Nearly two thirds of smaller businesses are leaving themselves exposed to legal action from their own employees, despite the number of employment tribunals increasing by 15 per cent last year, according to business insurer Hiscox.

The annual Hiscox Risk Barometer reveals that 62 per cent of business bosses polled are failing to protect themselves against possible employee legal action, even though a third are concerned that they could become a victim of the UK’s growing compensation culture.

Government figures show the number of cases brought to employment tribunals increased to almost 133,000 last year, with claims relating to unfair dismissal and equal pay accounting for most cases.

Hiscox business insurance director, Gary Head, said: “Most bosses will have considered what to do if their office burns down, but the fact is they are more likely to be sued by one of their employees. Although smaller businesses tend to have more of a ‘family atmosphere’, employee litigation remains a risk so it is concerning that employment practices insurance is low down their list of priorities.

“By failing to take out appropriate cover they’re leaving themselves hugely exposed to lengthy and expensive legal action and significant reputational damage.”

Despite the danger of being caught short, more than a third of the small businesses surveyed admitted they would reduce their levels of insurance cover if faced with financial difficulty.