IF2 - Module 6

Question 1

What is employers’ liability insurance?

Answer 1

The purpose of employers’ liability insurance is to provide coverage for legal costs and compensation payments that may arise from claims made by employees who are injured or become ill due to work-related activities. This type of insurance is important for employers to have because they can be held liable for the injury or illness of their employees.

Employers’ liability is compulsory in the UK.

Question 2

What does the Employers’ Liability (Compulsory Insurance) Act 1969 say?

Answer 2

The Employers’ Liability (Compulsory Insurance) Act 1969 stipulates that employers in Great Britain (with certain exceptions)
must be insured against liability for bodily injury or disease sustained by their employees arising out of and in the course of their employment in the business.

An employer was required to display a certificate of insurance at each place of business to signify that it was insured against legal liability for injury or disease to their employees.

The Employers’ Liability (Compulsory Insurance) (Amendment) Regulations 2008 (effective 1 October 2008) removed this requirement. It is now sufficient to have an electronic copy of the certificate, as long as employees have reasonable access to it.

Question 3

What do the Employers’ Liability (Compulsory Insurance) Regulations 1998 say?

Answer 3

The provisions of the Employers’ Liability (Compulsory Insurance) Act 1969 were extended by the Employers’ Liability (Compulsory Insurance) Regulations 1998. The key extension increased the minimum limit that must apply under an insurance policy from £2 million to £5 million.

In practice, insurers have provided a £10 million limit since January 1995.

Question 4

What is the Employers’ Liability Tracing Office (ELTO)?

Answer 4

It was created to provide claimants and their representatives with quick and easy access to a database of Employers’ Liability (EL) policies through an online enquiry facility.

Question 5

What is the definition of an employee under a employers’ liability scheme?

Answer 5

An employee is defined as ‘any person who is under a contract of service or apprenticeship’ with the insured. Most policies extend the category of ‘direct’ employee to include, for example, self-employed persons, hired persons and students on work experience.

Question 6

What are the common extensions with EL insurance?

Answer 6

Defence costs and expenses

• In addition to paying compensation to the claimant and their costs and expenses, an EL policy can also indemnify the insured in respect of their own costs and expenses incurred in settling or defending a claim.

Though the insurer will expect to be in charge of this process and in practice will appoint legal representatives as appropriate.

Additional persons insured
- An EL policy usually provides that cover is also available in respect of, for example, any director, partner or employee of the insured for any action brought against them, in their personal capacity, for which the insured would be entitled to
indemnity under the policy.

Indemnity to any principal is also provided.

Question 7

What are the limitations with regards to employers’ liability insurance?

Answer 7

There are very few standard exclusions in an EL policy, mainly because they are not permitted by the EL compulsory insurance legislation. In fact, there is not even a standard war risks exclusion.

However, cover may be limited by an insurer as part of the underwriting process in terms of applying trade clauses:

• by restricting the definition of ‘business’;
• by excluding certain kinds of work; or
• by excluding certain machines and/or processes.

Question 8

What is vicarious liability with regards to employers’ liability insurance?

Answer 8

In law, the employer is liable for the negligence of employees arising in the course of their employment. This is known as vicarious liability.

Question 9

What is public liability insurance?

Answer 9

Public liability insurance is designed to compensate an insured in respect of claims for legal liability from members of the public or companies who may suffer due to their negligence or that of their employees.

Cover is provided for damages, as well as costs and expenses incurred in the event of a claim for injury or for damage to property.

Question 10

Why is public liability insurance necessary?

Answer 10

A business may have offices, factories, shops, buildings or other sites. It may have signs and/or goods outside its premises, trap-doors and other situations where a member of the public may incur injury, which they allege is the fault of the owners of the business or their employees.

Question 11

What is the standard policy cover of a public liability insurance policy?

Answer 11

A public liability policy provides an indemnity to the insured for legal liability to third parties
for damages (including claimants’ costs and expenses) in respect of bodily injury, death, disease or illness.

It also provides cover for any loss of, or damage to, property which happens in connection with the business insured under the policy and occurring during the period of insurance.

Question 12

What are some of the further policy wordings with regards to a public liability insurance policy?

Answer 12

Some policies make reference to ‘accident’ in the policy cover, as it is only intended to cover unexpected and non-deliberate events.

Question 13

Why is the Employers’ Liability Tracing Office (ELTO) necessary?

