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Court of Appeal decides employment tribunal can hear a claim against the insurer of an insolvent employer

  • Legal Development 27 January 2021 27 January 2021
  • UK & Europe

  • Employment, Pensions & Immigration

The Court of Appeal has decided that an employment tribunal could hear a claim brought by a former employee of an insolvent business directly against his employer's insurer, where his employer had taken out an insurance policy covering their potential liability for employment tribunal claims.

Court of Appeal decides employment tribunal can hear a claim against the insurer of an insolvent employer

In Irwell Insurance Co Ltd v Watson and ors, the Court of Appeal found that an employment tribunal is a ‘Court’ within the meaning of the Third Parties (Rights against Insurers) Act 2010. This meant that in a claim for unfair dismissal and disability discrimination brought against an insolvent employer, an employment tribunal was able to hear the employee’s claim for compensation against the employer’s insurer, as a result of an insurance policy that covered liability for employment tribunal claims.

Right of claimants to seek to recover compensation from insurers of insolvent employers

Many employers take out insurance policies to cover their liability in the event that a claim is brought by an employee or former employee. But what happens if the employer becomes insolvent – can the employee bring a claim against their employer's insurer?

The answer is yes. If there is a valid insurance policy covering the type of claim the employee is bringing, there is the potential for them to bring a claim against the relevant insurance company.

However, before the introduction of the Third Parties (Rights against Insurers) Act 2010 (the "2010 Act") which came into force on 1 August 2016, a claimant had to bring two sets of proceedings in these circumstances. Firstly, they had to bring a claim against the insured business to decide the claim against them, and secondly they had to bring a claim against the insurer, in order to establish the liability of the insurer under the insurance policy and recover for the loss. This resulted in a complex, lengthy and potentially costly process for the claimant.

The 2010 Act removed the need for two separate proceedings and simplified the process so that if an insured business has become insolvent, a claimant can bring a single claim against both the insured and their liability insurer. The 2010 Act also granted additional powers to "the Court" hearing the claim to decide the issues.

The facts

Mr Watson (the Claimant) brought claims of unfair dismissal and discrimination in the employment tribunal against his employer, Hemingway (the Employer) and also a director at the Employer in the case of the disability discrimination claim. The Employer had an insurance policy with Irwell (the Insurer) that would indemnify the Employer in the event that they were unsuccessful in defending the tribunal claims, provided certain conditions were met. Those conditions included the need for the Employer to take advice from the Insurer's chosen employment law advisors, Peninsula, promptly.

In December 2017, the Employer entered voluntary liquidation and has since been dissolved. In January 2018, the Claimant applied to the employment tribunal to add the Insurer as a party to the claims. The Insurer opposed this application and argued that because the employment tribunal was not a "Court" within the meaning of the 2010 Act, it did not have the jurisdiction to determine whether the Insurer was liable for the Employer's actions. Part of their argument was that an employment tribunal could not decide policy coverage questions, such as whether the Insured had complied with the requirement to follow Peninsula's legal advice. They also argued that since the insurance policy required disputes to be resolved by arbitration, the tribunal's jurisdiction would be further ousted.

At a preliminary hearing the employment tribunal concluded that it did not have jurisdiction for reasons including that:

  • The issues between the Claimant and the Insurer had nothing to do with an employment contract but rather a contract of insurance.
  • The Claimant's claims against the Employer arose out of an employment relationship. The Insurer was never the Claimant's employer. There was no contractual connection between the Claimant and the Insurer, nor between the individual respondent (Mr Draycott, the former managing director of the Employer) and the Insurer.
  • The tribunal would need to determine policy coverage questions such as whether the Insured had followed Peninsula's advice, which had nothing to do with any employment relationship or contract. These were issues that were properly decided by the ordinary courts rather than an employment tribunal. The tribunal's jurisdiction in breach of contract cases did not extend to this type of case.

The Claimant appealed this decision and the Employment Appeal Tribunal allowed his appeal. They concluded an employment tribunal functioned in all ways like a court. It would make no sense for claimants in employment tribunal claims to have to raise separate proceedings in the civil courts, when avoiding that complication was precisely the purpose of the 2010 Act. They also concluded that because employment tribunals have exclusive jurisdiction to hear unfair dismissal and discrimination claims and parties cannot generally agree a contract which would limit a claimant's right to raise claims in the employment tribunal, the arbitration clause was void.

Employment Tribunals are "Courts"

The Insurer appealed to the Court of Appeal who refused the appeal and agreed with the reasoning of the Employment Appeal Tribunal that an employment tribunal is a "Court" and so could determine issues relating to an insurance contract.

In a nod to the range of often difficult and complex issues employment tribunals regularly deal with they said:

"ETs regularly have to deal with difficult questions of law across a variety of topics, not confined to what would be regarded as mainstream employment law. Some of the claims with which they have to deal involve millions of pounds (contrasting with the limited jurisdiction of the County Court); others have very complex facts. I doubt whether applications for a declaration that an insurer is liable to meet a judgment in an unfair dismissal claim are even at the top end of the range of difficulty of cases with which employment judges have to grapple."

The Court of Appeal also held that the arbitration clause did not apply because its effect would be to prevent claimants raising proceedings of this nature against insurers.

Comment

This decision is significant for employment practices liability ("EPL") insurers. The employment tribunal is a more accessible forum than the ordinary courts - the procedural rules are less complex, and there is greater flexibility and a degree of informality adopted in the employment tribunal, particularly when dealing with litigants in person. Added to this, there are no longer any tribunal fees payable by claimants and awards of costs are the exception rather than the rule. All of this means that insurers should be prepared for the possibility of having to defend more cases like this in the employment tribunal.

However, there are some benefits for EPL insurers in employment tribunals being allowed to hear claims in this way, including the potential cost savings as a result of these claims being resolved fully in employment tribunals - which may be a lower-cost forum. There are also wider benefits for insurers of the 2010 Act, including the fact that it gives them the opportunity to scrutinise the initial claim against the insured rather than simply being presented with a judgment which must be paid. Insurers who are made a party to employment tribunal proceedings have greater control and can ensure a proper defence is invoked. Even if the policy defence fails, insurers will be able to contest liability and quantum of the original claim under the policy.

Irwell Insurance Company Ltd v Watson & Ors [2021] EWCA Civ 67

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