Taking precautions

Footballers protection

Many have warned workplace legislation regulation could result in a swell of employment-related claims. Louise Meeson looks at how employment practices liability insurance could help stem the tide.

In the US, where employment practices liability insurance originated, claims of this type can typically turn into multi-million dollar lawsuits. While the UK legal system differs vastly from the US" not enabling costly class actions, punitive damages or juries, typically more sympathetic to the claimant, to adjudicate" meaning compensation is far lower, litigation is undoubtedly on the rise.

According to figures from the Tribunals Service published earlier this year, the number of employment tribunal claims rose sharply to 189 303 for the period of April 2007 to March 2008, an increase of 43% on the 2006/2007 figures.

However, despite this, take up of EPLI, which covers discrimination, harassment and other similar employer-employee disputes, has been relatively low in the UK. For instance, Andrew Swan, associate director at Aon Global Professions, told Post (25 June 2009, p4) that just 17% of the top 100 UK law firms have EPLI, compared to 75% of US practices.

Phil Bell, group casualty director at RSA, which sells EPLI as both a standalone product and as part of its directors' and officers' offering, says that" while the US is more litigious than the UK" England, Northern Ireland, Scotland and Wales are a "long way ahead of many parts of Europe", and that there is an increase in compensation awareness, predicting that interest in EPLI will build over the next decade.

"The European Union influence will also have an effect because of its focus on protecting consumer rights. The EU is currently consulting on the possibility of bringing class actions, which while they won't be the same as in the US, will still provide a vehicle to claim for those that may not singularly do so," he adds.

Both Mr Bell and Nigel Pearson, UK and Ireland underwriting manager for Chubb's specialised insurance division, agree that although EPLI has been available in the UK for a decade it is still not well known. However, the pair agree awareness in increasing.

Talking specifically about law firms, Mr Pearson says more are requesting quotes for EPLI cover. "We've seen an uptake in claims, especially in EPLI," he adds, pointing out that while there is not a huge frequency, when claims occur from the legal sector they tend to be severe, due to the high wages earned and the compensation focus on loss of earnings. However, he adds most EPLI claims tend to come from the general commercial sector, while smaller companies tend to take the hit on their balance sheets, rather than take out EPLI cover.

"There's no doubt it's one of those products that will take a while to come of age in the UK. Employees' rights will not be weakened, if anything they will be strengthened. With all of the legislation that seems to be emerging I don't see the burden or risk lessening,' Mr Pearson comments.


Ignoring obligations

Jane Hobson, partner in the employment team at Weightmans, says some law firms have a "reputation for ignoring their obligations under employment law" and believing that their staff will not take them on in employment tribunals and court.

However, she adds that the "times are definitely changing" following a number of high profile cases: "However, law firms are actually no different from many employers in the UK in failing to put this type of insurance in place to cover them. There are many reasons for this. Cost is a factor, particularly in the case of larger firms, but historically there has not been a range of products in this area on the market" although this is now starting to change."

Ms Hobson says with potential compensation for successful discrimination claims now unlimited and with the maximum compensation for claims of unfair dismissal over £76 000, the cost of the premium may be a small price to pay for peace of mind.

"The US has seen much higher levels of compensation paid out in discrimination cases, and this may be why a higher percentage of firms in the US have insurance. But UK employees in all sectors are now more aware of their employment rights than they were 10 years ago and there is no longer the stigma attached to pursuing claims before employment tribunals," Ms Hobson points out.

Ian West, underwriter of D&O at Syndicate 2468, Marketform Managing Agency, which provides EPLI as either as a standalone product or as an extension to its D&O offering, says: "I have noticed an increase in the take-up of EPLI over the past few years, especially within the small to medium-sized enterprise sector. Whereas it has been a topic for discussion during renewal meetings with larger companies, which might have the resources to deal with developments in the employment law arena, smaller companies and not-for-profit entities, especially in the current straitened economic circumstances, often lack such in-house capabilities and so feel increasingly exposed and vulnerable. Hence, the increased interest in EPLI within the SME sector."

Similarly, Mr Bell states: "The number of discrimination laws is increasing and, therefore, employers are becoming increasingly vulnerable. In a recession, more people become unemployed and, therefore, the prosecution rate for unfair dismissal is bound to increase. Even if the claim is without foundation, EPLI would cover costs."

He continues: "It's the larger commercial companies, rather than the smaller businesses, that take out EPLI. We would probably be looking to write for companies with at least 25 employees, mainly because they will have systems in place, a HR department and the right kind of guidance. The company would be UK domiciled, not US."

Mr Bells comments that some companies could have "potentially huge exposures". "For example, if an employee brings a successful claim on the grounds of race discrimination and could prove the company policy is racist, then everybody of ethnic descent potentially has a claim," he explains.

