INSURANCE Contents: Scope Key Points Background Commercial Insurance Loaned Assets Fees and Charges Employers' Liability / Roads Traffic Acts Liabilities of Office-Holders and Board Members Vehicle Insurance in the EU Uninsured losses or Claims Insured Losses or Claims
Scope 1. This section gives guidance on insurance arrangements in constituent parts of the Scottish Administration (including the core Scottish Government (SG) and Executive Agencies) and bodies sponsored by the SG. Other bodies to which the Scottish Public Finance Manual (SPFM) is directly applicable should ensure that appropriate guidance on insurance is put in place.
Key Points 2. Insurance arrangements of all bodies to which the SPFM is applicable should be reviewed from time to time in the context of "Risk Management". 3. As a general rule commercial insurance would only be justified in constituent parts of the Scottish Administration and sponsored bodies (but see paragraph 9 below) if the cost of claims, including administration costs, was calculated as likely to exceed the cost of insurance premiums. However, in certain circumstances there are special factors which may justify commercial insurance being taken out. 4. The insurance arrangements for sponsored bodies, including the circumstances in which self-insuring sponsored bodies should or may take out commercial insurance and the circumstances in which additions to grant in aid and/or adjustments to targets might be considered should be covered in the individual body's Management Statement / Financial Memorandum. Sponsored bodies must insure commercially where there is a legal requirement to do so. 5. Portfolio Finance Teams should be consulted before commercial insurance is taken out by the core SG or Executive Agencies (including non-ministerial Executive Agencies / Departments) and on proposals by a self-insuring sponsored body to take out commercial insurance in circumstances not specifically covered in this guidance or in the body's framework document. 6. Under the policy of self-insurance, where it is decided that an asset should be repaired or replaced or a claim met, the presumption is that the costs will be met from within existing allocations of resources.
Background 7. Insurance arrangements of all bodies to which the SPFM is applicable should be reviewed from time to time in the context of Risk Management. However, under the Scottish Ministers' policy of self-insurance constituent parts of the Scottish Administration and sponsored bodies (but see paragraph 9 below) would as a general rule be justified in taking out commercial insurance only if the cost of claims, including in-house and contracted-out administration costs, was calculated as likely to exceed the cost of insurance premiums. All of the expected costs and benefits should be taken into account in appraising the case for commercial insurance. Detailed guidance on conducting a cost-benefit analysis is provided in the Green Book. In order to show that commercial insurance provides value for money the cost-benefit analysis must show a positive net benefit.
Commercial Insurance 8. In certain circumstances there are special factors which may justify commercial insurance being taken out e.g.: - buildings insurance where insurance is a condition of a lease and the lessor will not accept an indemnity. Every attempt should be made to persuade the lessor to accept an indemnity or letter of comfort but where the lessor will not agree to do so commercial insurance may be taken out, provided that incurring the total cost of the accommodation in question including the cost of the insurance policy is more cost-effective than other accommodation options;
- overall site insurance. Private sector contractors and developers usually take out a single joint site insurance policy because it is cheaper than each individual party insuring themselves separately and the client's own risks can be covered for little or no extra cost;
- where the purchase of insurance is integral to a project and where the cost would make no difference to the choice of contractor. Every attempt should be made to persuade the contractor to accept an indemnity or letter of comfort and any costs should be included in the appraisal of the project;
- insurance in relation to income generation schemes / wider market activities outwith core responsibilities where the cost of such insurance would be met entirely out of the income generated by those schemes / activities - see below under Fees and Charges;
- insurance in respect of boilers and lifts which involves periodic expert inspection designed to reduce the risk of loss or damage; and
- insurance in respect of loaned assets where the lender is not prepared to accept an indemnity or letter of comfort - see below under Loaned Assets.
