When considering what limits to choose under a Management Liability (“ML”) policy, much of the focus centres on the Directors and Officers (“D&O”) liability section. Less attention has typically been given to the Employment Practices Liability (“EPL”) component, despite the fact that this is subject to a greater volume of claim notifications. Although they may not involve the same perceived levels of personal financial risk to directors, EPL claims can be time consuming, expensive and highly emotive. Consideration needs to be given to selecting limits to avoid surprises and a range of factors exists when making this choice:
Prior Losses: this is often a function of the factors that follow below, but if there is a pattern of claims or recurring themes within an organisation and costs can be identified against them, this can prove instructive.
Basis of cover: it is over 10 years since the market moved to an any one claim (“AOC”) cover from an aggregated limit. Average EPL limits are almost always lower than those for D&O, so the potential benefits of AOC are more obvious and the basis of cover exerts a much bigger influence on limit decision. Moreover, if the EPL limit is a sublimit of another aggregated section, this will be influential, as well as unappealing.
Activities: certain trades and sectors are disproportionately exposed to claims, to the point that some will be considered uninsurable. Public sector risks are unattractive, due in part to unique features of those environments. Those that were previously within the public domain, such as housing associations, education and the care sector will present a higher hazard risk profile to underwriters. Weaker performance management, concentrated union membership and less portable skill sets are just some of the factors in play. Salary levels will influence risk, so those with higher than average earnings may be more exposed. Caps exist on the level of some categories of claim, such as unfair dismissal, but employees on higher salaries will reach those quicker.
Scale: claims can happen irrespective of what the employer may or may not do. It is simple probability that the greater the number of employees, the greater the likelihood of a claim occurring will be. Of course, stronger policies that are more effectively communicated will help, but the less control and the less that Human Resources are walking the floors will mean the chances of a claim are higher, and the opportunity to deal with emerging and developing issues are lower.
Financial Profile: this can impact hiring and firing patterns. Redundancies are material to underwriters and will prompt examination of the process to ensure proper procedures have been followed. Some insurers will remove the risk entirely and seek solutions in exclusionary language and higher deductibles. Nonetheless, once a section limit is set, it is often difficult to persuade underwriters to increase it as circumstances change, so this should be considered up front.
Merger and Acquisition Activity: aligned with the previous point, most acquisitions will involve some assessment of duplication of resource. Whilst there is protection available under the TUPE regulations, there is often an inevitability to reductions in force and attempts to rationalise staffing levels following the acquisition and integration of organisations.
Territory: location is a key consideration in any assessment of limits and the extent of any exposure to the United States (“US”) affects the risk profile more than any other territory. A US exposed risk can be materially different to one which presents as UK only, particularly if there is employment at scale (certain statutes only apply above a certain size in the US). There can often be an overreaction to US exposure when a risk is insured from the UK and deductibles are often out of line with those that would apply in the local market. This means it is invariably a more cost effective solution to obtain a policy in the US, the terms for which are likely to be kinder than those applied remotely.
Regulatory Framework: the maximum and average employment awards in the UK are, for the most part, transparent and visible, and it is possible to get a good line of sight on these. This makes it easier to formulate ideas on what the sensible limit to choose might be:
Maximum and Average Awards for Unfair Dismissal and Discrimination 2023/24:
| Maximum Award | Average Award | |
| Unfair Dismissal | £179,124 | £13,749 |
| Race Discrimination | £431,768 | £29,532 |
| Sex Discrimination | £995,128 | £53,403 |
| Disability Discrimination | £964,465 | £44,483 |
| Religion/Belief Discrimination | £20,000 | £10,750 |
| Age Discrimination | £261,949 | £102,891 |
| Sexual Orientation Discrimination | £47,297 | £27,070 |
Whatever the actual or perceived merits of a case, the number of costs awards made by Employment Tribunals was fractional at only 192 in 2023/24 (respondents (employers) having 153 costs awards awarded in their favour versus 39 in favour of claimants), with the default position at law that each party has to bear their own expenses. An understanding of the potential claim costs that are hidden from the ACAS statistics is therefore important. On unfair dismissal claims, it is reasonable to estimate that employers could spend £8,000 to £12,000 in legal fees to defend their position. Discrimination claims have the potential to bring even larger awards of compensation and legal costs can easily reach £20,000. If the respondent has called a large number of witnesses to defend allegations and a lengthy hearing (10 day) is needed, those legal costs can easily exceed £40,000.
It should also be remembered that the statistics relate only to cases decided by the Employment Tribunal after a full hearing. The vast majority of cases will not make it that far and will either have been settled or withdrawn at an earlier stage.
The latest Ministry of Justice statistics (for the quarter April to June 2024) show a rise in the number claims by 20% when compared with the same period in the previous year. With the Employment Rights Bill on the horizon, bringing with it enhanced rights for employees, it is difficult to see how the numbers will not continue to rise, probably sharply. The latest figures also show 59% of claimants having lawyer representation, adding to the cost and complexity of cases. From the perspective of the buyer, it is often the ‘bombshell claim’ that drives the limit choice and the risk factors feed in to both the likelihood and potential value of any claims. A claimant alleging a pattern of behaviours over a prolonged period can be a key feature of the high value cases, so having a proactive approach and ‘boots on the ground’ can definitely mitigate the risk and cost should employees be determined to present their case. There is no question that good quality insurance can help, but having solid employment practices provides the greatest initial defence and can have a meaningful downstream effect on any claims that hurdle them.
