The majority of small and medium-sized businesses are failing to insure themselves against potential legal action from employees, a new report has claimed.
Research by insurers Hiscox found that less than a fifth of small firms have Employment Liability Insurance (ELPI), despite the fact that a ‘flurry of new employment legislation has led to predictions of increased discrimination claims’.
The Companies Act, which came into force last year, has imposed a number of new obligations for directors to comply with, such as promoting their company’s success and exercising independent judgment.
When exercising these obligations, directors will have to consider the effect of their actions on a wider group of stakeholders – not just shareholders - but also employees, consumers, suppliers and the environment.
The Hiscox survey also found that only 15% of small firms have Directors & Officers’ (D&O) insurance, which protects company directors personally against claims brought against them in their capacity as director.
According to Hiscox, smaller businesses can be just as vulnerable to (D&O) claims as multi-nationals but there is an even greater potential for ruin. This is because smaller firms can often have a much greater dependency on one or two individuals in the smooth running of the business.
Gary Head, professions underwriting director at Hiscox was keen to point out the danger to uninsured small firms:
“While [smaller firms] are increasingly viewing risk management as an important tool in their business armoury, the survey reveals some significant gaps in the level of insurance cover they have, particularly in areas such as D&O ELPI.
“The potential cost from employee discrimination claims or other lawsuits is enormous.”
© Crimson Business Ltd. 2007
