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The most expensive collapse of all?

COVER STORY: INDEPENDENT INSURANCE - Contractors, consultants and some clients could be facing additional costs running into millions of pounds after the collapse of the Independent Insurance group last month. Diarmaid Fleming reports.

As lawyers pore over the carcass of the collapsed Independent Insurance company, there appears to be little short term prospect of relief for those who held policies with the doomed firm.

Construction firms were particularly badly hit because Independent offered cheap policies in a specialist sector seen by some firms as high risk. Now the cost of premiums is rising and anecdotal evidence suggests that the number of firms offering policies to the industry is falling.

The cost of replacement policies for Independent's clients could, according to insurance experts, increase by anything from 50% to three times that charged by the failed insurer.

'Anyone looking for new insurance is going to be paying more because Independent was offering policies which were cheaper than others, ' says Mark Hiller, construction specialist and partner at insurance firm JLT Risk Solutions. 'That's why they went under.'

The cost of replacing insurance policies held with failed insurers is graphically illustrated by the experience of the Dublin Light Rail (DLR) scheme.

Like the Channel Tunnel Rail Link (CTRL), the project is insured by the client to save costs rather than seek insurance through a myriad of different contractors.

While the CTRL was only part insured by Independent, the DLR scheme was fully covered by the troubled firm.

'We had taken out contractorwide cover and project-wide insurance covering various elements such as public liability and professional indemnity. The insurance was taken out around a year ago but the main concern is that we will have to pay current rates which are possibly double, ' says DLR project manager Michael Sheedy. The additional costs could reach IR£1.5M (£1.2M).

Failure of one of construction's most significant insurers is only one factor affecting the industry's ability to protect itself against the unexpected.

Changes in the insurance marketplace are also having an effect.

'It seems the market is hardening, with evidence that premiums are increasing, possibly due to fewer companies offering insurance to the construction industry, ' says Civil Engineering Contractors' Association director Rosemary Beales.

The Construction Confederation and the Association of Consulting Engineers have issued guidelines to all members following Independent's collapse.

The ACE says that consultants insured with Independent should take legal advice and contact their brokers.

Independent policies cannot be relied on, meaning that without alternatives, companies effectively have no insurance.

This could put them in breach of contractual obligations to clients to maintain cover such as professional indemnity and public liability cover. They could also be breaking the law by failing to have statutory cover such as employers' liability or motor insurance.

And there is a further sting in the tail. Some of Independent's policyholders are committed to making long term premium payments to keep long term policies alive. While Independent may not now be able to pay out on these policies, policyholders who make new arrangements are still obliged to keep up these payments. Independent's liquidators will seek these payments in an attempt to recover any money that can pay off the insurer's creditors.

The Construction Confederation says that whether the insured will be entitled to cancel and receive a prorata refund would need to be provided for in the terms of the policy.

It also says that while Independent's liquidators could cancel policies, it is unlikely to happen. Refunds will depend on what money is left for unsecured creditors, and would be unlikely to meet the full value owed.

Companies which fail to pay premiums in breach of their policy could find themselves being pursued by the liquidators for themoney owed, the Confederation warns.

The ACE says many consultants were covered by its own scheme run by insurance company Griffiths & Armour (G&A) and policies had no connection with Independent. However a spokesman said a number of unnamed consultants were covered by the stricken firm.

Apart from having to pay for additional insurance, firms which used to hold policies with Independent, but which had switched their cover before the insurer ran into trouble, could face worse problems.

G&A senior partner Mark Griffiths says that claims on previously held policies could still have an impact. 'Some claims could go back as far as 10 years and still remain unsettled. Firms could be exposed to claims of millions which they will have to meet themselves, ' he said. The spread of firms affected could vary from very small to large, raising the possibility of severe problems for some.

There is some relief under the Policyholders' Protection Board (PPB) scheme, set up to protect those insured by companies which fail. Both the Construction Confederation and ACE advise that claims arising from compulsory insurance policies such as employers' liability will be met in full by the PPB.

Sole traders or partnerships where the partners are individuals can recoup 90% of claims from the PPB on noncompulsory cover, such as professional indemnity.

But private companies will not be able to claim from the PPB for these types of policies, and will have to wait their turn as unsecured creditors of the firm. What flows from the liquidation of Independent remains to be seen and will not happen soon.

The Irish construction industry has been hit even harder than Britain, as a high proportion of contractors held Independent policies. It has emerged that Irish firms may not be covered by payments from the PPB, meaning they may be even more exposed than their UK counterparts. The Irish Construction Industry Confederation (ICIC) is meeting the Irish government this week over the matter.

'There is supposed to be a single European insurance market yet this can happen. We want to see what can be done or what mechanisms can be put in place to prevent it happening again, ' an ICIC spokesman told NCE.

Legal action could offer some hope. Solicitor Class Law partner Stephen Alexander is coordinating a class or group action of on behalf of those affected by the collapse.

'We do know quite a few construction companies have claims, ' says Alexander. He would not name any, but indicated that well known names were involved with large amounts of money at stake.

The group is trying to raise £1M cash to fight the action which may offer the best prospect of recouping losses. The group will be examining the role of Independent's auditor KPMG, actuary Watson Wyatt and other firms such as credit agencies which gave policyholders assurances about the company's health.

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