Law: Who Pays the Price of Failure? ; the Demise of Independent Insurance Last Week Took the Industry by Surprise. Penny Lewis Investigates the Crash Barriers That Should Protect Its Policyholders

Article excerpt

THE IMPACT of the collapse of the Independent Insurance Company last week could be far-reaching. One group that could be indirectly affected is the victims of the Hatfield rail crash. There has been speculation that the Independent insured GNER, the rail company involved in the disaster. If so, any claims are unlikely to be met by their insurance policies and will have to be paid direct by the company.

Similar issues arise in other litigation against companies insured with the Independent. The comfort factor of having an insured opponent has vanished. People must take their chances of recovering legal costs and damages against what are, in effect, uninsured parties.

There are headaches for individual policyholders, too. The half- a-million private policyholders will have got a nasty shock when provisional liquidators were appointed on 17 June.

The wobble began when Michael Bright, the chief executive, resigned on 14 June and share trading was suspended. All eyes are watching what happens next. Events have moved quickly. On 17 June, PricewaterhouseCoopers was appointed provisional liquidator. It is concentrating on valuing and securing assets. No one knows how much is in the kitty or if reinsurance contracts are valid.

PWC envisages that the company will enter a scheme of arrangement under section 425 of the Companies Act allowing business to be run down without a full liquidation. This would severely delay claims settlement. In the meantime, they recommend that customers place cover elsewhere. But luckily, it seems that agreement is likely to be reached with the RSA to assume around half of personal lines business. This may include claims already made. If this plan goes ahead and is successful, there should be seamless cover for the majority of individual policyholders.

The priority for consumers will be finding out if existing claims will be paid and premiums returned. When insurers go into liquidation, financial support is provided by the Policyholders Protection Board. This is an independent, industry-financed body that administers and pays certain classes of claim. If, as with the Independent scenario, there is only provisional liquidation, the PPB chooses whether to become involved. PWC has said that in this case, the PPB has agreed to step in.

The payment criteria are relatively straightforward. Where insurance is compulsory the PPB ensures that claims are met in full. This includes motor insurance, riding schools, employee liability and nuclear installations. Personal injury claims against employers are therefore covered. However, with general insurance it is only required to meet 90 per cent of liabilities to individuals. Accordingly, in motor accidents third party damage is fully covered, but you are responsible for 10 per cent of repair costs to your vehicle. …