In depth: Employment practices liability: getting back to business?

Coronavirus has driven unprecedented change in how we live and work, bringing with it significant uncertainties about employment risks. Remote working, furlough, redundancies and numerous other staffing issues have added to a complex set of challenges for businesses.

Some employees became ill with Covid-19 while others were facing significant pressures in managing childcare and other caring responsibilities. Repeated lockdowns took their toll on individuals’ mental health and wellbeing. These issues combined to complicate the EPL market where rates have hardened significantly.

“A lot has happened to employers over the past couple of years. They had to furlough people, [then] get people back. What we saw right at the beginning of the pandemic was a hefty increase in the number of people looking for legal advice [including how best to] restructure their staff,” says Dave Haynes, underwriting director at ARAG.

“We were expecting a big increase in claims as a result of furlough coming to an end. We did see a spike, probably at the end of 2020, but then [furlough was] extended several times so we never quite saw the volume of claims expected.”

Vulnerable

One complication for employers centred on vulnerable employees, who were required to shield, being classed as a person with a disability. Therefore, any less favourable treatment of these individuals, or failure to make reasonable adjustments, increased the prospect of disability discrimination complaints. Also, as employers adapted workplace practices regarding health and safety, employees raised concerns around possible vulnerabilities.

“All of these issues required employers to make decisions and introduce new policies and ways of working in the face of ever-changing government regulations and rules,” says Louise Bloomfield, partner and head of DAC Beachcroft’s national EPL team. “With that came risk, and it inevitably led to an increase in claims, given that some employers either did not handle matters well enough or employees felt they were not being treated fairly. For some employers, the pandemic was a step too far and forced their hand in terms of redundancies which [caused] a spike in claims.”

As a result of the uncertainty and escalation of risk, some insurers withdrew from the EPL market. This tightened capacity, so the market hardened with deductible levels rising significantly or cover being declined on renewal for some insureds.

Recovering?

However, the market is now seeing tentative signs of recovery. According to Karen Cargill, chief client officer, management liability and D&O product lead at broker Marsh Specialty, some carriers are returning to the market.

“The last couple of years have been a bit rocky, to put it mildly,” she says. “There isn’t a lot of EPL capacity about, at least in the London market. A large chunk of that has to do with Covid. EPL insurance is clearly grounded in the employment relationship.”

“The optimistic outlook will continue if the carriers continue re-entering the market. However, if there’s a sudden rise in claims, people might get the jitters. If I were an underwriter I would be less worried about people’s return to work and have more of an eye on that backlog of employment tribunals.”

Charles Emkes, senior account manager, management liability at broker Protean Risk has seen less evidence that insurers are coming back to the EPL market. He says that other management liability lines have seen adequate corrective action over the last 24 months, which has attracted new capital to enter those classes of insurance, increasing supply.

Oversight

Emkes also highlights the fact that clients are placing more rigorous oversight of the cover on offer to them.

“Insurers… may need to consider retentions in relation to territories more carefully than previously… to maintain competitive rates and stable portfolios,” he explains. “EPL should be seen as an insurance policy to protect a business for the large claims that will damage an insured’s balance sheet, rather than a policy to claim upon with day-to-day concerns.

“This will maintain some stability for the next 12 months until more insurers offer a wider array of options for insureds. If this doesn’t happen, we may see a spike and crash in premiums that will be in neither the insureds’ nor insurers’ best interests,” Emkes adds.

The increased interest in EPL is driven by the rise in employment litigation and the expectation that the Covid-19 pandemic will only exacerbate disagreements between employers and employees. Businesses of all sizes are vulnerable to the costs of defending employee claims, which can prove ruinous.

“Unfortunately, legal fees may need to be paid even if the claim is unsuccessful, which is why it is important to have insurance in place that will cover these costs,” says Neil Hodgson, managing director of risk management at Gallagher: “Businesses should speak to their broker about EPL insurance that will cover costs as a result of certain legal disputes with employees.”

He adds: “When a company’s workers claim their legal rights as employees have been violated, this can protect against resulting litigation, including claims of discrimination and wrongful termination.”

How do EPL and commercial legal expenses insurance differ? And what are the alternatives?

A hardening EPL market means more challenges for insureds trying to secure the right cover for their businesses. Providers’ cover, premiums and excess charges can vary so it is worth hunting around. In such circumstances, firms need to look at their risk mitigation practices, as well as considering other types of insurance that can provide some of the necessary protection.

“They’d need to improve on their HR procedures and have to make sure they have the right people internally to make sure they’re not exposing themselves to potential claims,” says Dave Haynes, underwriting director at ARAG.

“Alternatives would be self-insurance or legal expenses – that can be another option. Then the company could get legal advice before they did anything to make sure they’re following the right procedures and… don’t get lumbered with awards in the event that claims are found against them.”

Both EPL and legal expenses cover are suitable for an organisation that wishes to protect itself from paying legal costs arising from an employment dispute. They both respond to unfair and wrongful dismissal, constructive dismissal, discrimination and equal pay claims.

Although there is a considerable overlap between the two covers there are also some key differences. Legal expenses has a “prospect of success clause” which requires a 51% chance or more of the organisation successfully winning or defending their case.

Del Sharman, director at broker Pound Gates, says: “The legal expenses product is based around there being a prospect of successfully defending the client. [If that prospect is not there], the legal expenses insurer won’t engage [with] whatever that employment matter is.

“EPL takes the rough with the smooth,” he adds. “You don’t have the prospect of success test, so the insurer is taking on everything. [As a result] there is a higher excess and higher premiums. The insurer might also be looking to [take] the client through some sort of pre-qualification too, to understand their employment processes in… more detail before starting coverage.”

EPL brokers and insurers offer a range of services, and expert risk management advice, to help businesses guard against any potential claims and mitigate risk. The pandemic raised employers’ awareness of the value of that advice and helped raise the profile of EPL.

ARAG’s Haynes describes EPL as the ‘Rolls-Royce of legal insurance’. “EPL is different in that we will always defend the claim. People make mistakes – they might dismiss someone without due process. They might think they have [followed the rules], but they’ve missed something.

“It is not deliberate or negligent and in those cases the tribunal will find they have unfairly dismissed or unfairly selected someone for redundancy. We will still defend that and pay the award of compensation.

“We provide a health check for the business. We look at the documents, the contracts of employment, the standard letters and make sure they are in a good state. As well as that we give 24-hour legal advice and [provide] a suite of legal documents that form a user guide for support.”

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