EOT's - Managing the risk of uninsured liabilities
Trustees of Employee Ownership Trusts (‘EOTs’), especially those of long established companies, should take care to understand the liabilities they may inherit unwittingly.
Founders may have a greater appetite for risk compared to the trustees of an employee owned business and the possibility of gaps in insurance cover may not have been considered. Geldards’ Corporate and Corporate Claims teams have extensive experience of advising businesses how to manage and mitigate such liabilities.
Employer liability insurance
Since 1 January 1972, it has been compulsory in England and Wales for employers to have employer’s liability (EL) insurance. EL insurance indemnifies an employer for its liability to its own employees for its acts or omissions and for its vicarious liability for those employed by it in the course of its business. Businesses can find themselves unintentionally uninsured against EL claims because:
- they operated prior to 01.01.1972 and have to meet liabilities for historic industrial disease claims if they are still trading when the claim is made;
- the insurance company providing the cover for a given period cannot be traced;
- under a TUPE transfer, they have inherited liabilities for nationalised industries which were exempt from the obligation to hold EL insurance;
- the insurer has become insolvent (although some protection is offered to policyholders by the Financial Services Compensation Scheme);
- there may be an exclusion in the relevant policy against indemnity for certain claim types such as asbestos related claims;
- there may be a large deductible or excess on the EL policy;
- the indemnity limit under the relevant policy may have breached.
Historic industrial disease claims
Historic industrial disease claims (also known as ‘long tail diseases’) arise from occupational working practices which operated many years before symptoms occur and over many years. They include asbestos related diseases (mesothelioma, asbestosis and pleural thickening) deafness and vibration white finger. Such claims can be expensive both in terms of damages and costs.
Mesothelioma has a long latency period, sometimes as long as 30-40 years after the date of exposure to asbestos. As a result, they can be difficult to defend due to the lack of available evidence which has long since been lost or destroyed and the business may be unable to trace the relevant insurer on risk during the exposure years.
Businesses inherit an employee’s employment rights on transfers covered by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) which have been in force since 1982. Also inherited is the previous employer’s liability for any personal injury and disease claims made by transferred employees, even if they relate to negligent acts which occurred before the TUPE transfer.
However, the transferee employer is entitled to the benefit of the transferor’s EL insurance to meet the claims but difficulties can arise if the insurance cannot be traced, particularly where there have been a succession of TUPE transfers.
How can these risks be managed and how can Geldards help you?
Trustees may wish to undertake a due diligence exercise before the EOT takes effect and collate the best possible records of the business’s EL insurance history from incorporation. The obligation to retain records of EL insurance is the policyholder’s and not insurers or brokers. Until 2008, employers were required to retain EL certificates for 40 years but few did so. A review of the business’ insurance history could be undertaken after the transition to employee ownership.
We can assist trustees to manage the risk of being faced with an uninsured EL claim by:
- undertaking corporate and insurance archaeology investigations ;
- undertaking searches of the Employer Liability Tracing Office database;
- advising on the impact of TUPE transfers and appropriate indemnities;
- introducing you to organisations who buy up books of potential claims.
We can assist you to mitigate the cost of any uninsured claims by:
- expert claims handling from notification through to resolution of the claim which ensures claims are not over compensated nor allowed to drift;
- providing expert advice upon the potential value of the claim and balance sheet exposure;
- providing a holistic approach- we can advise where decisions in civil claims also affect employment/regulatory issues;
- providing consistency and continuity of approach.
Moving forward rather than looking back
In relation to EL cover for the EOT going forward, trustees have the prerogative when placing cover to insist that, as a term of cover, their trusted legal advisers and not a panel firm nominated by the insurer will handle any claims which fall within the policy. There are no additional fees to be paid as the insurer meets the fees of the trustees’ chosen firm, but trustees gain more control over how claims made against the EOT are handled and can be confident that such claims will be handled in a consistent manner.
If you require any further information on Geldards’ Corporate Claims team, please contact Donna Makin.
If you require any further information on Geldards’ EOT team, please contact Andrew Evans.