A s insurance is both a legal requirement and a business
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necessity for hauliers, what happens if your insurance company becomes insolvent? Are you still covered by your policy? If not, can you recover the premiums you have paid? These were the questions 600,000 policyholders were asking themselves in June 2001, when provisional liquidators were appointed to the Independent Insurance Company.
Policyholders protection
The position is governed by the 1975 • Policyholders Protection Act, by which the Policyholders Protection Board ("the Board") was set up to assist policyholders when an authorised UK insurance company goes into liquidation. The Board imposes a levy on all UK insurers, and uses the funds to meet, in certain circumstances, the liabilities of insolvent UK insurance companies.
Claims
All policyholders are entitled to 100% protection in respect of insurances which are by law compulsory (such as Employers' Liability Insurance or Third Party Liability Insurance).
In the case of other insurances (such as public/product liability, property insurance and professional indemnity insurance), policyholders who are indi • viduals, partnerships (with non-corpo rate partners) or unincorporated associations are entitled to 90% protection from the Board.
Limited companies are not entitled to any protection from the Board for these non-compulsory insurances. In the case of hauliers, non-compulsory insurance would include goods in transit and depot or warehouse coverage.
Where the Board provides protection, it will pay out on claims made during the period of the existing policy.
Premiums/cancellation
A liquidator will be appointed to any insolvent insurance company, and might seek to cancel all policies. Policyholders should check the terms of their policies, which might provide for a proportionate turn of premium representing the mainder of the policy.
However, the Board will not return y premium to limited companies. here the policyholder is a company and e policy is cancelled by the insurer, the licyholder will have to claim in any liquition, or scheme of arrangement of the ranee company, for any eligible protion of its premium to be returned. h policyholders will rank as unsed creditors.
he Board will pay private individuals, erships or other unincorporated associations 90% (net of Insurance Premium Tax) of any proportionate return of premium.
Finance companies
Because of the cost of some insurance, it is quite common for companies to obtain a loan from a premium finance company to pay the insurance premiums. Indeed, some companies which had policies with Independent Insurance had done this, many with the company Premium Credit. Such finance companies pay the pre mium directly to the insurance company in a lump sum, and the policyholder repays the loan in instalments.
If the insurance company becomes insolvent, the cover arranged might be worthless, yet thousands of pounds might still be outstanding to the finance company. Companies who enter into such arrangements with premium finance companies only to find that their insurer has become insolvent should immediately seek legal advice as to whether they can terminate their instal
ment plan payments. There can often be delays in the processing of claims by the Board. The liquidation of Drake Insurance (an insurer which specialised in insuring young drivers) is an example of how long it can take for claims to be settled.
Some policyholders were still waiting for payment a year after the company went into liquidation.
In the case of Independent Insurance, the provisional liquidators have directed that all claims should be sent to Independent, which will direct the claims to the Board. However, the provisional liquidators have stated that in cases of hardship the policyholder should contact the provisional liquidators directly to see if payment can be arranged immediately.
Alternative cover
Because the Board gives limited protection, companies are advised to secure alternative insurance cover as soon as possible after learning of their insurer's insolvency. However, they should take care that they do not end up with "double insurance", as many policies will not respond if another insurance policy provides the same cover, whether or not that other policy actually responds. The insured's broker should be consulted.
Conclusion
All claims relating to compulsory insurance should be paid in full by the Board. Non-corporate policyholders are covered by the Board for 90% of any claim on any other type of policy, and can also recover up to 90% of any entitlement to the return of premiums. However, this leaves many policyholders, including small businesses, without protection.
These would have to join the ranks of unsecured creditors of the insolvent insurance firm, and the chance of any recovery is often slim.
w Note: The Board became part of the Financial Services Compensation Scheme (FSCS) under Financial Services and Markets Act 2000 in November 2001.
• by Paula Tindale
Paula Tindale is a partner in insurance law at Eversheds in Manchester CONTACT
Policyholders Protection Board, 51 Gresham Street, London EC2V 7HQ.
Phone: 020 7600 3333.
Fax: 020 7216 7654.
wympolicyholdersprotectionboard.org.uk (a temporary website to deal with queries relating to Independent Insurance).