However, despite this risk Mr Bell says he has "not particularly seen an increased interest in this product" adding that due to the turbulent economic climate companies are looking to cut costs wherever they can. "At the very time when they are more vulnerable, they are making the decision not to buy the cover," he adds.

In agreement, Mr Pearson comments that the "vast majority of UK companies don't purchase EPLI cover". "They have a list of things shouting for their attention. EPLI is down at the bottom of the list," he says.

However, many believe awareness is increasing. Mark Shreeve, chief executive officer of Angel Underwriting, which has been selling EPLI in the UK for the past four years as part of its D&O offering, says that "most businesses see employment practices liability as a significant risk to their business both in terms of time and money". He says that sales of D&O including EPLI were up 50% to 3500 policies last year and that it expects another 50% rise this year.

"The market in the UK has been driven by legal expenses providers. That's beginning to change. Until recently, I don't think brokers or consumers were aware that there is a viable insurance alternative," Mr Shreeve adds.

He says the benefits of EPLI are that of a traditional insurance product and that as long as procedures are followed it will cover the loss, while legal expense cover demands that certain steps and advice is taken before a claim is made.


Right fit for all?

On the other hand, some question whether EPLI is the right fit for all firms. Richard Candy, underwriting director at Abbey Legal Protection, says that EPLI can work well for employers that are aware of current legislation, perhaps having an internal HR department and advisors.

"The problem is how do you know what the law is if you don't have this support? If you are a smaller business you may not have a HR function and be unaware of the correct way of dismissing an employee," he adds.

Mr Candy claims that legal expenses protection is more suitable for smaller companies as it includes advice and risk management as part of the service.

"Potentially, discrimination claims are unlimited, you could be looking at claims costing hundreds of thousands, however, most are attritional," he says, adding that EPLI "normally comes with a four figure excess while legal expenses comes with none".

He continues: "We've seen a consistent and significant increase in people calling us to take advice on employment law especially around redundancy due to the recession. We've not seen the same rate of increase in claims we think that's because our advice is good so we are avoiding the dispute."

John Batch, senior vice president of Marsh's Finpro practice, points out that the US legal system differs vastly from the UK in a couple of crucial areas" the ability in the US to launch class actions and punitive damages" both of which can lead to multi-million dollar claims.

However, he says that in the UK compensation is much lower, pointing out that in 2007 to 2008 the highest awards were about £227 000, £131 000 and £76 000 for disability discrimination, sex discrimination and unfair dismissal respectively and that the average disability, sex and race discrimination awards ranged between £11 000 and £19 000.

Mr Batch says that while a number of companies buy standalone EPLI policies, most of the mid-market companies interested in the product, which is about 5% to 10%, tend to buy an extension to their D&O policy.

"In a recession, exposure for EPL increases, however, perversely, this is the time where companies are struggling to find the money for extra cover. Most that buy EPLI will not cancel it but there are not many buying it for the first time," Mr Batch says.

Some believe that EPLI is not striking the right cord in the UK market. Alex Lock, partner and head of the EPL practice at law firm Beachcroft, describes EPLI as a "dog that hasn't quite barked yet", stating that there are a number of reasons for this.

He says: "It was a US product designed for that market, and, in the employment sphere, while they have few rights compared to the UK and Europe, they are more prepared to exercise the rights they do have. Also, as in the US, the cases are determined by jury, not a judge, this is a bigger risk."

However, he says that over the past decade an awful lot of employment legislation has come into force including new rights in discrimination such as sexual orientation, age and part time working and that rights have been extended in areas such as unfair dismissal, where qualification was decreased from two years to one year's service and compensation limits increased dramatically.

"We've seen a fairly steady increase in claims over that 10 to 12-year period. In a recession, more people will be made redundant and the number of claims goes up significantly. In 1990 to 1991 claims jumped up by 50% and employment tribunals claims went up by a similar amount in the early 1980s. We would expect that again," Mr Lock claims.


Product pitching

Talking about why he believes the take-up of EPLI "has not increased proportionately to the risk", Mr Lock says there are a number of legal expenses companies that offer "quasi- EPLI products for the bottom end of the market, which only kicks in if the business agrees to take advice", adding that cost is also an issue.

"What a number have found is the cost of the premium and deductible is high. If you are paying a £10 000 to £15 000 deductible on a claim then that's quite a lot, especially when you look at the average claim amount, which for unfair dismissal is about £8000."

He asks if the insurance industry pitched the product correctly for what the risk actually is, pointing out that while high earners claiming multi-million pound awards hit the headlines, the average claim is just under £11 000.

"Given the current economic circumstances and certainty that claims will rise, I would think this is a market crying out for a good quality EPLI policy that is cost effective," Mr Lock concludes.

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