Answer 13

EL policies cover liability for bodily injury or disease caused during the period of insurance, even if the injury does not become apparent until a later time.

Where there has been a considerable lapse it can be difficult to trace who the insurer was when the illness was caused.

To assist this process, insurers set up the Employers’ Liability Trading Office (ELTO)

Question 14

How does the FCA over see the Employers’ Liability Tracing Office?

Answer 14

The Financial Conduct Authority (FCA) requires all members of the ELTO to provide details of their employers’ liability policies, along with policy records relating to historic covers triggered by claims to allow tracking of policies by claimants via the Employers’ Liability Database (ELD).

Employers must provide their EL insurers with an employer reference number (ERN) which is then sent to the ELD.

Question 15

What are the typical exclusions of a public liability policy?

Answer 15

The typical exclusions are:

• injury to employees (covered under an EL policy)
• property belonging to the insured (covered under a material damage policy);
• product liability (covered under a product liability policy);
• contractual liability;
• cost of rectifying defective work;
• professional negligence or advice for a fee (covered under a professional indemnity policy);
• deliberate acts;
• motor vehicles, vessels and craft (covered under separate motor or marine insurance);
• lifts, elevators and boilers (covered under engineering insurance); and
• war risks and radioactive contamination.

Question 16

On what basis are product liability policies issued?

Answer 16

Product liability policies are issued on an occurrence basis, whereby the insurer who is on risk when the loss or damage occurs deals with any claim.

Question 17

What does product liability cover?

Answer 17

The standard product liability policy cover is for legal liability for bodily injury or property damage that arises out of goods or products manufactured, constructed, altered, repaired, serviced, treated, sold, supplied or distributed by the insured.

Question 18

What are some important considerations with regards to product liability cover?

Answer 18

• Consequential losses incurred by a third party are only covered if they flow directly from the loss or damage;
• there must be an element of accident;
• there must be injury or property damage (i.e. claims for pure financial loss are not usually covered); and
• a total yearly aggregate limit of indemnity applies to cover (which is usually the same as the limit per occurrence).

Question 19

What are the four main exclusions of product liability insurance?

Answer 19

Contractual liability - where the liability arises purely because an agreement has been made by the insured to accept more liability than exists normally

Damage to goods supplied - The cost of repairing, renovating, replacing or recalling unsuitable or defective goods is not covered

Faulty design or formula - Any claims due to faulty design or formula are excluded

Unsuitability or failure to perform - Any claims due to the goods unsuitability for the purpose for which they were designed or failure to perform in the way they were intended are excluded

Question 20

What is Directors’ and officers’ (D&O) insurance?

Answer 20

Directors’ and officers’ (D&O) insurance is designed to cover the legal liability of individuals within a company who may be personally liable for breaches of duty towards the company’s shareholders, employees, creditors, or members of the public and so incur financial liabilities.

Question 21

How is cover arranged with regards to D&O insurance?

Answer 21

Cover is arranged in two parts:

• cover for the individual directors and officers if they cannot claim an indemnity from the company; and
• cover for the company where it indemnifies the directors or officers.

Question 22

D&O cover is provided for breach of duties under:

Answer 22

• contract
• common law
• statute

Question 23

Liability for D&O insurance can arise under common law as a result of:

Answer 23

Liability may arise at common law from:

negligent advice or misstatement, particularly in the context of a merger or take-over;

acts outside the company’s constitution;

failure to disclose conflicting interests - or the full extent of the director’s interests;

errors of judgment;

negligent supervision;

and imprudent investments.

Question 24

Liability for D&O insurance can arise under statute as a result of:

Answer 24

Statutory duties for directors include to:

act within powers;

promote the success of the company;

exercise independent judgment;

exercise reasonable care, skill and diligence;

avoid conflicts of interest;

not accept benefits from third parties;

and declare an interest in any proposed transaction with the company.

The Pension Schemes Act 2021 introduced two new criminal offences relating to pension schemes. These can be committed by anyone, including a director or officer, and lead to fines of up to £1 million.

Question 25

What are the typical exclusions under a D&O policy?

Answer 25

• prior notification: circumstances known (or which ought to have been known) prior to cover commencing;
• prior and pending litigation;
• bodily injury and property damage (covered under an employers’ liability or public/product liability policy);
• liability for pollution and contamination (some cover for defence costs may be available);
• claims based upon improper personal gain, fraud, or dishonesty of a director;
• breach of a professional duty (covered under a professional indemnity policy);
• ‘insured v insured’ claims (to avoid internal conflicts); and
• fines, penalties and punitive damages.

