Courtroom of Enchantment decides employment tribunal can hear a declare in opposition to the insurer of an bancrupt employer

The appeals court has ruled that a labor court can hear a lawsuit by a former employee of a bankrupt company directly against their employer’s insurer if their employer has taken out an insurance policy that covers their potential liability for labor court claims.

In Irwell Insurance Co Ltd v Watson and Ors, the appeals court found that a labor court is a “court” within the meaning of the Third Party (Rights Against Insurers) Act 2010. This meant that in a motion for unjustified dismissal and disability discriminating against an insolvent employer, a labor court could hear the worker’s claim for compensation against the employer’s insurer under an insurance policy that covered liability for claims of the labor court.

Applicants’ right to claim compensation from insurers for insolvent employers

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

The answer is yes. If there is a valid insurance policy that covers the type of claim the employee is making, there is potential for them to make a claim against the insurance company in question.

Before the introduction of the Law on Third Party Rights (Rights Against Insurers) of 2010 (the “2010 law“), which came into force on August 1, 2016, an applicant had to initiate two proceedings under these circumstances. First, they had to bring a lawsuit against the insured company to rule on the lawsuit against them, and second, they had to bring a lawsuit Claim against the insurer to determine the insurer’s liability under the insurance policy and to compensate for the damage, resulting in a complex, lengthy and potentially costly process for the claimant.

The 2010 Act removed the need for two separate procedures and simplified the process so that when an insured company becomes insolvent, an applicant can bring a single claim against both the insured and their liability insurer. The 2010 law gave “the Court of Justice” additional powers to examine the motion to rule the questions.

The facts

Mr. Watson (the Claimant) brought a lawsuit against his employer Hemingway (the employer) for unfair dismissal and discrimination in the Labor Court and, in the case of disability discrimination, a director of the employer. The employer had taken out an insurance policy with Irwell (the insurer) that compensated the employer if certain conditions were met if they were unable to defend their legal claims. These conditions included the requirement that the employer immediately seek advice from the insurer’s chosen labor law advisor, Peninsula.

In December 2017, the employer entered into voluntary liquidation and has since been dissolved. In January 2018, the Claimant requested the Labor Court to add the insurer as a party to the claims. The insurer denied this request, arguing that since the Labor Court was not a “court” within the meaning of the 2010 Law, it had no power to determine whether the insurer was liable for the employer’s actions. Part of their argument was that a labor court could not rule on insurance coverage issues such as: B. Whether the insured has complied with the obligation to follow Peninsula legal advice. They also argued that the tribunal’s jurisdiction would be further removed as the insurance policy required the settlement of disputes through arbitration.

In a preliminary hearing, the labor court concluded that it did not have jurisdiction for the following reasons:

  • The disputes between the Claimant and the insurer had nothing to do with an employment contract but with an insurance contract.
  • The Claimant’s claims against the employer arose from an employment relationship. The insurer was never the Claimant’s employer. There was no contractual relationship between the Claimant and the insurer, as well as between the individual interviewee (Mr. Draycott, the former managing director of the employer) and the insurer.
  • The tribunal would have to determine questions about insurance coverage, e.g. B. Whether the insured has followed Peninsula’s advice that has nothing to do with an employment relationship or a contract. These were issues that were decided by the ordinary courts rather than a labor court. The court’s jurisdiction over breaches of contract did not extend to these types of cases.

The Claimant appealed that decision, and the Employment Appeal Tribunal upheld his appeal. They closed a labor court that functioned like a court in every way. It would not make sense if applicants in labor court claims had to initiate separate proceedings before the civil courts if avoiding this complication were precisely the aim of the 2010 law. They also concluded that the arbitration clause was void because labor courts have exclusive jurisdiction over unjustified dismissal and discrimination claims, and the parties generally cannot enter into a contract that would allow an applicant to file claims in the labor court would restrict.

Labor courts are “courts”

The insurer appealed to the appellate court, which dismissed the appeal and agreed with the Employment Appeal Tribunal’s reasoning that a labor court was a “court” and could determine issues related to an insurance contract.

Alluding to the often difficult and complex issues that labor courts regularly deal with, they said:

“ETs have to deal regularly with difficult legal issues on a variety of subjects that are not limited to what is considered general labor law. Some of the claims they have to deal with are millions of pounds (as opposed to the limited jurisdiction of others have very complex facts. I doubt that requests for explanation that an insurer is facing judgment in an unjustified dismissal claim are even at the high end of the difficulty range of cases where labor judges serve to pack. “

The appeals court also ruled that the arbitration clause did not apply as it would prevent applicants from initiating such proceedings against insurers.

This decision is relevant to liability for employment practices (“EPL“) Insurers. The Labor Court is a more accessible forum than the ordinary courts – the rules of procedure are less complex, and the Labor Court has more flexibility and a certain level of informality, especially when dealing with litigation in person. Added to This means that by applicants will no longer have to pay tribunal fees and the award of costs is the exception rather than the rule, all of which means that insurers should be prepared for the possibility of defending cases like this before the labor court.

However, there are some benefits to EPL insurers in labor courts allowed to hear claims this way, including the potential cost savings of having those claims fully resolved in labor courts – which is potentially a more cost-effective forum. There are also broader benefits to insurers of the 2010 Act, including the fact that they have the option to review the original claim against the insured rather than just receiving a judgment that must be paid for. Insurers that become party to labor court proceedings have greater scrutiny and can ensure that a proper defense is brought. Even if the policy defense fails, insurers can contest the liability and scope of the original policy claim.

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

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