Up to speed?

Many companies - particularly, but not exclusively, smaller companies - are struggling to keep up to date with employment law. As a result, the risks posed to these businesses by their every day problems with their employees have become more significant following the recently announced increased compensation limits in employment tribunals.

It is to be noted that these increased limits are not a one-off. The Employment Relations Act 1999 allows for annual adjustments to the compensation limits in line with the Retail Prices Index.

Even firms with dedicated human resources departments are under pressure to keep up to speed with the constantly changing legal landscape. Managers and their companies bear overall responsibility for employment practices but, no matter how sound the procedures, in reality it is impossible for any business to say it is immune from an employment dispute. The rapidly increasing amount of employment laws in the UK means that outside support and the safety net of insurance are invariably essential.

Brokers have a real opportunity here to step in and use legal expenses as a differentiator. However, based on past experience, it will only be those brokers that are prepared to rise to the challenge in the current difficult commercial market that will benefit.

So, just how big is the problem - and, equally, the opportunity?

The likelihood of a company becoming involved in a dispute with a current, previous or even prospective employee is, perhaps surprisingly, higher than that of a fire. Employment tribunals regularly hit the headlines and all employers must be aware of, and guard against, an increasingly wide range of issues, including disability, equal pay, part-time working and race, age and sex discrimination. Behind the official statistics for the Employment Tribunal Service are the countless thousands of employment disputes that never get counted but that nevertheless cause very real cost and disruption to those companies affected. Smaller businesses are particularly vulnerable since they are less likely to have formalised business procedures in place.

The costs associated with an employment dispute are also significant. How many companies can easily afford to pay costs that can run into many thousands of pounds? The new limit for a compensatory award following a finding of unfair dismissal - the most common reason for a dispute - by an employment tribunal is £60,600, whilst there is no upper limit on compensation in cases of proven discrimination.

Consistent claims

The proportion of discrimination claims has remained consistent over recent years, although the impact of the age discrimination legislation introduced in October 2006 is yet to be realised, with views being expressed that the resultant increase in claims could be anywhere between 7% and 22%. This is a situation that businesses simply cannot afford to ignore, particularly as the Employment Tribunals Service Annual Report 2005-2006 tells us that more than 60% of discrimination compensation awards during that period exceeded £5000, while more than 5% exceeded £50,000. The highest award fell only slightly short of £1m. There are very few companies that could survive an unplanned and unbudgeted award of such a size. Even if they could, would it not make more sense to insure against or, even better, prevent the dispute from occurring in the first place?

It is also worth remembering that in the case of an employment dispute the loss of management time and other auxiliary costs can quickly add up to the equivalent of many months' business profits. On top of that, there is invariably disruption to the business, exacerbated by the time involved, while a hearing for a relatively straightforward case may take only a day or two the time taken to prepare for the hearing can take weeks.

Given this apparent need for companies to take out legal expenses to protect against employment disputes, it is surprising that the sale of these covers is relatively small. It is generally believed that little more than 30% of businesses have any form of commercial legal expense cover, a percentage that is stubbornly resisting all attempts to expand the market.

However, when you talk to brokers it quickly becomes clear that there are some fundamental problems that need resolving, including educating more intermediaries on the benefits of cover, as well as the differences in providers, wordings and service.

A difficulty with employment legal expenses - and commercial legal expenses in general - is that it is invariably sold on price. It has become a commodity product, where the benefits are rarely 'sold'. To date, the majority of providers - and these are usually wholesalers rather than insurers - have decided the best way to sell commercial legal expenses is to 'pile it high and sell it cheap'. Some providers are selling a commercial legal expenses policy, which includes employment disputes cover, for under £100. At that level of premium it is difficult to see how the cover can be anything other than narrow or restricted and, therefore, unable to react to the full range of legal problems that are typically present for an average business.

With a market penetration as low as 30% this is not even proving to be a particularly successful sales strategy.

Too complicated

Intermediaries undoubtedly face difficulties when trying to promote employment disputes cover. Some find commercial legal expenses to be too complicated, a situation not helped by variety in wordings and covers. However, for those intermediaries who take the time to research the covers provided there is an opportunity to enhance their relationship with their client and also offer a product that will deliver very tangible benefits.

