A Solicitors Guide to Employment Protection Insurance
An objective guide to Employment Protection Insurance and retainers Introduction Solicitors all over the country face the challenge of new forms of competition from quasi- legal competitors and before- the- event insurers who offer a cost- effective combination of legal advice and insurance indemnity. Their pitch is quite compelling we will hold your hand with advice when you need it and if there is a claim against you we will represent you and meet your legal costs including awards- and we will do all this for a low fixed monthly fee. These competitors operate from a lower cost base than most law firms and while some question the quality of their service that is purely a question of perspective and the fact is they are winning many SMEs to their cause. The long- term effect of this trend and it is already estimated that more than 1m UK businesses have BTE employment insurance in one form or another will be to deny solicitors work opportunity. There are two elements to providing these types of service- your retainer fee for legal advice and an employment review or Healthcheck and secondly the insurance indemnity itself. The two go hand in hand as unless an employer s systems are fit for purpose and the client follows competent advice, insurance against awards cannot be offered. In the following notes we will brief you on both employment retainers and insurance offerings but if you take nothing else from this paper we urge you to remember two key issues: 1.The benefit of a client having indemnity insurance is that it will flatten the risk to your firm of pricing an annual retainer incorrectly. 2. When one client calls you unexpectedly for simple advice it may be considered a nuisance when 100 clients call you regularly it s called a business! All of which means that to compete against non- law firms it is important to get the core service priced correctly and then use insurance cost- effectively to pay for post- ET representation and awards of compensation. Retainers There is no standard definition of a retainer or anything like a market wide understanding of how much to charge for them. Most retainers provide for an initial employment review without which the adviser cannot understand the contract wordings and employment procedure in place, this is sometimes done by telephone or more often, for relationship reasons, in situ. The extent to which a retainer provides documentation and drafting services varies from d- i- y templates to bespoke services. Most retainers provide unlimited telephone and email advice for the period and almost all exclude TUPE and redundancy programmes as well as intellectual property issues (e.g. pursuit claims). These are then charged separately.
Insurance Employment insurance policies differ widely but the most important issue is who makes the judgment call on prospects of success we can make a strong case that if the insurer is sole arbiter then the policy is not worth the paper it is written on (as with many BTE policies) and that is because they have an inherent conflict of interest. If the advice and representation is provided by the insured s own chosen solicitor the policy is much more likely to fulfil expectations and pay up! The largest drivers of insurance cost are previous claims and the cost of representation, since 70% or more of the payments made by insurers will be for representation rather than the settlement. In order to provide representation on behalf of your client your firm will need to be pre- approved by the insurer and to enter into a claims handling agreement with agreed hourly charging rates. This is where you need to reflect on your choice of supplier. Many solicitor based insurance schemes are offered by Intermediaries who are tied to one insurer (unlike ourselves) and they will insist on minimum volumes of support and on exclusivity requiring you to use only them. We will stand or fall on our service and competitiveness and do not require such exclusivity and we will also allow you the flexibility to charge varying claims handling rates as appropriate to your own risk assessment of the client. Understanding where policy wordings usually differ: 1) Limit of indemnity. This is usually selected for each client and is the sum insured or the maximum that the insurer will pay for any one event. There is also an aggregate limit, in every policy and this represents the maximum sum an insurer will pay in total for any one year. When considering the appropriate limit to insurer (higher limits do cost a bit more, look at the profile of wages and consider the maximum likely award. 2) TUPE cover. This is often excluded from retainers and offered as an extension to an employment policy. In reality many clients may not require this cover and it is inappropriate for everyone to pay for it. For this reason we offer TUPE as an optional extension when requested. 3) Pursuit Cover is generally not covered by most standard policies. We consider such cover less of an employment dispute but more a contract breach and we feel this resonates better as a potential fee earning opportunity for solicitors 4) Excesses may apply to costs or awards, or both. Generally insurers expect the client to pay at least a 1000 excess in the event of an award against them as they like the client to feel a little pain for themselves. As standard, our policies have no excess on costs but carry a 1000 excess on awards. Excess s will vary from one insurer to another but we are able to offer substantial discounts for voluntary excesses, for example a client taking a 1000 all claims excess would benefit from a 17.5% premium discount. 5) Definition of an employment claim. The overwhelming majority of insurers determine an employment dispute claim trigger as being the point where an employer is in receipt of an ET1. Under our preferred policies we determine an employment dispute claim as being where the grievance procedure has been exhausted and there is no satisfactory outcome. Within our claims handling agreement, you as the clients solicitor are empowered to assess each claim or potential claim 6) Prospects of success The prospects of success clause is a widely used standard and is usually defined as 51% - i.e. that there is a better chance of winning than losing. It is not an ideal clause as the issue of who determines the prospects is crucial and of course they can change at any time- leading to arguments over costs to date or representation being denied by insurers. There is one policy which does not have this clause (see below) and while it costs a bit more it is much more forgiving and gives greater client satisfaction.
