Running for cover

With the rise in staff tribunal claims, even best-practice employers are turning to the benefits of liability cover. But how do you choose the policy that’s best for your firm?

Recent months have seen UK employers rushing to buy insurance against employment tribunal awards prompted by the realisation of the impact on the bottom line of the Government’s recent reforms of unfair dismissal law.

A glance at the statistics recording the number of claims made to tribunals is a clear indication that workers are becoming ever more litigious – claims rose 14 per cent for the year to September 1999, before the reforms had time to have a significant effect. And lawyers have realised that as compensation awards have risen it is now viable for them to offer to represent tribunal claimants on a no-win, no-fee basis.

Favourable legislation means that trade unions have renewed self-confidence and legal assistance with tribunal claims is one of the benefits of membership. Claimants will be better represented than ever. To cap it all, the impact of recent case law has been to make it more difficult for employers to defend claims successfully and to make the outcome of tribunal cases even more uncertain than at present. Unfair dismissal law is in a state of turmoil. Former president of the Employment Appeal Tribunal Mr Justice Morrison left as a parting gift before handing on the presidency the decision in Haddon v Van den Bergh Foods, which was soon afterwards followed by the Scottish EAT in Wilson v Ethicon.

The particular significance of Haddon lay in its rejection of the “range of reasonable responses” approach to the all-important question of whether an employer has acted reasonably or unreasonably in treating a reason for dismissal as sufficient and, therefore, fair within section 98(4) of the Employment Rights Act 1996. Mr Justice Morrison regarded it as a mantra (no doubt dreamt up by wicked lawyers) which obscured the true purpose of the unfair dismissal law and which had led in practice to applicants finding it too difficult to win at tribunal.

They could do so only by persuading the tribunal that the employer had acted perversely in deciding to dismiss them. Not only were tribunals entitled to substitute their own views of the matter for those of the employer, they were under a duty to do so.

The Haddon decision was heavily criticised. It seemed to ignore the fact that the range of reasonable responses test had been approved by the Court of Appeal, and was binding on the EAT. Many employers would not agree that from their experiences it had made it difficult for applicants to win their cases. It allows for the reality that an employer can be torn between two possible decisions – to dismiss, or to issue a warning, for example – which are finely balanced and not necessarily unreasonable.

In Midland Bank v Madden the new EAT president, Mr Justice Lindsay, has accepted that until the Court of Appeal can consider the issue again the range of reasonable responses test must be applied, albeit without falling into the trap of treating it as a test of perversity.

The Court of Appeal is expected to give guidance later this year, but meanwhile the results of unfair dismissal cases are bound to become even more unpredictable. Rather than continue to carry the risk themselves, and to attempt the difficult task of budgeting accurately for the likely costs in the year ahead, it may be more attractive for employers to pay a fixed sum to an insurer to take on the risk and provide support and assistance if and when claims are made.

Some employers may take a view that because they believe their HR practices are sound, tribunal claims are unlikely to affect them. But that approach is risky and possibly complacent. Even the best employers face claims from time to time. Even weak and/or frivolous claims are costly to deal with, and employment tribunals are increasingly unpredictable. Surprise results are not uncommon.

There have been at least 10 new insurance products launched in the last year alone, with more in the pipeline. Although this form of insurance is very widely used in the US (and many UK businesses with employees there have been buying it for years) it is relatively new to the UK. HR professionals may need guidance as to how to go about choosing the policy which best suits their own circumstances and which provides the best value.

In deciding what policy to buy, HR professionals should consider not only the amount of the premium which is being charged but also what the policy will and will not cover; the quality of support which the insurer will provide when claims are received; and the support which an insurer will provide to help prevent claims arising at all.

While the terms and conditions of policies will differ, almost all will pay awards of compensation and settlements of claims for unfair dismissal and discrimination, and many other employment-related claims, however they may be described in different countries. For example, in the US many forms of legal wrong such as the “intentional infliction of emotional distress” have been developed by the courts and will usually be covered if they relate to employment. They will normally not pay sums to which the employee was contractually entitled, although they may pay the costs of defending breach of contract and other contractual disputes.

Most policies have an overall limit on the amount the insurers will pay out in any single year. There may sometimes be a limit on the amount paid in respect of each individual claim. It is important that these limits are not set at too low a level for the size and nature of the organisation. If employees are well paid, the potential claims may be more substantial and the limit per claim should take this into account. There will usually be an excess which the customer must pay. It is important that this should not be too high, particularly in the event of several small claims being made in the course of the year, as may occur if the employer has a large number of employees.

Not all policies will do so, but many will provide cover worldwide. Some provide cover to cater for those European countries in which an employer may be forced to reinstate an unfairly dismissed employee – the insurer may meet the cost of back pay for the period between the dismissal and the date of reinstatement. It should be possible to buy a policy tailored to the countries in which the business operates.

• Some insurers are better than others at supporting businesses when claims come in. This will be particularly important to HR professionals, as these sorts of claims often require delicate and difficult decisions to be made. Critical business factors may influence the decision whether to fight or settle, so look for an insurer with a reputation for being sympathetic.


• Some insurers insist that claims may only be handled and presented at the tribunal hearing by their own in-house advisers and, in some cases, may refuse to provide cover at all unless their advice was requested and followed before the dismissal took place. Others are more flexible and will not include such onerous conditions.


• Some insurers will help you prevent claims arising in the first place by including as part of the package access to advice helplines, seminars and training sessions, and on-line legal advice which in price and quality will often more than match the services offered by consultants.


• The insurer should also make available lawyers of high quality with experience of employment law to help you deal with claims efficiently and sympathetically. Make sure that the law firm nominated has the expertise and depth of resources you need – and the number and experience of the assistants is often just as important as that of the partner or partners who front the operation.