Of course, this all needs to be viewed in the context of the wider commercial insurance market. Many intermediaries report that premiums for their commercial clients are continuing to reduce. When this is linked to an expectation by those clients of making the most of any price cuts, then the result is more pressure on intermediary costs and expenses. The focus is on premium spend and savings, particularly when under attack from another intermediary. In such an environment it is easy to see why many intermediaries shy away from a discussion with their commercial clients about using premium savings to purchase additional covers. Some do have discussions, however, and those intermediaries are not only protecting their clients but also protecting themselves.

Another difficulty faced by intermediaries that attempt to promote employment legal expenses is that very often the cover is already included in one form or another in the main commercial combined policy, either automatically or as an optional upgrade. This is an increasing trend but one that on the whole perpetuates the commoditised nature of the cover. While some of these covers represent good value, others do not, providing very little protection. The danger is that if the scope and restrictions of these covers is not properly understood by intermediary and client alike, then disappointment is sure to follow on the heels of a claim. Indeed, intermediaries do report dissatisfaction with these covers, fuelled by a high rate of claims declinature.

Even where a commercial combined policy includes legal expenses, there is no reason why an intermediary should not take the time to present the benefits of an alternative package of covers to a client, particularly when the alternative is more likely to react in the event of a claim.

In addition, forward-looking, intermediaries will increasingly speak with their clients about the benefits of risk management linked to employment legal expenses and how this can be surprisingly cost effective. As with the insurance itself, the number of companies prepared to invest in consultancy services is largely untapped.

Established legal expenses insurers are now focusing on risk management and working with intermediaries to offer this in an accessible and practical way to the range of their business clients. The message is that insurance is not enough - companies need to avoid claims wherever possible in the first place but also know they have the back-up of a quality policy should the worst happen. As it is not uncommon for a claim to run into thousands of pounds and take many months processing, the insured needs to have access to experienced panels of solicitors and be able to meet the costs of barristers and expert witnesses.

There are now viable risk management options for businesses, linked to employment legal expenses. Large companies, which typically employ in-house risk managers and put in place three to five-year programmes, have long been aware of the benefits. Now there are packages tailored to smaller business. Some include a range of risk management tools, working alongside specialist employment solicitor firms that identify problem areas and tackle them before a dispute or legal action occurs. Using these comes at a price but for almost all firms this will be highly affordable - typically costing just a few hundred pounds.

Of course, smaller companies have budgetary restraints on what insurance they can buy, which is why it makes sense for an intermediary to work alongside an insurer that can provide tailored cover off the back of a risk survey. For example, a company may be most concerned about discrimination and so want cover solely for this. Another way of making legal expenses cover more affordable is to take a deductible, safe in the knowledge that the business is protected by sound procedures and supported by access to specialist advice from a solicitor who already understands how the business works and where the potential problems lie. The solicitor will then be available to advise on a range of issues such as stress in the workplace, disciplinary procedures, handling redundancy, equal opportunities and avoiding unfair dismissals.

Indeed, in the future there is likely to be more scope for brokers, solicitors and insurers to work closer together to provide a holistic solution to the needs of commercial clients.

Proposed deregulation

The proposed deregulation of the legal services sector following the Clementi Review is set to create a more open legal market and the arrival of big brands. While Tesco Law may be there for the consumer on the high street, there is no reason why brokers and solicitors cannot link up to offer commercial clients an integrated service, encompassing risk management, regular employment law updates, training and insurance.

A growing number of switched on intermediaries are now offering risk management services and so can utilise these tools. It is an excellent way of differentiating themselves and also gaining a real understanding of how their clients operate - and of recommending lasting change. Clients gain a much clearer picture of where their risks lie and can therefore better manage their exposure.

Switched-on insurers recognise that intermediaries are under severe competitive pressure and need to find ways of offering their clients a more comprehensive and professional range of services. A high quality employment legal expenses product, perhaps combined with a tailor made risk management consultancy services, is an ideal solution. Otherwise, is there a missed opportunity?

- Peter Dobie, Underwriting manager, Allianz Legal Protection.