7) Restricted cover is where cover is only applied to (say) defence costs only or awards only. Clearly there is an increased exposure to an employer s balance sheet when policies exclude say, pre- hearing settlements. Many trade associations exclude awards of compensation. The extent of these restrictions can mean the prospect of a crippling award against a small business being uninsured. 8) Pre- existing issues/waiting periods Not surprisingly insurers do not want to be exploited by clients who take out insurance just to make a claim (a bit like insuring a house that is already on fire) so an exclusion of existing matters known at the time of application are standard and waiting periods of 60, 90 or 180 days for redundancy claims are common. It is possible to buy stand- alone cover for a planned redundancy programme (ask us about Redcap insurance) but it is relatively expensive. In order to ensure that a client changing insurers is not prejudiced by the creation of a gap in cover we have negotiated a waiver of the redundancy waiting period under many of our wordings. 9) Wages or Payroll. Definitions vary. Some answers require pension contributions and employee s N.I. to be included. As wages or payroll is the measure of exposure used by most employment insurers the wider definitions mean more expensive premiums. We define annual wages as payroll (gross wages, salaries, bonuses only). What we offer: dib insurance offers your clients a choice of employment indemnity policies: Essential Employment and our market leading TLC Absolute Employment. 1) Essential Employment: this type of cover is equivalent to a 'Market standard' in terms of cover and importantly is subject to a reasonable prospect of success clause. The policy will only provide indemnity if the claim has a better than 51% prospect of being successful. As we mentioned the reasonable prospects clause is market- wide and is usually shown in the policy wording of providers such as Peninsula, Mentor and many others. It causes particular problems when the definition is under the control of the insurer alone, or if new evidence emerges at any time. To better these competitors you need our Absolute policy. 2) TLC Absolute Employment: we think this policy is currently unique as employment claims are not subject to the reasonable prospects of success clause, meaning that claims can be paid even in those cases where the client may have failed to follow the correct procedure to the letter. We call it a much more forgiving wording. It is worth noting that both our Essential and Absolute covers include as standard two important additional extensions that differentiate them from the market: Compliance & Regulation provides indemnity for H&S defence or claims for the suspension, revocation or refusal to renew a statutory license or criminal prosecution. Employee Extra Protection, meaning managers are covered personally in civil proceedings brought under legislation for unlawful discrimination or defence of an employee as a trustee of the employer s pension fund. How we calculate insurance premiums: 1. The sum insured or limit of indemnity (LOI). The usual options are: 50,000.00 any one claim with an aggregate of 500,000.00 in any one year 100,000.00 any one claim with an aggregate of 1M in any one year As a general guide 100,000.00 LOI / aggregate 1M will cost 12.5% more than 50,000.00 /aggregate of 500,000.00
For the majority of SME s 50k 50,000.00 any one claim with an aggregate of 500,000.00 would usually be sufficient, however, we advise companies who employ staff with higher salaries (e.g. 30K or over) that they should take a higher limit of 100,000.00 2. Gross annual wage- roll but excluding employer NI contributions and staff benefits / or on headcount (FTE equivalent) for some of our schemes. 3. Type of cover required i.e. TLC Absolute or Essential Employment cover. Absolute costs about 1/3 more than Essential but is still very competitive against standard market offerings and is the basis that will usually give you an edge over competition. 4. Solicitor claims hourly charge out rate. Naturally, the higher the solicitors hourly charge- out rate the higher the cost of the premium will be since 70%+ of claims costs are for representation and this reflects itself in premiums a policy paying claims work at 200 per hour will cost twice as much as one paying 100 per hour. The majority of our policies are priced to a rate of 150 per hour. It is important to recognise that many HR competitors have a low cost base often working on 80.00 to 100.00 per hour. It is vital for solicitors who want to be competitive on tenders to recognise that employment insurance 'flattens' the risk of their retainer being under- priced since if the expected volume of work is exceeded, unexpected claims work will be paid by insurance. So policies offering lower charging rates e.g. 100 per hour are not at as unpalatable as it may at first seem. 5. Claims Experience. We offer No Claims Discounts where the client has been claim free for a number of years. Where an employer has had employment dispute in the previous 3 years we require a brief description of the dispute, date of incident, and the defence costs and awards incurred. 6. Cover extensions: Extensions such as TUPE / self employed contractors contingency risk / Temporary workers cover 7. Level of excess. Sizeable discounts can be offered for voluntary excesses. We hope you find these notes of interest and look forward to working with you. Brian Dunk Brian Dunk FCII MCIM Chartered Insurer T: 0845 625 3605 E: brian.dunk@dibinsurance.com W: www.dibinsurance.com