Doom at the top

It's a tough time for employers, with the maximum compensation award for unfair dismissal increasing from £12,000 to £51,700. There were more than 100,000 applications to employment tribunals last year and the number of cases has risen by 135% in the past ten years. Disability, race and gender status have all been at the heart of successful discrimination claims recently, with awards reaching the £1m mark.

And times are about to get tougher. A new European Community directive, to be adopted by the government by July 2003, will transfer the burden of proof onto employers in race discrimination cases. By December 2006, employers will hold the burden of proof in disability and age discrimination cases. The Equal Opportunities Commission Task Force report, published in February 2001, also recommended that employers be effectively guilty until proven innocent in pay claims.

Employees' success rates at employment tribunal cases, already high, look set to rocket, at the employers' expense.

Of course, the pain of employers is a bonanza for employment practices liability (EPL) cover providers. EPL, like commercial legal expenses (CLE), will cover compensation payouts, which are often one of the largest expenses in an employment case. But, unlike most CLE policies, EPL policies don't usually request a reasonable chance of success before giving cover. Although offered on a small scale in the UK for some time, EPL has become more widespread in the past two years, when insurers such as Chubb, Ace and AIG borrowed on their US experience to offer products tailored to the UK.

Chubb's UK and Ireland EPL product manager Dax Gulmohamed says the product is popular in the US, where employment cases are heard by juries who are often more sympathetic to the employee than the employer. "There are also punitive damages available in the US," he says. "We've seen some huge claims in the US, like the $176m (£124m) against Texaco for a race discrimination class action. Most of the payout was punitive damages. What happens in the States usually comes over here, but what really sparked the UK claims off were the changes in the caps to the awards."

A couple of years later, Chubb, Ace and AIG are still leading exponents of the cover. DAS also launched its Employment Practices Protection product in April and Capita Assistance forged into the sector with Legalplus Employer Protection in June.

Both Abbey Legal and Lawclub are carefully watching the competition, with a view to making a play for business. DAS is already in talks with at least two other insurers, hoping to provide them with a white-labelled EPL product.

Gulmohamed has no doubt the market will continue to grow, for three good reasons. "It's definitely going to become more popular because of the publicity surrounding claims," he says. "Also, the EU legislation changes mean liability and exposure will increase and, as employers become more familiar with the product, people will see the need for it."

Market assessment
Capita Assistance underwriting and sales boss Frank O'Malley says the company has studied the EPL market carefully before jumping in. He says CLE suits small to medium-sized businesses, which usually do not have an internal human resources (HR) department, while EPL suits bigger companies.

"Larger organisations have an issue with abdicating responsibility for their employment policies to a third party," O'Malley says. "But they do want protection against employment situations."

Legalplus is offered to companies with annual payrolls over £1m and doesn't require underwriters' approval prior to a dismissal.

DAS has taken a more managed approach with its product, which will cover claims defence and awards, provided the company has adhered to procedures recommended in a pre-cover risk management assessment. DAS sales and marketing manager Ray Kneeshaw says the firm is being cautious because it remembers the mistakes made with CLE in the early 1980s. "The mistake was to underprice the risk and to allow policyholders to nominate their own choice of solicitors," he says. "The costs went up, results were bad and it cost a lot of money to sort it all out. You've got to control claims."

He says firms that underwrite risks without a prior assessment are playing with fire. DAS also aims at £1m-plus payrolls, but Kneeshaw says the company has already given cover to a few smaller businesses with HR departments.

US model
Chubb, which sells mainly to larger companies but is now also trying to sell to the SME market, does not request a risk assessment. However, Gulmohamed says the company is very careful of the risks it takes. "We look at the proposal, sometimes meet with clients and often have a risk assessment as part of the policy but it's not a condition of writing," he said. "All claims are covered under the policy but we'll be in dialogue with the insured on whether there's a best time to settle. We work very much in partnership and research very carefully at preliminary stages to ensure they've got the right attitude to their exposures."

