Deciding on what will be an appropriate limit of indemnity under an employer’s liability, public liability, or professional negligence policy can be challenging. It is an area fraught with difficulty and ultimately the responsibility for making any decision has to rest with the client. In this bulletin, we highlight a number of key points that should be considered, and which can help make the process more manageable.
Local authorities, police forces and national health trusts are of course exempt from the requirements of the Employers’ Liability (Compulsory Insurance) Act. Consequently, they could elect to self-insure the employers’ liability risk in entirety. That said, virtually all authorities and police forces arrange employer’s liability insurance, although this will often be subject to a fairly sizeable deductible, which is funded by the organisation.
The statutory minimum (other than for offshore risks) is GBP 5 million for claims arising out of any one occurrence. The term ‘occurrence’ is not defined in the regulations and insurers currently treat industrial disease claims as separate occurrences, rather than one occurrence arising from a management decision.
There is no statutory minimum for public liability insurance. In fact, for most organisations, there is no statutory requirement to arrange public liability insurance (riding schools are one notable exception, whilst some professional bodies insist that their members arrange public liability up to a certain level) but nearly all organisations would regard the cover as an essential part of their insurance portfolio.
When considering the limit of indemnity under a public liability policy, you need to assess the risk to members of the public and their property, which arises from your activities. Once you have assessed those risks, you will need to try and quantify your maximum potential liability in the event that the activities you undertake give rise to a claim.
The risks and liabilities will vary from one authority to another. They will be dependent upon a variety of factors including the type of organisation and, consequently, the range of services delivered to the public. For example, a district council that has retained its housing stock could be exposed to significant liability in the event of fire in a multistory tower block. For a metropolitan authority, particularly one that has divested itself of its housing stock, the greatest degree of risk might attach to any one of a number of services; for example, social services, education, highways etc.
Involvement in partnerships, joint ventures or just general contracts, can also create additional or increased public liability risks. It may be possible to transfer some of those risks to the other party to the contract but care needs to be taken when drawing up the contract as certain local authority risks may be ‘non-delegable’. If for example, the contract conditions are not watertight, or if the other party has failed to arrange public liability cover, liability for any claims arising from the outsourced service is still likely to fall on the local authority. Is a limit of GBP 5 million going to be enough? In most cases, the answer to that question has to be no.
Professional Indemnity Insurance
In general terms, a professional indemnity policy covers your liability to pay damages to a third party for the consequence of professional services you have provided (in most cases, such services would have normally been provided for a fee). Historically, many local authorities only took out professional indemnity insurance when they entered into contracts that required them to arrange the cover.
Limits of indemnity under a professional indemnity policy are usually lower than those under a public liability policy. There can be several reasons for this; for example, the types and requirements of the contracts that you enter, or the nature of the work involved.
Historically, many local authorities only took out professional indemnity insurance when they entered into contracts that required them to arrange the cover.
The limit of indemnity under a professional indemnity policy is generally aggregated for all claims made against the policyholder during the policy period. In certain circumstances, it is possible to arrange cover on the basis of a limit one claim, but this will inevitably result in an increased premium. However, where the limit is aggregated during the period of insurance, the policyholder needs to ensure that the limit of indemnity is adequate to cover the cost of all claims that may be reported, during the policy period.
Factors to Consider
The cost of personal injury has escalated significantly in recent years and the recent changes to the Discount Rate (the figure used to help set compensation pay-outs when people suffer serious injuries as a result of someone else’s negligence) will prolong that trend.
Whilst some of the highest and most highly publicised have been as a result of motor accidents, (GBP 7.5million, GBP 11.5 million, GBP 23 million) the principles involved in assessing the amount of damages awarded in a motor claims are exactly the same as in an employers’ liability or public liability claim. Compensation awards are based on the injury suffered the potential loss of earnings and the life expectancy of the injured person, not the type of accident.
You also need to bear in mind that an injury sustained now, may not result in a claim until many years into the future. For example, employers’ liability claims for industrial disease, or public liability claims arising from the social services or education functions. Consequently, you need to be confident that the limit you insure for now, will be adequate to cover the cost of claim settlements in say five, 10, or even 20 years’ time.
