Clinging to the wreckage

The appointment of joint provisional liquidators of Independent Insurance on 17 June has shaken contractors and consultants out of any complacency they might have had about their insurer. No longer can insurance cover be taken for granted.

Fortunately, there is some statutory protection for policyholders, by virtue of the Policyholders' Protection Act 1975. That act sets up a board, financed by the insurance industry, to honour certain insurance claims if the insurer is unable to pay because it is in liquidation.

Any claim made under a compulsory insurance policy is paid by the Policy Protection Board in full. For any other type of policy, an individual or a partnership holder will be entitled to be paid 90% of the claim. However, a limited company receives nothing for insurance which is not compulsory.

For limited companies, past and future claims on policies such as professional indemnity, public liability and contractors' all risks will be paid out from the insolvent insurer's assets on the same basis as all other unsecured creditors. The effect is that the insured would have to meet a claim in full and then apply to the liquidators to be reimbursed.

If the PPB is able to transfer the underwriting business of an insolvent insurer to another insurer to enable continuation of the cover, the new insurer will only be obliged to pay out 90% of any claim value for the remainder of the policy period. Where premiums are due to an independent insurer but have not been paid, the liquidators would be entitled to pursue policyholders for the unpaid premiums.

If an existing policy is cancelled, the insured might be entitled to a refund of premium. However, such a refund would also be paid on the same basis as all unsecured creditors.

A company should not risk being in a position where claims during the remaining portion of a policy would only be met on the basis of the policyholder being an unsecured creditor.

For any contract where the insurance obligation includes using a reputable insurance company, remaining insured by an insolvent company would be in breach of such a warranty.

The liability of an architect or engineer to check the insurance held by contractors and consultants on behalf of a client should include consideration of whether it has been obtained from a reputable company. It might even be necessary to check the rating of that company with insurance brokers. This, of course, also applies to any company considering where to place their insurance in future.