UK law firms trail US in preparing for employee disputes

Aon Partnership Protect launches to cover insurance gaps

LONDON. – UK law firms are at high risk of being sued by their partners and employees for employment law breaches, yet few firms have protected themselves. Just 17% of the top 100 law firms have insurance cover for defence costs and awards, compared with 75% of their US counterparts, according to global insurance broker and risk adviser Aon Global Professions. In response, Aon Partnership Protect has been launched to provide partnership-specific coverage for the growing trend of high value litigation in the profession.

Aon foresees retaliation against rising job losses in the recession as a trigger for more employment claims, whether as a result of a poor redundancy selection or an inadequate preparation of the legal process.

A law firm represents a higher risk than a corporation due to:
· more high earners leading to higher payouts;
· partners and employees’ direct knowledge of the legal system means they are highly aware of their rights and have a better chance of success as well as direct access;
· partners not being eligible for redundancy protection could seek other ways to maximise their pay off.

Andrew Swan, associate director at Aon Global Professions, said: “The lesson to be learned is that as the economy sinks, people have their backs against the wall and well educated professionals know their rights under the law and will enforce those rights. The old adage that “you will never work in this town again” if you challenge management or rock the boat is slowly fading. The new generation of professionals has no fear of hierarchy or rules and will challenge what they perceive as a wrongful dismissal. Law firms need to wise up and prepare for a hit to the bottom line or look at how they can protect themselves through risk management and insurance.”

In the US, Aon has seen a significant increase in single plaintiff claims involving law firms where defence costs and awards exceed $1 million. Several claims have settled above $5 million, including a class action in excess of $25 million. In the UK, the award levels are generally lower but Aon has been involved in a number of claims in the last 12 months where the claimants are seeking millions of pounds in compensation. Some of these have settled for substantial amounts, suggesting the gap between the US and UK is closing. As all cases are settled under a confidentially agreement, the true extent of the damage to the industry including damage to reputation and loss of management time is likely to be significantly worse.

Obligatory employers liability insurance will not react to an employment law claim as it covers awards for stress (a bodily injury) or failure to provide a safe working environment. On the other hand, Aon Partnership Protect covers situations when a firm or partners are sued for any breaches of employment law including unfair dismissal, failure to promote and contractual disputes.

David Arnold, director in Aon Global Professions, added: “A key element of APP is the ability to cover a firm’s management liability which is critical if an employment claim evolves into a breach of partnership agreement claim. With the culling of partners across the UK, there is an inevitability in the air that those who are not protected by redundancy laws will seek higher pay offs however they can.”

In the UK, a 50-100 partner firm is generally buying between £5 million and £10 million of EPL insurance cover. Aon Partnership Protect provides cover for EPL and to protect partners from liability incurred for wrongful acts and breaches of partnership agreements.

UK firms also need to protect themselves against record payouts through improved risk management, for example, partners attending management training, HR managers being informed of risk issues and working cohesively with risk management experts.