Directors and Officers Liability (“D&O”) policies (or D&O sections of Management Liability (“ML”) policies) do not usually exclude cover for employment claims. However, such cover is only of minimal use and is rarely triggered in disputes between employees and employers.
It is for this reason that Employment Practices Liability (“EPL”) has developed as a separate class of insurance/section of a ML policy. The limited extent of cover under D&O hinges on the doctrine of vicarious liability, which operates within the law of tort (delict in Scotland). Well established under UK law, the doctrine is often referred to as “master and servant liability.”
The general rule in torts is that a person who authorises them will be personally liable for any damage or harm that results. However, vicarious liability sets out the circumstances in which a person is liable for the torts of another, absent any express authorisation or ratification. Under employment law, an employer is liable for the torts of employees committed in the ‘course of employment’. It is not necessary for the employer to have breached any duty that might have been owed to an injured party, simply that the act complained of was conducted in the course of employment and was closely connected with the performance of duties. This criteria is a question of fact and it is immaterial whether the alleged wrong committed by an employee was actually authorised or not. The only circumstances where employer liability might be avoided is if it can be shown that an employee acted “on a frolic of his/her own”, or in other words, the employee acted in a way that was unconnected with his/her employment. Such a defence may exist if the employer can show that it took all reasonably practicable steps to prevent the alleged wrongful act(s).
For liability (and damages) to attach to an individual, an employee must evidence that such individual(s) subjected them directly to unlawful harassment or discrimination and/or detriment (typically, this will be extreme behaviour or a whistle blowing scenario). In a serious enough case, deliberate disregard for statutory employment rights might be sufficient to render a director liable for his/her organisation’s default. Critically, though, a claim is not made against a director simply by way of their standing as such, rather as an individual whom it is alleged committed the discrimination or subjected the claimant to a detriment. Notwithstanding this exception, cases citing individuals are rare and claims would also typically be made against the company as a co-defendant. Moreover, it remains the case that, even where individual culpability is established, it is common for Employment Tribunals to make proportionately greater awards of compensation against the employer over the transgressing director.
Whilst all of this is well established, what seems to be less clear is what happens where an employment claim is outstanding, or made, when the employer enters an insolvency proceeding. Without a respondent, or with a respondent with no assets, the route to a remedy for employees appears to be more opaque. Upon learning of the insolvency, the claimant may try to add individuals to the claim, but that process would still be subject to the same limitations that existed prior to the insolvency i.e. it does not change the facts and the claim would have to drop into that very narrow area of unlawful discrimination and/or whistle blowing for any chance of even a partial recovery from the D&O policy/section.
If the employer has EPL insurance, a possible remedy may exist under The Third Parties (Rights against Insurers) Act 2010 (“the Act”). Broadly, this enables a third party with a claim against an insured party to pursue this directly against the insurer, provided the insured party is a “relevant person” under section 1 of the Act. Companies in liquidation count as a “relevant person”. In a case from 2021 against Hemingway Design Limited (“Hemingway”) the claimant (Mr. Watson) resigned and claimed disability discrimination and constructive unfair dismissal. Hemingway had insurance with Irwell Insurance Company Ltd (“Irwell”) for EPL. Hemingway entered liquidation and Mr Watson applied to join Irwell as a respondent to his action. The Employment Appeal Tribunal found that Hemingway’s rights under the insurance contract transferred to Mr Watson as a third party and he was within his rights to pursue his claim against Irwell. However, such a route is more hazardous and involves additional time and expense.
One other fly in the ointment is that a typical excess/deductible on EPL policies/sections is £5,000, often more. Whatever the outcome of the claim, that part of the loss is likely to remain unfunded and will not form part of any settlement, so must be deducted from the amount claimed. The claimant is also subject to all of the requirements that would have been imposed by the policy upon the employer. If there are limitations or preconditions on the extent of the cover, those apply equally to the employee. These might typically include a claim notification condition within a specified (and often short) timeframe, or a claim procedure condition, requiring the employer to provide the insurer with certain information. Breaches of those conditions might allow an insurer to legitimately avoid the policy, which it may be difficult for a third party employee to challenge.
Even if a claim is successful, however it might be arrived at, tribunal awards that a company is ordered to pay are ranked equally with other unsecured debts and are unlikely to be paid out in full, or at all. The option of redirecting the claim to the D&O policy/section seems to exist only to the extent that it would in the absence of an insolvency proceeding, so attempts to seek an alternative route or remedy are likely to be time consuming, expensive and, ultimately, pointless.
