Do I need Legal Expenses or Employment Practice Liability?

When taking out Insurance it is crucial to understand what the main risks are to ensure you are correctly covered.

However one area which might be overlooked is both Legal Expenses and Employment Practice Liability. To compare the two we will begin by giving a brief explanation to the covers and what exactly they insure an organisation for.

Legal Expenses:

Legal Expenses for an organisation provides cover for legal costs incurred when pursuing or defending a legal dispute. These policies typically cover but are not limited to:

• HMRC investigations
• Compliance disputes
• Employee Disputes
• Regulatory Investigations
• Access to Legal Advice helplines

Employment Practice Liability:

Employment Practice Liability is different in that it solely focuses on wrongful employment practice where cover will be available to defend actions brought by current/ex-employees, office holders and regulatory bodies where there has been a breach of employment law. These polices also pay awards and damages where employee’s rights have been breached.

Now that the two have been briefly explained we can now further look at the key differences between the two.

Further to the two having separate key areas in which the cover would respond, they also have the fundamental difference known as “Prospect of Success” and the impact this has on the payment of compensation awards.

Starting with Legal Expenses, this cover has always had a “prospect of success clause” which requires a 51% chance or more of the organisation successfully winning / defending their case.  Under the Legal Expenses cover, the starting point is that there will always be a reasonable prospect of successfully negotiating a settlement and the legal costs to do this will be covered by the policy. If it is decided that the organisation holding the Legal Expenses cover breached employment law or has not followed the correct fair dismissal procedures then they will be unable to satisfy the Prospect of Success condition. Under these circumstances the legal expenses cover will not indemnify any out-of-court settlement or compensation awarded by a tribunal if the case proceeds to a hearing. This cover also does not pay for damages awarded by court.

Employment Practice Liability on the other hand does not have this condition applied. There is an absolute duty on insurers to pay defence costs arising from a wrongful employment practice and indemnify an out of court settlement, employment tribunal compensatory award or damages awarded by court. Claim costs are likely to (on average) be much higher than the average claim under a Legal Expenses claim. This cover usually imposes a deductible and may offer higher limits of indemnity than Legal Expenses cover.

Given that Employment Practice Liability has a much greater risk to insurers, underwriters may require much more information about an organisation claims history and employment practices before they can issue cover. On some occasions they may even offer an audit service to help identify weak points within an organisation’s employment practice. They will wish to ensure that this leads to the organisation adopting fair procedures and maintains the best employment practice. This is because should something go wrong the insurer may be faced with expensive compensation pay-outs.

So are there any similarities between the two covers?

Both covers are suitable for an organisation that wishes to protect itself from paying legal costs arising from an employment dispute. They both respond to unfair and wrongful dismissal, constructive dismissal, discrimination and equal pay claims.

Some misconceptions on the covers:

Some organisations may feel that they only require one section of cover and not the other. This could be true given there is a considerable overlap between the two covers. But it is important to understand the impact of selecting one section over another.

When is it best to use either Legal Expenses or Employment Practice Liability cover?

Legal Expenses is focused on the requirements of SME’s (Small / Medium Enterprises, find more information here) to help in providing cover for a range of different legal disputes. It comes with helplines and law guides so an in-house HR expert isn’t a requirement. This cover can be included without any requirement to meet the best standards of employment practice.

In contrast, Employment Practice Liability is more suited towards large organisations who have dedicated in-house HR expertise and can change in order to meet the requirements mentioned above for the cover to be in place. This cover is also suitable for an organisation who does not wish to protect against non-employment related legal disputes.

Should you wish to review your current insurance and discuss with a specialist advisor whether your organisation should look to include this cover then please do not hesitate to contact us. Alternatively why not complete our online web inquiry form and receive a range of quotations from insurers solely focused on the voluntary / not-for-profit sector along with our advice on what insurance your organisation requires.