The policy may also contain a jurisdiction clause which states that English law will apply to any action and may exclude actions in the USA and Canada.

Question 26

On what basis is D&O cover issued?

Answer 26

D&O cover is arranged on a ‘claims made’ basis. This means claims notified to the insurer/insured during the period of insurance are covered, irrespective of when the event occurred that gave rise to the loss.

Question 27

What are some important considerations for D&O cover?

Answer 27

The D&O policy covers past, present and future directors and officers.

In common with other liability policies, it also indemnifies the personal legal representatives in the event of death, bankruptcy or insolvency of the insured person or company

The policy limit is an “annual aggregate”, meaning that there is only one single limit for all the claims against all the insureds during one policy year.

Question 28

What does professional indemnity insurance cover?

Answer 28

A standard PI policy covers injury, damage or financial loss to clients or the public because of breach of professional duty or negligent acts, errors or omissions in their professional capacity.

Cover is always based on claims made during the period of cover, rather than loss or damage caused or occurring during the period and a limit of indemnity for any one period usually applies.

Claims arising from the insured’s dishonesty are excluded

Question 29

Professional indemnity insurance can be extended to cover?

Answer 29

A PI policy can be extended to cover:

• claims which arise after the date of cancellation in the event of the firm being wound up (to allow for the possibility of claims in respect of negligent acts committed before the firm closed);
• breach of warranty of authority, in case the insured takes an action on behalf of a client in good faith which they are not authorised to do;
• financial loss caused by loss of documents;
• collateral warranties;
• cover for any other person or firm acting jointly with the insured; and
• fidelity guarantee.

Question 30

What is trustee insurance?

Answer 30

This type of insurance provides cover for trustees against the risk of personal liability for breaching their duties as a trustee.

Pension fund trustees and charity trustees are the two types of trustee for whom cover is required.

Question 31

On what basis is trustees insurance issued?

Answer 31

TI cover is provided on a ‘claims made’ basis, which means that all claims notified to the insurer during the period of cover are covered, irrespective of when the event that gave rise to the loss occurred.

Typical exclusions relate to wrongful acts, bodily injury, property damage, pollution, fraud, wilful act and employer failure to fund or collect contributions.

Question 32

What are the duties of charity trustees?

Answer 32

Charity trustees have a duty to safeguard any trust property against the risks of loss, damage or liability. If they unreasonably fail to discharge this duty, they may be found in breach of trust and held personally liable to make good the charity’s losses.

Insurance covers the management risks incurred by charities and their trustees and provides a personal indemnity to the trustees.

Charity trustees have legal authority to purchase TI and to pay the premiums out of trust funds, provided this is in the best interests of the charity.

Question 33

What does cyber insurance cover?

Answer 33

Cyber insurance policies will seek to cover losses relating to damage to or loss of information from IT systems and networks.

In addition, policies will offer assistance with and management of the incident itself, which can be vital in dealing with resultant reputational damage or regulatory enforcement.

Question 34

What does first party cyber insurance cover?

Answer 34

First party CI covers a business’s own assets for:

loss or damage of digital assets;
network downtime / loss of income / incident management costs;

cyber extortion – release of data, locking systems;

reputational damage – loss of intellectual property, data breach, lost customers;

and theft of money, funds and digital assets

Question 35

What does third party cyber insurance cover?

Answer 35

Covers the assets of others for:

loss/breach of third party data – investigation/defence and civil damages – including data stored with third party;

transmission of malware;

regulator action and certain fines;

breach notification;

and defamation/infringement of intellectual property rights

Question 36

What is extended warranty insurance?

Answer 36

A manufacturer’s own guarantee or warranty for a product is typically 12 months.

Extended warranty insurance provides cover for up to 5 years with a typical sum insured of £2,500 per period of insurance for replacement parts and/or labour.

Question 37

What are the typical exclusions to extended warranty insurance?

Answer 37

Typical exclusions that apply include:

• failure to comply with manufacturer’s instructions or negligent handling;
• risks normally covered by a household contents policy;
• war, etc; and
• costs of repairs to bulbs, aerials, external wires, knobs, handles, driving belts etc.