That sinking feeling

With new employment legislation due to be introduced, Peter Dobie explains why more needs to be done to prevent businesses becoming immersed in legal problems

The UK is facing the prospect of additional pieces of employment legislation over the coming months, causing the waters for employers to become increasingly choppy. Despite this fact, too few brokers are offering the lifeboat of commercial legal expenses, and are leaving their clients facing very real exposures.

Arguably the biggest threat in 2006 is that of legislation prohibiting workplace discrimination on the grounds of age, which comes into force in October and is both untested and wide-reaching.

Is it realistic, however, to expect the UK's small to medium-sized enterprises - of which there are around 3.7 million - to fully understand what is expected of them?

While larger businesses have the luxury of HR departments, smaller firms may not realise they will no longer be able to specify an age limit in a job advertisement. They will also need to take care with words such as dynamic, mature or energetic. While older workers are perhaps more likely to feel disgruntled and take legal action, this law affords protection to young employees too. Pressurised bosses are unlikely to realise that something as seemingly innocuous as a jokey birthday card from colleagues, relating to someone's age, could potentially prompt a law suit.

Exact figures are not available on the take-up of commercial legal expenses but a report by analyst Datamonitor estimates that less than 50% of the SME market currently has cover - and this figure could be as low as 30%.

There is no doubt that new laws are going to leave many employers more exposed and, certainly, legal expenses insurers are keenly aware of the fact they will undoubtedly face more claims themselves. Having said that, at least the insurance industry is prepared - for those businesses without cover, the consequences could be serious.

It is difficult to put an accurate overall figure on what the cost of an employment dispute is to the company affected. Apart from the payment of a settlement or a compensatory award, often far more damaging but less easy to quantify is the effect on a firm's reputation and the impact on other staff.

So, are brokers talking to clients about the risks? Too often, commercial legal expenses cover is treated as a commodity and brokers may only have a vague recognition of the overall benefits.

It is probable they will be spending far more time talking about physical hazards faced by their business clients - even though, in reality, suffering a fire or break-in is less likely than being affected by a legal problem or a lawsuit.

Because the cover is often not fully understood, brokers may also not appreciate the differences in cover. There is huge variation in this market, even though at the outset it can appear that policies are all very similar.

If brokers are uncertain about what they are recommending, how can they understand why a £500 policy is better value than the one priced at £25? The reality is that there are policies that offer little more than access to a helpline. This in itself is something of a misnomer, as the main purpose of the helpline may be to prevent claims.

Exclusions in low-cost cover are extensive and this is hardly surprising since by the time a cut has been taken out for the intermediary, the policy can support few claims. A quality policy is not cheap but the helpline provides best advice, as insurers often have specialist solicitors as part of a panel that are retained for the purpose of providing expert guidance and claims management.

There is scope in this market for brokers to work with local firms of specialist solicitors to give presentations to small businesses about the risks. For larger businesses, a broker may also be able to talk to clients about employment audits and, again, forge links with recommended providers.

Cover recommendations

Clients who are caught out by a legal problem may not be best pleased if their broker has not recommended a suitable legal expenses cover - or indeed if they have not suggested it at all.

There is also the regulatory perspective - brokers have a duty under the Financial Services Authority's Treating Customers Fairly principles to ensure clients receive appropriate advice. If there is to be positive change, brokers need to increase their understanding of the value of this insurance and break away from the view that it is a cheap and cheerful commodity product.

Brokers also risk alienating their clients if they sell poor quality cover that fails at the point of claim - indeed, the client could move their entire portfolio if they felt cheated.

It is not fair to blame brokers entirely for the low take-up of commercial legal expenses, however. Insurers must examine what training they make available and how they communicate their products. They must also make brokers more aware of the benefits of the claims service on offer and who is providing it.

There are real opportunities for brokers to sell more commercial legal expenses insurance. There is certainly a growing need among clients - so as an industry we must make sure they are fully informed and properly covered.

- Peter Dobie is underwriting manager for Allianz Cornhill Legal Protection.[QQ]

KEY THREATS FOR EMPLOYERS

- Age discrimination: From October, employers will find there are limited grounds on which age discrimination can be justified and, unless it can be objectively justified, they may not ban someone from working beyond the age of 65. Harassment policies need to be extended and bosses, as well as employees, must avoid making stereotypical assumptions about older or younger people. Apart from recruitment issues, treating a staff member unfairly when it comes to training and promotion could also lead to legal action.

- Race relations: A new statutory code of practice on racial equality in employment has been published to come into effect in April. The code is a set of recommendations and guidance on how to avoid unlawful racial discrimination and harassment in employment.

- Disability discrimination: Important changes took place to the Disability Discrimination Act 1995, which came into force on 1 October 2004. There is now an onus on employers to ensure there is adequate physical access for disabled employees and customers.

- Family friendly policies: Family friendly proposals in the Work and Families Bill, currently before parliament, are expected to come into force in April 2007. Maternity leave is to be extended to 12 months, the period of statutory maternity pay is to be extended to nine months, and to 12 months by 2010. Other reforms include 'keeping in touch' days where women can work for a limited number of days during maternity leave. A further proposal will allow working mothers to transfer part of their rights to maternity leave and pay to fathers, after the first six months.

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