Many of the contracts you enter will stipulate that you are to arrange employers’ and public liability insurance, and professional indemnity insurance, up to certain specified levels. In some cases, you may feel that those specified limits are extraordinarily high; for example, Network Rail usually insist on a public liability limit of indemnity of GBP 155 million for anyone undertaking work with the potential to impact or impinge on Network Rail track. In these circumstances, the cover is normally best arranged by the contractor, or by the organisation that employs the contractor, under a one-off single contract policy.
Finally, a word about public liability insurance for contractors that you engage to carry out work on your property. How much cover should you ask them to arrange? Is it wise, for example, to allow a contractor to undertake work on your behalf if that contractor only has public liability cover up to GBP 10 million, whilst you insure up to a limit of say GBP 50 million.
The first point to bear in mind is that you cannot draw any meaningful conclusions from the contract value. What you will need to do is to:
- Assess the value of the property being worked on
- The potential liability if say, the contractor negligently started a fire that was to spread to other properties
- The consequent interruption to the businesses in those properties
- The value of contents in all these various properties
- Along with the potential for injury to members of the public, your own staff and of course, the contractor’s own employees.
You also need to consider the contract conditions that are applicable, particularly as far as the value of your property is concerned, as those conditions will determine the extent of the contractor’s liabilities and both his and your insurance responsibilities. These points were considered in our bulletin ‘working with contractors’, which highlighted various issues raised by use of the Joint Contracts Tribunal (JCT) contract conditions. We will be issuing an updated version of this bulletin in the next few weeks.
At the same time, however, you need to be realistic about the maximum potential loss. What is the nature of the work and how likely is it that that work could give rise to a total loss? The total value of a multi tenure commercial block, its contents, the tenants’ potential loss of revenue and increased costs of working, could run into several hundred million pounds. The chances of a fire spreading throughout the entire block may, however, be remote and if the work is of an innocuous nature, insisting on say GBP 200 million worth of public liability cover would only serve to dissuade many contractors from bidding for the business.
As regards cover for professional negligence, many local authorities and police forces seem to adopt GBP 5 million as the ‘default limit of indemnity’ on all contracts. GBP 5 million may well be adequate to cater for the majority of claims as many will be settled for the costs of rectification. It is possible, however, that an error in design could result in a claim for the total loss of an entire project.
You should also bear in mind that, as previously mentioned, the limit of indemnity under a professional negligence policy is often aggregated during the policy year. Consequently, there is a possibility that the cover could be totally eroded if a series of claims are made against the contractor during the policy year.
How Much Insurance Do I Need to Arrange?
A difficult question. Deciding on limits of indemnity is not an exact science and it is impossible to generalise and provide one answer that is appropriate for all organisations, or even say local authorities of a particular type.
What we would say is that up until very recently, nearly all local authorities, and police forces had seen GBP 50 million as being the absolute minimum limit of indemnity under their employers’ liability policy. Bearing in mind the continuous rise in the cost of personal injury claims, and the fact that many of the losses that occur today will not be settled until some years into the future, many are now asking whether GBP 50 million is indeed an adequate figure.
Similar comments apply as in respect of public liability insurance, particularly in the wake of the recent and tragic fire at Grenfell Towers. Whereas previously, public liability cover of GBP 50 million might have been thought as being adequate for the majority of cases, many local authorities, particularly the metropolitan authorities, are now looking to increase their public liability cover to limits in excess of GBP 100 million.
Whilst it is even more difficult to provide a general guideline for minimum limits under professional indemnity policies, we would suggest a starting point of at least GBP 5 million, although this will obviously vary, dependent upon individual circumstances and the nature of work undertaken.
Finally, the limits of indemnity under motor, medical negligence, and cyber liability policies are often not mentioned but they also require careful and individual consideration. For example, the third party property damage limit for commercial vehicles stands at just GBP 5 million under some motor policies, which might be thought inequitable for an organisation that has elected to arrange public liability cover in excess of GBP 100 million.
For further information, please contact Julia Reffell on +44 (0)20 7558 3253 or email email@example.com
This document is compiled for the benefit of clients and prospective clients of companies of the JLT group of companies (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property.