important that boards should have regular training opportunities to improve their leadership capabilities and to protect themselves and their organisations from potential liability issues.

Seeking out opportunities to broaden their knowledge in the following areas will ensure that your board will be efficient and effective

• Finances
• Legislative requirements
• Grants
• Fundraising
• Audits
• Leadership
• Recruitment
• Conflicts of interest
• Code of ethics
• Whistleblower protection
• Document retention
• Fiduciary duties

Organisations such as the Institute of Community Directors Australia are an excellent resource for best-practice governance and training.

Conclusion

As churches and ministries engage in a variety of unique and diverse activities, there is a possibility that claims will be made due to unjust dismissal, unintentional legal violations, or even embezzlement by an office bearer.

For these reasons, Management Liability Insurance for faith-based organisations is more than just a financial precaution; it is a strategic requirement that protects the organisation and the individual directors and their personal assets.

Protecting the future of your church or ministry requires you to adopt and promote proactive risk management strategies, get professional advice for specialised coverage, and purchase Management Liability Insurance.

ACS Financial has provided expert insurance advice and tailored insurance solutions to churches and ministries across Australia for 30 years. Our team of insurance experts understand the unique nature of ministry and have access to a broad range of products that will protect your activities allowing your ministry to grow and flourish.

Contact our team on 1800 646 777 to discuss your church Insurance and Protection requirements today.