As employment and commercial solicitors working for businesses that don’t have their own in-house HR, I think it’s important that we educate and protect our clients. Considering commercial relations, cashflow and reputation alongside employment law is not just good practice, but vital. However, we are seeing insurance-based HR services putting up barriers and creating risks.
Insurance is an everyday requirement for SMEs and some policies build in legal expenses or HR support. Most business owners assume that if they follow their insured HR outsourcing advice, they are protecting their company. In reality, many are unknowingly protecting something else entirely: they are following a process designed to protect the insurer from liability.
Those two things are not always aligned and, as a commercial lawyer, it is becoming increasingly harder to navigate.
Insurance compliance vs commercial reality
Legal expenses insurance can be a valuable safety net for employers. It is designed to cover legal costs arising from employment disputes, including grievances, disciplinaries and potential claims. But it comes with conditions.
In many cases, insurers require employers to follow strict procedural steps, often guided by HR providers who are focused on one objective: ensuring the claim remains 'valid' under the policy and claim sums are mitigated. That sounds sensible, but in practice, it can create a rigid framework that does not always reflect the commercial reality of running a business or the commercial risk of running a dispute.
Because business decisions are rarely just legal decisions. They are commercial, operational, reputational and strategic. A good solicitor understands this and works with the company, but insured outsourcers have different objectives and balancing this is becoming difficult. Recently, in a case we had, we had to battle with the HR team, who had frankly weakened our client’s position in the marketplace, reduced the strength of an injunction application and potentially caused them significantly more losses. A solicitor at odds with an outsourced HR provider is not good for the company. It is confusing, and we have serious concerns about the lack of flexibility these frameworks are boxing clients into.
The problem: when HR process replaces legal or commercial judgement
HR providers are not solicitors or business owners. They are process-driven specialists working within tightly defined systems designed to reduce risk exposure for the insurer. They work strictly within employment frameworks, with limited scope to act commercially. Many are very good and helpful, but if the process is too rigid or at odds with the reality of the situation, it can cause damage.
It can lead to a very narrow and specific approach: investigating everything fully before action is taken, following the process step-by-step regardless of commercial urgency or wider exposure, and avoiding any deviation that might jeopardise insurance cover.
From a risk perspective, this is understandable. From a business perspective, it can be constraining. Paying someone instead of proceeding with an immediate dismissal, for example, can cause other legal and public relations problems.
This approach assumes every situation is purely procedural, when in reality employment issues often sit at the intersection of client delivery and operational continuity. There are considerations like crisis management and mitigation of public relations concerns, confidential information and data protection risk, team morale and wider reputational impact.
So where is the line and how, as solicitors, can we protect the company without voiding the client’s insurance?
This is the question most business owners never get fully advised on: at what point does strict compliance with HR process become commercially irrational?
And, more importantly, at what point does blind adherence to process create greater legal exposure than it prevents? Do we step in and encourage the client to move away from the insurance advice, or do we step back to avoid insurance and conflict despite the losses we can see exposed?
The answer is not simple. Risking insurance cover is not something many want to consider, nor is it something solicitors ever wish to do, as it exposes us to claims ourselves.
The law itself does not operate in a vacuum. ACAS’ code of conduct is flexible; it recognises that there can be challenging factual circumstances and that there is a difference between multinational organisations and SMEs. Tribunals assess fairness, process and reasonableness in context. The rationale behind why certain steps have been taken, or not taken, is important.
That context includes the reality of the business, not just the HR checklist. If you need to dismiss immediately, lock the employee out of your client database and secure protection of your IP, then the risk may be too high to follow a slow, step-by-step protocol. Affirmative action can be taken and justified.
Insurance protection is not absolute control
One of the most misunderstood aspects of legal expenses insurance is this: it is designed to fund legal defence, not to dictate commercial strategy.
Despite what many are led to believe, policyholders in legal expenses insurance matters generally have the right to choose their own legal representative once proceedings are contemplated or issued, subject to the policy terms. In other words, insurers can guide process, but they should not entirely control legal judgment.
Yet in practice, many employers feel constrained by insurer-approved HR processes long before any claim even arises. If something does go wrong, they may feel that they cannot use their own solicitors who know their business, but instead must use those pre-approved by their insurers or, as in our recent case, receive conflicting advice.
Our duty is to advise and protect, but if that conflicts with the HR insurance advice to the extent that the client fears losing insurance cover, do we step back? Do we fight with HR? Do we go ahead regardless? It is a professional headache either way.
The unintended consequence: risk avoidance over business protection
When HR process becomes overly rigid, businesses can find themselves over-investigating low-risk issues, causing delay and artificial processes that in turn expose the business to allegations that decisions have been manufactured or processes manipulated. They may delay necessary commercial decisions such as dismissals, expose sensitive information, lose control of internal communications and systems, increase reputational damage while trying to reduce legal risk, and detrimentally impact other members of the team and morale.
Ironically, in trying to 'stay safe' for insurance purposes, businesses can increase their real-world exposure and other legal harms. A court could deny an injunction because we did not act fast enough; the damage may already be done or, worse, the evidence may have been destroyed. If someone is poaching staff or stealing data you need to act fast, lock them out, dismiss them and preserve the data, the staff and the clients. Dragging it through investigations and meetings and procedures can worsen the case.
So what should solicitors and business owners do?
This is not an argument against HR or against insurance. Both are essential. It is also not a call for all businesses to reject proper processes or take a cavalier approach to employment law or employee rights. Instead, it is an argument for balance.
Business owners should be asking whether the advice they are receiving is driven by legal strategy or insurance compliance, whether they have flexibility to act in a commercially sensible way, and at what point they should escalate to independent legal advice. They should also consider whether they are relying on process rather than judgement and what the wider legal ramifications of what they are being asked to do might be, including how this could impact customer contracts or other staff.
Most importantly, employers should ensure they have access to legal advice that understands both employment law compliance and commercial business reality, because one without the other is incomplete.
However, as solicitors, how do we balance protecting and servicing our client if option one contradicts and exposes them to loss of insurance cover, but following option one means their business faces worse consequences than the employment aspects?
The uncomfortable truth
Sometimes the 'correct' HR process is not the most commercially sensible decision.
The role of good legal advice is not just to guide compliance. It is to help businesses make decisions themselves that are defensible, strategic and commercially sound, even in difficult, fast-moving situations. We need to advise and support, but ultimately arm the business with all the information so it can choose the option to follow, with us as advisers evidencing and supporting the decision.
The key question for any employer, though, is: Are you using your insurance to support your business strategy, or allowing it to define it?
Karen Holden is managing director at Allin1 Advisory limited
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