A recent Scottish court case has resulted in a divergence north and south of the border as to whether directors can be sued personally by an employee if the company has no, or inadequate, employers’ liability insurance.

An apprentice joiner was injured after an accident at work involving an electrically powered circular saw. His employer company had employers’ liability insurance but it did not cover accidents caused by this kind of equipment. The company went into liquidation. The employee sued the sole director of the company personally for damages.

A company has a statutory obligation under the Employers Liability (Compulsory Insurance) Act 1969 to have in place insurance for injuries suffered by employees in the course of their employment. A company is guilty of a criminal offence if it breaches this obligation.

Further, if the offence is committed with a director’s consent or facilitated by his neglect, the director is also guilty of an offence.

Directors might have thought that, if they were criminally liable under the Act, that was the exclusive sanction and they could not also be sued by injured employees in the civil courts for damages. Indeed, if the case had been brought in England, that would probably have been the result.

However, the judge chose to diverge from English case law on the point and has decided that a civil action for damages can be brought against the director personally.

The general rule is that, where an Act creates an obligation and enforces performance in a particular way, performance cannot be enforced in any other way. But there was an exception that applied here. Where the statutory obligation was imposed for the benefit or protection of a particular class of individuals, those individuals had a separate civil right if the obligation was breached. The obligation to maintain adequate employers’ liability insurance was, in the judge’s view, clearly imposed for the benefit of the employees: they should be able to look to the insurance policy if the employer became insolvent and could not meet any claim for damages.

Actions against directors personally tend only to be brought where the company has insufficient funds to meet a claim (as was the case here). Nonetheless, this case provides an added incentive – if any were needed – to check the terms of your company’s insurance policies to make sure they cover everything they should. If you require any advice in this area, please get in touch with your usual Brodies contact.

Fiona Beal

Practice Development Lawyer at Brodies LLP
Fiona is a practice development lawyer in Brodies' corporate team. She provides support and knowledge management services in the field of company and corporate law including management of the department styles and know-how bank
Fiona Beal