In fair weather - In fair weather or foul

As the global economic slow down continues to bite in the UK, businesses are coming under increasing financial pressure from stagnating sales and rising costs. Squeezed profit margins have spurred many firms to look into trimming costs, and with employment costs often the largest overhead, a general tightening of employment conditions and a rise in lay-offs and redundancies now seem inevitable.

In addition, employees will be feeling the pinch and may look to their employers for some financial relief from their own soaring living costs. Put these factors together and the rising number of disputes between employers and employees, which has increased steadily in recent years, looks guaranteed to escalate further.

Tough year ahead

The number of businesses that could be affected by employee disputes is significant, with the Confederation of British Industry predicting that the economy is facing its toughest year since 1992. Meanwhile, the latest quarterly economic survey by the Chartered Institute of Management Accountants in May revealed that 35% of businesses are anticipating budget cuts, with 75% saying that temporary and agency staff would be the first to leave, followed by administrative support at 61%.

In addition, claims made to the Employment Tribunals Service (ETS) are already at record levels. From 2006 to 2007, 132,577 applications were made to the body, showing that increasingly more employees are seeking financial compensation against their employer for alleged unfair treatment. Uninsured employers that face a claim have the unenviable prospect of trying to reach a settlement with the employee, or defending a potentially expensive legal claim out of their own funds.

Furthermore, directors of smaller firms could be putting their business, their employees and their own assets at risk. According to research by the think tank Committed2Equality, which advises the government on discrimination in the workplace, UK employers are now spending more than £300m a year on employment tribunal claims.

In addition, the new Equalities Bill, which has been described as replacing a 'thicket' of legislation, will mean that the ETS will now be able to not only consider the employee's complaint but also to make recommendations across the employer's entire workforce. Tribunals will also be given the power to adjust awards of compensation by up to 25% for a firm's unreasonable failure to comply with employee dispute organisation ACAS' code of practice.

Whether or not these cases are proven in favour of the claimant - 54% of unfair dismissal cases are disposed of at hearing - fighting an employment tribunal claim is an expensive and time-consuming process. They are estimated to cost companies an average of £7,000, which is mainly comprised of lawyers' fees. While almost 10% of cases that are found in favour of the claimant result in awards in excess of £20,000, the maximum current award stands in excess of £250,000.

Despite these rising number of complaints, the expense involved with a claim and the fact that directors' and officers' (D&O) insurance will cover the costs in fighting such claims, many small and medium-sized businesses in the UK remain uninsured. The growing raft of employment legislation is creating a situation where companies can all too easily fail to update their procedures in line with legal changes, rather than knowingly flout employment law.

In addition, this honest mistake offers little or no defence when a claim is made. This argument is backed up by a court of appeal judgement last year that imposed a 'presumption of guilt' on employers facing legal action, so they must provide proof of their innocence.

The reality is that many directors, especially those of smaller businesses, do not realise how much exposure they and their organisations face where employment law is concerned, or just how much protection D&O insurance can provide. For example, in a recent survey of small business owners in the north-east of England, 29% of respondents said they were unsure what their D&O policies covered.

Brokers have a major role to play in ensuring their clients are aware that employment practices cover is affordable and a readily available option on most D&O policies. Increasingly more D&O insurers are looking to add value to their insurance products and many firms now offer risk-management tools to accompany their policies. Such services can be an invaluable aid for companies in keeping up to date with company and employment legislation - areas that can be unfamiliar territory to directors.

Risk-management services should be part of all good D&O policies. If brokers can offer additional services that are of real value to their clients, then they will be able to differentiate themselves from their competitors.

A period of stormy economic conditions now awaits the UK market and more companies will start to struggle financially, making an increase in claims in the coming years almost inevitable. For those that remain uninsured, the impact of increased claims is likely to hit doubly hard.

The message to brokers is to ensure their commercial clients have a D&O policy in place now, because even if their clients are expecting the best, they should be preparing for the worst.

Mark Shreeve is chief executive officer at Angel Underwriting.