Effective insurance for local councils
LEGAL MATTERS
PRINCIPALLY, the function of insurance is to help protect councils from financial compromise. While UK law stipulates that certain insurance covers are a legal requirement (employer’s liability, for example), a council usually decides to protect its liabilities and assets through the procurement of a policy that is designed to protect it via the principle of indemnity. Such an insurance contract compensates a council for any damage, loss or injury caused, to the extent of the loss incurred. The main principle is to put the insured party in the same position financially as it was before the loss.
The National Association of Local Councils (NALC)’s Model Financial Regulations set out several requirements in relation to insurance, including one for an annual risk assessment. The regulations assign responsibility to clerks for identifying risk and properties and vehicles that require insurance, while it is the duty of the responsible financial officer (RFO) to arrange insurance, negotiate claims and keep insurance records. The regulations also include a requirement for members of the council and staff to be covered by an appropriate fidelity guarantee.
At a minimum, a policy designed to effectively protect a council and all those involved in its operation should include the following cover.
Public liability: protects against claims for injury to members of the public or damage to third party property. It includes hirer’s indemnity, which provides cover for hirers of council property (non-commercial small groups or individuals), should injury or damage occur during the period of the hire.
Employer’s liability: provides cover if an employee, councillor or volunteer is injured while carrying out their responsibilities for the council.
Officials’ indemnity: provides cover for claims arising from financial loss as a result of a negligent act, error or omission committed in good faith by an employee or official of the council.
Libel and slander: provides protection in the case that a member of the public considers a verbal or written comment made by the council to be incorrect or damaging, and as a result seeks financial compensation.
Fidelity guarantee: provides cover against acts of fraud or dishonesty by any official of the council or multiple officials in collusion, along with loss of property.
Key person: provides cover should key staff be unable to work due to accidental bodily injury or illness.
Business interruption (increased cost of working and loss of revenue): increased cost of working (ICOW) insurance provides cover should the council incur additional expenditure as the result of a claim from an insured event. Loss of revenue insurance provides cover following a claim from an insured event under the property damage section.
Legal expenses: a defence-only policy which provides protection for the councillors or clerk, acting in their capacity as officials of the council, against the cost of potential commercial legal disputes, legal advice and representation, including employment, tax and contract disputes.
These are the principal parts of a policy under which often complex claims can be reported. Further insurance provision relating to buildings and other assets may also be held by a council.
Due to the specialist nature of the requirements of local councils (providing cover to effectively protect a council which is abiding by its financial regulations or councillors who are following standing orders), bespoke underwriting may be necessary and policies should therefore be sourced from specialist brokers.
Some councils now consider standard local council procurement frameworks as a means to obtain quotations. While we appreciate that, due to the potential value of the contract, financial regulations may require that such a process be followed, it is important to understand that taking this approach alone could lead to important areas being overlooked, particularly where cheaper premiums are favoured over service and advice. As in all areas, cheapness and value for money may not be the same thing. It is vital to be able to establish, through the procurement process, that capability, responsiveness and experience are included in the package, and not just basic insurance cover. The time when these things are shown to be meaningful are the hopefully rare, but nonetheless important, occasions when claims are made. The difference between cheapness and good value may at this point turn out to be substantial.
When considering an insurance company that is offering coverage, a number of factors should be taken into account, advises Andy Cotter. Gallagher places cover for thousands of town and parish councils and therefore must ensure that its insurers have the infrastructure and capacity to manage any matter arising. He recently asked the company’s principal insurance partner for local councils, Hiscox, to comment on insurance providers and current market conditions. It stated, in relation to considering an insurance company: “Look to an insurer that has a strong financial rating with a respected financial rating company. This will ensure that you are dealing with a financially sound insurer that has a reputation for quality, coverage and claims payments.”
The insurance industry is yet another sector that is being significantly affected by the current economic crisis. The impacts of COVID-19 are still with us, and other factors (such as changes in regulation, increasing severity of storms and floods, and claims inflation) could result in premiums rising.
- Average claim costs are rising, as a result of increased costs of building materials and labour shortages, which will increase claims values in the event of an insured incident.
- Storm events within the UK are also becoming more severe and frequent and therefore costing insurers more money.
- Cover for flood risks is being more strictly controlled. This has been driven by the increasing frequency and extremity of flood events linked to climate change.
With its regular engagement with clients, a good insurer can quickly identify “hot” topics to look out for and share these with council clients. These complicating factors have remained fairly constant over the past decade, but it is still common to see councils experience large losses when there are usually circumstances that could have been mitigated with some proactive consideration.
Under-insurance is a key topic within the insurance industry and especially so with recent increases in the costs of building materials and labour. If a council has underestimated a rebuild cost for one of its buildings or the total value of its contents, for example, it could find itself significantly out of pocket if it has to make a claim, as its insurance company might not pay out the full cost to replace lost or damaged items. It is therefore crucial to ensure that cover accurately represents the cost of rebuilding or replacing the items that are insured, and the increased costs of building materials and labour should be considered when calculating these values. One way to ensure that the correct values are insured is by undertaking a professional valuation.
Now more than ever, effective risk management programmes are proving vital. Identifying and recording the risks encountered by staff, third parties or anything associated with a council’s property (or anything else for which it is responsible), and how these risks are to be managed, can be crucial in the defence of any claim for negligence levied against the authority. An effective risk management programme will enable council officers to understand these risks and take proactive steps to reduce or mitigate them. Most specialist providers offer access to portals or solutions that will help councils to better control their health, safety and risk management. A service that enables a council to reduce the frequency and severity of incidents that can be hugely expensive and disruptive will always be of significant benefit to its operation.
Andy Cotter has worked in the insurance industry for the past 25 years in varying roles including claims management, underwriting and business development. For the past 15 years, his principal role has been as a broker specialising in the local council sector. Now Managing Director of the community division for Gallagher, Andy and his team offer specialist insurance solutions for town and parish councils and their councillors, clerks and volunteers. Gallagher is the insurance broker most frequently turned to by local government and is the only broker serving the town and parish council market that has the strength of a global broker behind it.
For more information, visit https://www.ajg.com/uk/public-sector-insurance
Disclaimer: The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
Nick Randle is Managing Director of LGRC Associates Ltd. Founded in 2013, LGRC is an independent professional services provider focused on the town, parish and community council sector. It works to bring best practice to every aspect of a local council’s activities through the provision of locum, consultancy, outsourcing and training services. LGRC Partners and Associates are among the most skilled and experienced practitioners currently working with local councils, with a track record of hundreds of successful client assignments. For more information, see www.lgrc.uk or email info@lgrc.uk
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Written by Andy Cotter, Managing Director, Gallagher and Nick Randle Managing Director LGRC Associates Ltd.
As appeared in Clerks & Councils Direct, November 2022
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