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3 pitfalls of tribunal indemnity insurance

Why quality HR processes could negate the need for expensive insurance policies

Tribunal indemnity insurance takes various forms. Cover can range from insurance against all legal and compensation costs arising from a tribunal claim, to just simply covering legal costs or to covering nothing at all because you didn’t follow the rules.

Because employment law can appear complex and full of tricky loopholes, the scaremongers selling tribunal indemnity insurance can have a field day. Many small and medium-sized businesses can’t afford the time and money involved in handling an employment tribunal. They may also worry about preserving their reputation and the negative impact the news of being taken to a tribunal might have on their business.

As with any insurance policy, the first step is to think about the risk you are insuring against. It’s an easy decision for an electrical firm with a warehouse near a river to insure against flood damage. If there’s a flood, all of the stock could be wiped out and the business could go bust. The risk is high, and so is the potential cost of the insured event.

For business owners, it’s not so easy to quantify the risk and potential costs of a tribunal claim, so they go for peace of mind, and take the insurance.

The reality is that there are many steps in the journey to an employment tribunal, and an employer who has sensible HR policies and procedures in place, and follows them, is at a very low risk of losing an employment tribunal claim. Even if the employer loses the claim and has to make a compensation payment, the costs are often not as high as expected.

The claims with the highest potential costs are those relating to unlawful discrimination. These are technically uncapped, but the median awards in 2011/12 for race discrimination claims was £5,256, and for sex discrimination £6,746. Although there will always be media stories about huge successful claims, they are rare, and the median award is a more realistic indicator of potential financial risk. The median compensation payment for unfair dismissal claims in the same period was £4,500, with only 5% of employees being awarded more than one year’s salary.

The pitfalls of tribunal indemnity insurance

So now you understand more about what tribunal indemnity insurance actually is and the cost implications there are a number of issues to consider.

1. You may not even need it

The electrical services company will not sit and watch the river rising or not worry about their stock, just because they have insurance. They will use sandbags, move the stock to higher shelves, and stand by with buckets to bale out the water as it flows in. Nobody wants to have to deal with the aftermath of a flood. It’s better to prevent the damage in the first place. If business owners took the same approach to people issues, and took notice and practical action early on, there would be little risk of a tribunal claim, and therefore little need for an insurance policy.

There are experts who can explain the rules, and help managers to take each step carefully, ensuring that employees are treated fairly and that the needs of the business are also met. This is equivalent to using sandbags.

If managers are not capable of handling an issue with performance, or there is a persistent problem, such as bullying and harassment, consider sending them on training, or coaching and even hand holding them. This is effectively like moving the stock to higher shelves.

If matters are so serious that the employee is likely to take a claim to tribunal, businesses can seek further expert advice to help evaluate the risk of a successful claim, and mediate between the employer and employee. If that doesn’t work they can negotiate the terms of a settlement agreement, making a financial payment to the employee to leave the business and waive all their rights to make a claim. This is not desirable, and costs money, but still salvages the situation, a bit like baling water with a bucket.

2. All of your costs won’t be covered

If the tribunal claim goes ahead, there will be legal costs, but much more significantly, there will be huge management time lost in the preparation and aftermath of a tribunal – these costs will not be covered by the insurance. The impact on employee motivation, and even on management morale, which ultimately hits the bottom line of the business, doesn’t have a price, and therefore isn’t covered by the insurance.

3. Insurance companies don’t like paying out

The real nub of the issue is this – there are so many ‘get out’ clauses in tribunal indemnity insurance, that an employer runs a real risk of thinking they are covered, only to find that the insurance company gives lots of reasons why they won’t pay out.

If the insurance is offered as part of a HR service, there will be a big caveat stating that if the employer doesn’t consult the service provider and follow the employment law advice to the letter, the insurance will be invalidated.

This also means that the HR service provider is likely to sit on the fence, or tell their client what the law is, without committing to a recommendation, for fear of invalidating the insurance.

Some providers even proudly boast that they help their clients to make sure their paperwork is correct, so that if a claim goes to tribunal, they will have a ‘bundle’ already prepared, saving lots of time. It doesn’t save lots of time for the manager trying to do their day job. The rules become a pair of handcuffs, restricting their freedom of movement.

The vast majority of employees are reasonable people, who want to be treated reasonably by their employer. The vast majority of managers and business owners want to have happy, engaged employees. Surely everyone’s time and effort would be better spent building good relationships, ironing out misunderstandings, and dealing in a reasonable way with problems, than filling in forms, following scripts and ticking boxes to make sure that the tribunal insurance is not invalidated?

This advice has been provided by PlusHR. For further information or advice contact 0843 289 5933 or visit


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