by ARAG plc
Legal expenses insurance (LEI) for business customers provides protection against legal costs incurred in pursuing or defending a range of legal disputes. Policies typically cover defence of employment claims, employee restrictive covenant disputes, legal defence which may include motoring offences, HMRC investigations and compliance disputes, representation for criminal and regulatory investigations and hearings and criminal prosecutions, pursuit of property damage nuisance and trespass, and contract disputes and debt recovery. Legal advice helplines are also available.
Employment practices liability (EPL) insurance, on the other hand, focuses solely on what is commonly referred to in policies as “wrongful employment practice.” Cover will be available to defend actions brought by employees/ex-employees, office holders and regulatory bodies where there has been a breach of employment law. Policies also pay awards and damages where there has been a breach of an employee’s rights.
What are the key differences between LEI and EPL?
In addition to the differing scope of disputes that the policies respond to (described above), a fundamental difference between the two products is “prospects of success” and the impact this has on the payment of compensation awards.
LEI policies always have a “prospects of success clause” requiring a 51% or more chance of the claimant winning or successfully defending their case. Under an LEI policy, the starting point is that there will always be a reasonable prospect of successfully negotiating a settlement with an employee (or ex-employee), and legal costs to do this will be covered by the policy. However, where it is established that the insured business has breached employment laws or not followed correct procedures for fair dismissal, they will be unable to satisfy the prospects-of-success condition. Under these circumstances, an LEI policy will not indemnify any out-of-court settlement or compensation awarded by a tribunal if the case proceeds to a hearing. LEI policies do not pay damages awarded by a court.
On the contrary, EPL policies do not have a “prospects of success” clause. There is an absolute duty on the insurer to pay defence costs arising from a wrongful employment practice and indemnify a reasonable out-of-court settlement, employment tribunal compensatory award or damages awarded by a court. Claims costs are likely to be on average very much higher than the average employment claim paid by an LEI policy. EPL policies will usually impose a deductible and may offer higher limits of indemnity than LEI.
Due to the increased risk, EPL underwriters may require much more information about claims history and employment practices before they issue cover. Sometimes, they will offer an audit service to identify weak employment practice. They will wish to ensure that the business adopts fair procedures and maintains best employment practice before agreeing to go on risk because if something goes wrong, they could be faced with expensive compensation pay-outs.
What are the similarities between LEI and EPL?
Both products are suitable for businesses that wish to protect against the risk of paying legal costs arising from an employment dispute. Both respond to unfair and wrongful dismissal, constructive dismissal, unlawful discrimination and equal pay claims, whistle-blowing and a raft of other employment protections.
What are the misconceptions about both covers?
Generally, there is a lack of understanding regarding the benefits and limitations of the products. Businesses can fall into the trap of thinking that they need one and not the other. That could be right as there will be a considerable overlap between the policies if both products are purchased, but it is important to understand the impact of selecting one or the other.
When is it best to use LEI? EPL?
LEI is designed to cover the needs of small- and medium-sized businesses for a range of different legal disputes. It comes with helplines and a law guide so businesses that do not have dedicated in-house HR expertise can get help if there is a problem with an employee. Businesses are insured as they are, without any requirement to meet the best standards of employment practice in order to obtain cover.
EPL, in contrast, tends to be most suitable for larger businesses that have dedicated in-house HR expertise and can meet requirements set by the insurer. EPL is also suitable where the business does not wish to protect against non-employment related legal disputes.
Are there any recent developments on LEI/EPL insurance? (Ex: any additional coverage areas that were typically excluded in the past)
Products have remained pretty constant as far as employment disputes cover is concerned, although the risk of claims fluctuates as employment law and court judgments change the legal landscape. Since employment tribunal fees were abolished in July 2017, the volume of employment claims brought against employers has climbed. The increased frequency will have an impact on both products but to a greater extent on EPL since average claims costs are higher.
Policies do not pick up claims brought by self-employed contractors who are bringing challenges to obtain “worker” rights, so there has been some immunity against a recent rash of such claims; however, that could be an area for future development. We are keeping our eye on reforms in the pipeline that the government intends to introduce following their consultation in response to the Matthew Taylor report into working practices.
What add-ons would you recommend brokers to consider offering their clients?
Commercial legal protection is an essential product for small- and medium-sized businesses.