The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) of 1981 and 2006 have a clear purpose – the protection of employees where the business or contract changes hands. The regulations transfer liabilities (and associated rights) from one employer to the other along with the employee. Where an employee is subject to a TUPE transfer, the later company also takes the benefit of previous insurance policies - and can make a claim under those policies.
However laudable the aim of the regulations they can create problems in fixing employer’s liabilities cases. Investigations can be hampered by multiple transfers over an extended period of time. The companies involved may show little inclination to assist insurers’ enquiries. This article examines the intricate problems which can arise.
S1(1) of the Employers Liability (Compulsory Insurance) Act 1969 requires every employer to take out liability insurance for the benefit of its employees. This is to ensure that an employer’s insolvency would not extinguish the right of an employee to recover compensation. Particular companies may have aggregate or deductible insurance policies. In exchange for lower premiums, they agree to meet claims up to a certain value.
A common argument in such circumstances is that the transferee company should not be in any better position than the transferor company in meeting these claims. They are therefore, not entitled to the benefit of insurance cover, or, if they are, the same terms of the policy agreed will apply. For an insurer, the temptation to decline indemnity is apparent. The insurer collected reduced insurance premiums on the understanding that it would not be meeting a significant liability of the transferor company.
Following a TUPE transfer of employment, an Insurer may well query why it should now meet all future claims. However, employers’ liability insurance is compulsory and its terms defined by statute. It is not permissible for any insurer to impose a deductible or an excess on the policy.
Regulation 2(3) of the Employers’ Liability (Compulsory Insurance) Regulations 1998 prohibits any condition in a policy of insurance which requires the employer to pay or contribute any sum to the insurer to satisfy any claim made under the employers’ liability policy.
It is permissible to have a term requiring that employer repay any sums back to the insurer. In practical terms of course, the insured would normally meet such claims directly rather than having to reimburse the insurer. An insurer cannot refer to or rely upon any agreement reached with a transferor company to decline to indemnify the transferee company. The purpose of this mechanism is clear. It again ensures that the employee is always protected.
Having settled the claim in full, can the insurer seeking to recover its outlay? The liability of the transferor company has passed by law to the transferee.
Must the transferee company now reimburse the indemnifying insurer on the basis of a contract it knew nothing of and was not a party to? The obligation to repay arises from a commercial contractual agreement between the transferor and its insurer.
There is no judicial authority that would suggest the obligation stated within this contract should also transfer with the employee.
In Martin v Lancashire County Council (2000) Peter Gibson LJ, stated: “the transfer of employers right is to recover from the insurers an indemnity in respect of the transferors liability arising from, or in connection with, the contract of employment. Backed with the very liability which the transferor was required to insurer under the 1969 Act….. but the important point is that the right arises from and is in connection with, the contract of employment, because the liability insured under the contract is such a liability.”
The reasoning is that the right of an indemnity arises from or is in connection with the contract of employment. The same could not be said with the same certainty about a commercial agreement to reimburse an insurer on payments of certain qualifying claims. In addition, the doctrine of privity of contract provides that a contract cannot confer rights or impose obligations arising under it on any person or agents except the parties to it - although the same doctrine is intentionally subverted by TUPE so far as the employee is concerned.
The doctrine of privity is also undermined by the Contracts (Rights of Third Parties) Act 1999. It is theoretically possible that an insurer’s claim for recovery could be brought under the 1999 act - although this would depend on a fortunate interpretation of (probably unintentionally) helpful clauses in the contract of employment.
An insurer’s road to recovery from the transferee therefore seems strewn with obstacles. The stronger claim, under the terms of any contractual agreement, may be against the transferring company. However, if TUPE acts automatically to transfer an employer’s liabilities this again causes problems for an insurer.
There is one avenue which offers distinct possibilities - the 1978 Civil Liability Act.
The Civil Liability (Contribution) Act 1978 provides that a person may recover a contribution from: “any other person liable in respect of the same damage.”
We have seen that TUPE transfers all liabilities arising from the employment from one company to another. How can one pursue a company with no liability following a TUPE transfer? One answer may lie in some consideration of when the liability of the transferor company arises. At the time the employer suffered his injury, the transferor company would have been liable.
Whilst the liability will cease under the TUPE Regulations 1981 for a local authority and under both sets of regulations for an ordinary company, that may not negate the right to seek a contribution under S1 of the 1978 act under such an analysis. The advantage of this is clear to any transferee company or insurer. If the transferor is unable to establish a full insurance history then a contribution claim against might secure a contribution. It may also help to ensure its co-operation in any investigation.
The full effect of the 1978 act is little considered in TUPE claims. There is generally an assumption that once the liability passes there is no right to seek a contribution from the transferee company. The timing of the loss may be crucial. There may even be an argument for a more general application of the 1978 act applying to give a wider right to a contribution.
The TUPE legislation serves to protect the employee. It seems only right to redistribute the costs of that more fairly and help ensure that contracts are honoured and the actual wrongdoer pays towards the claim. The Supreme Court will soon be hearing similar sentiments about mesothelioma in IEG v Zurich - but that is a whole new article…
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