Abbey Legal Protection's business development manager Leo Gibbons says the reason most EPL providers exercise less caution than DAS is because they are liability-orientated, rather than legal expenses-orientated, insurers. However, he says their premiums are not always appropriate to their risks and that the omission of set risk management procedures is dangerous when applied to SMEs.

"It's good that players are coming in, but it's with a US model that they're not aiming at the right companies," Gibbons says. "They (the SME companies) haven't got a personnel director or an in-house lawyer, they haven't got a sophisticated approach to employment. I think there's a great danger people will get burned on this kind of product."

Gibbons says brokers were mis-selling the product to SMEs, purely on the basis that their client didn't need to take advice before dismissal. He also says DAS's approach is too regimented and could be expensive. Any Abbey Legal launch into the market is a few months away but it's likely any product will be aimed at much larger companies, with the possibility of modifying a normal CLE policy for SMEs.

Tailored products
On the other hand, Lawclub's corporate business development manager Andy Dyer says his company is looking at the EPL possibilities with SMEs and also at tailoring products to the kind of business done. He says the huge claims tend to come from financial institutions, local authorities and the police. "Real-life employers, in the general run of the mill industries, won't be subjected to the same exposures," he says. But Dyer says Lawclub would probably look at putting some risk management procedures in place, even if not in the same manner as DAS.

With the pitfalls involved in providing EPL to SMEs, perhaps Markel syndicate 702 has the right idea. The syndicate's legal expenses underwriter Terry Mason says 702 has been offering EPL for several years, although its profile has only grown recently. Markel has a comprehensive employment advice and protection policy, which is aimed at SMEs with a turnover of between £1m and £5m. It requires its legal helpline to be consulted before any employment action is taken. The Lloyd's syndicate also offers EPL as part of its entity policy, which is aimed at companies with a turnover of around £50m. It doesn't have a helpline because companies of this size almost always have specialist HR departments.

Mason says customised products eliminate the need for risk management audits prior to cover. "Enforced use of the helpline means that companies will be encouraged to adopt sound employment practices to improve their own risk management, so an audit or the like at the outset is less vital," he says. "The entity policy typically requires higher excesses which will encompass some of the less serious claims."

Despite the risks involved to participants who don't have the experience, Mason is sure that more companies will jump into EPL."The potential market for EPL insurance remains largely untapped," he says. "Insurers and brokers have only scratched the surface so far."

Callery vs Gray - what it will mean for liability insurers
Liability insurers are carefully watching the progress of the Callery vs Gray case, because it will help decide whether they have to pay successful claimants for after-the-event (ATE) insurance as well as success fees.

They are currently required to do so under section 29 of the Access to Justice Act 1999, but they have complained it has affected their underwriting performances, particularly since claims management companies such as Claims Direct and the Accident Group made it easier from individuals who have suffered a personal injury through no fault of their own to bring a claim.

Many insurers are refusing to pay both the ATE premium and success fee and are holding up settlement of claims because of this situation, which may be resolved through the case.

Callery was a rear-seat passenger in a vehicle that collided with a car driven by Gray in April 2000. His case was taken on using a conditional fee agreement, an ATE policy and a 60% success fee marked up by his solicitors.

The case came before court in November 2000 and, after the hearing, the success fee was reduced to 40% and the defendants were ordered to pay the ATE in full.

The liability insurers appealed the decision relating to the ATE premium, although their request to appeal the success fee was refused.

They appealed again and, in January 2001, the decision was reversed.

Following the appeal, the judge found in favour of the claimants and the case is now in the Court of Appeal, with a final judgement expected by August.

Meanwhile, personal injury and insurance lawyers, the Association of British Insurers (ABI) and representatives from the large claims management companies, legal expenses insurers and claimant solicitors are meeting at the Law Society in a bid to resolve the issue amicably.