With indemnity, like all insurance, the higher the risk the higher the premium. However if your risks are much higher than average and that risk is not reflected in the premium then it may make good sense to take the insurance.
Similarly if what is at risk could sink you financially then you might well feel that insurance is worth it despite a high premium.
We believe that most business owners live with calculated risk and the purpose of this blog is to help you to assess that risk so you can make an informed decision about indemnity.
It is Tribunal awards that most concern employers as well as the time and other expense involved, including opportunity costs, if an Employment Tribunal claim is made.
So let’s start with the risk of a claim
The latest statistics show there are about 62,500 single claims per year. Single claims are the type most likely to be against an SME. Multiple claims (i.e. made by many employees at the same time) are far more likely to be against a large organisation or public body such as some 199,000 airline Working Time Regulation claims recently in the pipeline. For simplicity we will not include multiple claims.
The Federation of Small Businesses says approximately 14 million people work in SMEs.
On this basis, and on average an SME can expect one claim per year for every 225 employees.
Among our clients we assess the annual risk at only around one in (coincidentally) every 2,250 employees because of our practical help and advice. At this level how much would you want to pay to insure against the risk?
In answering that question, perhaps you need to look at your potential costs
Defending a relatively straightforward claim can be assessed as costing about £10,000 (£5,000 in your costs and £5,000 in legal costs) and, as a broad rule, these costs apply whether you win the case or lose it. For this reason many claims are settled, most for substantially less than it would cost to fight the case. Indeed only about a third of claims proceed to a full hearing.
Currently about 80% of claims are then successfully defended at a hearing.
For the rest, leaving aside age discrimination cases (where there has been no more than a handful) the median award when one is made is around about £6,000 (it varies a little according to the nature of the claim). “Headline awards” are very rare; of the 4,200 cases upheld in 2010/11 only 63 exceeded £50,000. Most of those arose from various forms of discrimination and related to high earners.
Each business owner has to assess the risk for themselves but, given that the risks can be reduced hugely by following procedures (and watching out for discrimination) the cost of indemnity has to be weighed carefully.
The median value of an indemnity could be as low as £5 per employee per year.
And what does the indemnity not cover?
Any costs arising from failure to follow the insurance company’s advice
Unsurprisingly most major providers do not cover you if you have not followed their advice. Some providers have departments dedicated to checking that you have done everything you were supposed to do and not done anything without seeking their advice. Slip up and you may not covered.
Of course there can be times when you do not want to follow their advice. Sometimes it makes better commercial sense to deal with a matter quickly and take the risk. Of course if you do that then the risk is invariably yours, no value in having an indemnity.
Your time, your opportunity costs, your internal administrative resources
It may not sound much but these costs are substantial. A day of your time in Manchester (or other regional office) on a date not of your choosing can be expensive. You may also need a day from one or more of your employees or managers. Indemnities do not usually cover such costs.
Then you should not under-estimate the time involved in preparation. It is common for the other party to make this as difficult as possible for you, seeking disclosure of this and that, requiring you to dig down into correspondence and records that may have originated months ago.
Cost of settling
Because legal costs are rarely recovered at Tribunal, and with all your own costs in mind, it is often sensible to “settle” the claim whether you are in the right or in the wrong. If the overall cost of your time in fighting is £5,000 then to settle for £2,000 makes commercial sense. As some of our clients have found, the indemnity will not normally cover the cost of a settlement that you choose.
Please consider carefully:
What is the true risk?
What amounts could be at stake?
And what would not be covered anyway?
Employment Tribunal and EAT Statistics, 2011-11, HM Courts & Tribunals Service
Federation of Small Businesses: http://www.fsb.org.uk/stats
Better dispute resolution Michael Gibbons March 2007 A review of employment dispute resolution in Great Britain