Employment Liability Insurance – Taking precautions in UK

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

According to figures from the Tribunals Service (Click here to learn more about this Ministries of Justice agency) 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.

Despite this, firms that are purchasing EPL, which covers discrimination, harassment and other similar employer-employee disputes, has been relatively low in the UK. For instance, it has been reported by a leading insurance broker that just 17% of the top 100 UK law firms have EPL, compared to 75% of U.S. practices.

Companies which sell EPL in the UK as both a standalone product and as part of its directors’ and officers’ (“D&O”) offering, say that – while the U.S. 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 EPL will build over the next decade. It has also been reported that 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 U.S., will still provide a vehicle to claim for those that may not singularly do so.

Ignoring obligations

It has long been the case that some 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, thus choosing to fail 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 also, historically there has not been a range of products in this area on the market – although this is now starting to change. With potential compensation for successful discrimination claims now unlimited, the cost of the premium may be a small price to pay for peace of mind.

The U.S. has seen much higher levels of compensation paid out in discrimination cases, and this may be why a higher percentage of firms in the U.S. have insurance. However, 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. The number of discrimination laws in UK 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.

Currently, it is the larger commercial companies (more than 25 employees), rather than the smaller businesses (less than 25 employees), that take out EPL. The theory behind this is mainly because they will have systems in place, an HR department and the right kind of guidance. The company would be UK domiciled, not U.S.

Right fit for all?

Some question whether EPL is the right fit for all firms because the U.S. legal system differs vastly from the UK in a couple of crucial areas – the ability in the U.S. to launch class actions and punitive damages – both of which can lead to multi-million dollar claims. In the UK, compensation is much lower, therefore, while a number of companies buy standalone EPL policies, most of the mid-market companies interested in the product 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 EPL will not cancel it but there are not many buying it for the first time.

Some believe that EPL is not striking the right cord in the UK market. There are reportedly a number of reasons for this. Namely, it was a U.S. product designed for that market, and, in the employment sphere, while U.S. workers have few rights compared to the UK and Europe, they are more prepared to exercise the rights they do have. Also, in the U.S., the cases are determined by jury, not a judge, this is a bigger risk for the U.S. firms.

Given the current economic circumstances and certainty that claims will rise, it is believed this is a market crying out for a good quality EPL policy that is cost effective.

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