Pursuing an insurer of an insolvent employer

A claimant may have difficulties in pursuing an employment claim where his employer or former employer has become insolvent and the company has gone into administration.

The Insolvency Act states that where a company is in administration, no legal process (including legal proceedings) may be instituted or continued against the company except with the consent of the administrator or with the permission of the court. Generally, employment tribunals will stay proceedings while the employee applies for the appropriate consent from the administrator or obtains leave to proceed from the High Court.

However, many employers have the benefit of Legal Expenses Insurance (LEI) which insures the company (and sometimes its officers) against liability for claims brought by employees or former employees.

The Third Parties (Rights against Insurers) Act 2010 (TPA) enables a third party with a claim against an insured party, to pursue their claims directly against the insurers, if the insured is a
“relevant person” including a company in administration or voluntary/compulsory winding-up.

A recent Tribunal case made claims for constructive unfair dismissal and disability discrimination.

The company went into creditors voluntary liquidation but, as the company had LEI covering liability for employment claims, the claimant applied to join the legal expenses insurers as a respondent in this case.

The insurer contested the Tribunal’s jurisdiction to hear the claim against it and denied it had any liability to indemnify the company on the grounds that the company had failed to comply with the LEI policy terms. The insurer also argued that because there was an arbitration clause in the LEI policy which required any disputes concerning the insurance policy to be resolved by arbitration, the dispute should be resolved by arbitration, not the Tribunal.

At a preliminary hearing, the Employment Tribunal agreed with the insurer and held it had no jurisdiction to decide the issue between the claimant and the insurer. It said that this issue had nothing to do with an employment contract, it was a dispute about a contract of insurance. The Employment Tribunal said there would be evidential disputes over whether the company had breached the LEI policy by the alleged non-compliance with the policy terms, and that those matters were for the ordinary courts to deal with and not the Tribunal. The Employment Tribunal stayed the employment tribunal case, pending resolution of those issues by a civil court.

The claimant appealed and the Employment Appeal Tribunal (EAT) allowed his appeal. It held that, under the TPA, the company’s rights under the LEI contract transferred to the claimant as a third party and he could pursue the LEI company. But the LEI company could rely on any defences it might have relied on had it been in dispute with the company.

It said the main issue was whether the Employment Tribunal has the jurisdiction to determine the merits of those defences – in other words, whether the Employment Tribunal was a “court” within the meaning of the TPA.

The EAT held that an Employment Tribunal was a court for these purposes. It did not agree that contracts of insurance were out of the Employment Tribunal’s “comfort zone” because Employment Tribunals were expected to be versatile and to apply the general law outside the employment sphere, including generic defences of estoppel or illegality in contract claims.

The EAT also said that Employment Tribunals must consider contracts between third and fourth parties in cases involving agency workers, and noted that the transfer of liability under the TPA was not dissimilar to the transfer of liability under TUPE; that caselaw has applied a different meaning to the word “court” depending on the context and that a purposive interpretation was required to give effect to the solution intended by Parliament when it introduced the TPA. If an Employment Tribunal were not a “court”, then the purpose of the TPA legislation would be frustrated.

When dealing with the arbitration clause the EAT indicated it was prudent to express an opinion on whether that would be relevant. The EAT said the arbitration clause would be void, as against the claimant, because it would prevent him from bringing his claims in the Employment Tribunal which was unlawful because of s203 of the Employment Rights Act 1996 and s144 of the Equality Act 2010.

This is the first case to consider the effects of the Third Parties (Rights against Insurers) Act 2010 in an Employment Tribunal claim. It is a useful reminder to claimants, whose employer has LEI cover, that they might be able to continue with their claim by joining their employer’s Legal Expenses Insurers if the employer has gone into liquidation, administration or has become insolvent.