Demand for commercial legal protection is rising quickly — Arag

Brexit, the #MeToo movement, a global pandemic and Russia’s invasion of Ukraine would each be enough to create significant challenges for many businesses. Coming, as they have, in such rapid succession has produced a climate of continual disruption.

The implications for UK companies of Russian president Vladimir Putin’s invasion and Covid-19 obviously pale in comparison to the humanitarian impact of these events, but still, the effects of these circumstances will take years to be fully felt and have already changed the world of business forever.

The combination of longer-term social changes and - hopefully - shorter-term economic pain has made organisations more aware of the legal risks facing their businesses. 

While disputes with employees, suppliers or customers are the most obvious, HM Revenue and Customs (HMRC) has made no secret of its plans to claw back the huge outlay linked to the Covid-19 pandemic and the recovery of business debts is, unsurprisingly, a growing problem.

The pandemic effect

Based on research commissioned by Arag and conducted by Research in Finance between September and December 2021, brokers are already seeing a growing demand from commercial clients for all kinds of legal expenses insurance (LEI). Of the 100 broker respondents, most expect demand to grow further over the coming year.

While brokers who responded to the research did so anonymously, their sentiments are reinforced by others with experience of the legal expenses market.

Becky Newman, divisional director of health and care at specialist broker Howden, said that the cover for employment disputes is crucial for the broker’s clients in the care sector - particularly for small and medium-sized enterprises (SMEs) without their own HR teams. Therefore, Arag’s legal advice helpline proved especially important during the pandemic.

She said: ”During Covid, advice on how to navigate the furlough scheme, manage staff absences and then the mandatory vaccination piece made the cover more crucial than ever, particularly the advice given by the helpline.

“The support through the portal of documents and templates is also valuable for the smaller operator.”

Employment cover is also important to broker Darwin Clayton’s clients in the contracting sector.

Service providers, such as cleaning and facilities management and security businesses, typically have a large labour force and Mark Harris, Arag’s assistant director of technical operations, noted that the breadth of support Arag can provide is attractive for Darwin Clayton’s SME clients.

He continued: “It’s a comprehensive package covering issues including contractual disputes, tax, property and employment. Policyholders have got access to legal advice lines too, which is very valuable to SMEs.”

Big boost for EPL

The biggest trend revealed by Arag’s research concerned employment practices liability (EPL) cover.

Around 70% of brokers surveyed said they had seen demand for this insurance increase over the last year, with 72% expecting further demand increases during 2022.

EPL is often seen as the big brother to a standard commercial legal protection policy, more suited to a larger business that may have an in-house HR team. It can give the same breadth of cover provided by standard legal protection policies - against tax investigations, contract disputes and the like - but it also offers much deeper cover against employment risks.

EPL policies typically protect a company against the costs of all employee disputes, even if the business was at fault.

The prospects of success clause in LEI policies that makes it affordable for SMEs to protect themselves against litigation from a disaffected employee does not apply in EPL. As a result, premiums are inevitably much higher and hefty excesses and deductibles typically apply.

The EPL market was hardening significantly, even before the pandemic, with some insurers withdrawing and others increasing excesses and introducing exclusions.

Harris said EPL cover is attractive for Darwin Clayton’s clients with larger headcounts in the contracting sector, but that policies are getting more expensive. “The market for employment practices liability is extremely volatile at the moment. We’re seeing significant increases in premiums,” he added.

For many organisations, even larger SMEs, commercial legal protection policies provide a lot of the bang of EPL for a lot less buck.

While bigger operations, especially those with a very large workforce, can make sizeable excesses and deductibles add up, in the wider equation of managing employment risks, many SMEs get all the protection they need from a decent LEI policy.

There are some early signs of capacity returning to the EPL market, but many of the huge changes that the worlds of work and commerce have seen over the past five years are permanent.

A radically different commercial landscape is emerging in the aftermath of the pandemic, but the insurance industry has already developed the tools to navigate it.