Claims against insurers in the employment tribunal

A claimant in employment tribunal proceedings does not have to begin a separate action against the insurer in the ordinary civil courts. We look at what Irwell Insurance Company Ltd v Watson means in practice for claimant employees, tribunal judges and liability insurers.

Mr Watson’s claim

Mr Watson was a product administrator at Hemingway Design Ltd and in April 2017 he brought claims of unfair constructive dismissal and disability discrimination against his employer. Hemingway went into a creditors’ voluntary liquidation in December 2017 and was subsequently dissolved.

Hemingway was insured with Irwell Insurance Company Ltd against awards from successful claims brought by its employees in an employment tribunal. The policy included a condition to the effect that Hemingway should take prompt advice from employment law advisers, Peninsula Business Services Ltd, before taking any action against an employee.  If it failed to do so, the clause in question stated that the policy would become void.  

In July 2017 Irwell informed Hemingway that because it had not taken advice from Peninsula concerning Mr Watson, any award to him would not be covered by the policy. In January 2018 Mr Watson applied to join Irwell to the tribunal proceedings so that he could bring a claim against it under the Third Parties (Rights Against Insurers) Act 2010.

Irwell’s position

Irwell accepted that liability for Mr Watson’s claim against Hemingway (subject to any defence under the policy) had transferred to Irwell when Hemingway went into liquidation.  It took a jurisdictional point, arguing that the tribunal did not have jurisdiction to hear claims under the 2010 Act because it was not a “court”. Section 2(6) of the Act states: “Where the court makes a declaration under this section, the effect of which is that the insurer is liable to P (Mr Watson), the court may give the appropriate judgment against the insurer”.

The Court of Appeal decision

The tribunal accepted Irwell’s argument and held that it had no jurisdiction because insurance third party rights fall outside the normal business of an employment tribunal and should be decided by the ordinary courts. The Employment Appeals Tribunal (EAT) allowed Mr Watson’s appeal and that decision was upheld on all grounds by the Court of Appeal.  We look at the key arguments below.

The purpose of the 2010 Act

Irwell made many potentially persuasive points in favour of excluding employment tribunals from the definition of “court” in these circumstances – too dry and numerous to list here but they will resurface should this issue ever reach the Supreme Court –  but these all paled into insignificance in the face of the “mischief” argument. 

The 2010 Act was intended to remedy the “mischief” under the previous 1930 Act regime whereby a claimant in the position of Mr Watson had to (1) restore their insolvent employer company to the register, (2) establish liability against it and then (3) bring separate proceedings to enforce an indemnity against the employer’s insurer.

The stated purpose of the 2010 Act was to introduce a single forum solution and the Act should be interpreted in order to give effect to that purpose.  If an employment tribunal was held not to fall within the words “the court”, a claimant would have to litigate the employment issues in a tribunal and the insurance issues separately in an ordinary court or arbitration. This was unacceptable, given that a claimant with a personal injury or wrongful dismissal claim against an insolvent employer can have a one-stop service in the ordinary courts.

The arbitration issue

As is often the case in liability insurance contracts, Hemingway’s policy of insurance included an arbitration clause. Usually when a statutory assignment of rights under an insurance policy occurs under the 2010 Act, the claimant in Mr Watson’s position (described as the third party or P) is bound by an arbitration clause in the policy. Arbitration then becomes the single forum for determining liability against the insolvent employer and the claim for indemnity against the insurer, unless the insurer waives its right to arbitrate.

The problem here is that the employment tribunal has exclusive jurisdiction over claims for unfair dismissal and discrimination and so those claims cannot be determined by an arbitrator (see section 203 of the Employment Rights Act 1996 and section 144 of the Equality Act 2010). The only solution which upholds the single forum aim is that the arbitration clause must yield to the exclusive jurisdiction of the employment tribunal. 

The Court of Appeal decided to dispose of this issue in order to avoid another jurisdictional dispute, even though Irwell had not yet made an application to stay the tribunal proceedings under section 9 of the Arbitration Act 1996.  It held that Irwell could not rely on the arbitration clause as a defence in, or a procedural block to Mr Watson’s claim against Irwell in the employment tribunal.

What does this mean for claimant employees?

This outcome is excellent news for those bringing claims against an insolvent employer in the employment tribunal.  They will be able to have a single determination of all the issues before a single tribunal with the benefit of time and costs savings that brings.  It also means that claimants can ignore arbitration clauses and the risk that they might end up with litigation before an arbitrator and an employment tribunal. The potential downside is that there could be a greater risk of appeals by insurers about defences under the policy.

What does this mean for employment tribunals?

As we comment on in our Employment review 2020/2021 there was a steady rise in employment tribunal claims in 2020. The case load has risen significantly and disposal times have fallen, not least because of the reduction in capacity due to Covid restrictions. It’s fair to say that the tribunal judge in this case did not express reluctance at reaching the conclusion that insurance issues under the 2010 Act were outside the jurisdiction of the employment tribunal. The backlog of cases means that tribunal judges may not welcome this potential increase in their workload and the increased breadth of the legal issues they have to determine.

What does this mean for liability insurers?

Liability insurers are likely to be concerned that tribunal judges won’t appreciate the importance of conditions in insurance contracts and could take a more lenient approach to breaches of policy terms than might be the case with a commercial arbitrator or a judge in the Business & Property Courts. This in turn could lead to appeals about coverage defences.  Although the Court of Appeal rejected the argument that employment tribunal judges aren’t up to dealing with insurance law, it is fair to say that they are unlikely to be experienced in it either.

In the present climate, claims against employers are likely to continue to rise. Some of these will result from occupational stress – see our article on reasonable adjustments for employers who wish to mitigate the mental health risks related to the pandemic. An increasing proportion of those employers will be facing insolvency and we can therefore anticipate more claims under the 2010 Act, particularly since they can be disposed of by the employment tribunal. Claimants, employment lawyers and tribunal judges alike will need to brush up on their insurance law.