9. Sponsored bodies must insure commercially where there is a legal requirement to do so e.g. to comply with the Road Traffic Acts. So far as a sponsored body's other insurance arrangements are concerned the sponsor Directorate, in consultation with the portfolio Finance Team, should consider whether commercial insurance would be more appropriate than self-insurance. As a general rule a sponsored body should insure commercially where it meets more than half of its overall costs from the provision of commercial services (i.e. non-statutory services provided in competition with the private sector) or where it receives less than half of its non-fee income from the SG (i.e. the SG provides less than half of the total grant / grant in aid from all sources). Otherwise self-insurance will normally be appropriate. Where self-insurance is considered appropriate the circumstances in which the sponsored body may insure commercially are otherwise essentially the same as those for constituent parts of the Scottish Administration. 10. The portfolio Finance Team should be consulted before commercial insurance is taken out by a constituent part of the Scottish Administration (i.e. the core SG and Executive Agencies, including non-ministerial Executive Agencies / Departments). The insurance arrangements for sponsored bodies, including the circumstances in which self-insuring sponsored bodies should or may take out commercial insurance and the circumstances in which additions to grant in aid and/or adjustments to targets might be considered should be covered in the individual body's Management Statement / Financial Memorandum or equivalent document. If a self-insuring sponsored body wishes to take out commercial insurance in any other circumstances it should consult its sponsor Directorate which in turn should consult its portfolio Finance Team.
Loaned Assets 11. Where assets owned by the Scottish Ministers or self-insuring sponsored bodies are temporarily held in the custody of a contractor or other outside agency and the holder is required to insure them, or decides to insure them because it is the normal practice of the contractor to insure in such circumstances, the cost of the premiums may be met by the relevant Directorate, Agency or sponsored body. However, the cost of any insurance against risks arising from negligence or wilful misconduct by the contractor's employees should be borne by the contractor. 12. Where assets owned by the Scottish Ministers or self-insuring sponsored bodies are loaned to a third party other than a body which does not insure, the general rule is that the borrower should, in the name of the lender, insure against damage or loss of the assets from the time of receipt and against claims by third parties including the employees of the borrower. An indemnity by the borrowers can take the place of insurance if the lender is satisfied that any losses could be met by the borrower from its own resources. 13. Where a constituent part of the Scottish Administration or self-insuring sponsored body receives on loan an object of value and the owner, as a condition of the loan, insists upon the continuation of current insurance, the borrowing party should make every effort to persuade the lender to accept an indemnity in place of insurance, unless commercial insurance would be more cost-effective. Where an indemnity is acceptable to a lender its terms should (with legal advice) be so drawn as to leave no doubt as to the extent and duration of the liability of the borrowing party. (Indemnities resulting from the policy of self-insurance should be regarded as arising within the normal course of business - see the guidance on Contingent Liabilities.)
Fees and Charges 14. Where commercial insurance is taken out against risks arising in connection with a service for which a fee or charge is levied, the actual premium payments to the insurance company should be included in the calculation of costs for the purpose of determining the fee or charge. In the case of self-insurance where there is no actual payment to record it will be necessary to calculate a notional insurance premium. This should be done for all relevant uninsured risks, such as damage to or loss of assets, employers' liability and claims from third parties. Notional insurance premiums should be based on an assessment of the amount needed, taking one year with another, to cover the costs of meeting any losses. 15. Where fees and charges are set by statute the statutory requirements must be observed and override any guidance in the preceding paragraph.
Employers' Liability / Roads Traffic Acts 16. Crown bodies are not bound by the Employers' Liability (Compulsory Insurance) Act 1969 or the relevant Road Traffic Acts. Constituent parts of the Scottish Administration, therefore, are not statutorily required to insure the risks which may arise under those Acts and a decision to insure or not to insure should be taken on value for money grounds. 17. Sponsored bodies are not Crown bodies and must insure commercially where there is a legal requirement to do so. However, sponsored bodies do not necessarily have to insure against employers' liability risks. This is because the Employers' Liability (Compulsory Insurance) (Amendment) Regulations 1998 (as amended by the Scotland Act 1998 (Consequential Modifications) No 2) Order 1999) provides exemption for any body which holds a certificate issued by the Scottish Ministers. If it is decided, in consultation with the relevant portfolio Finance Team, that the sponsored body should not insure, responsibility for the issue of certificates in accordance with the Act rests with the sponsor Directorate. Sponsor Directorates, in consultation with their portfolio Finance Teams, should ensure that the circumstances in which certificates have been issued are reviewed from time to time so that certificates may be revoked if circumstances change. Certificates should, as a general rule, only be issued to bodies receiving grant in aid as it would not normally be appropriate to issue such certificates to bodies funded in other ways. 18. The scope of the certificate should be strictly confined to the risks with which the Act is concerned, and may not be extended to any other risks. It should be in the following form: "In accordance with the provisions of paragraph 1 of Schedule 2 to the Employers' Liability (Compulsory Insurance) Regulations 1998 (as amended by the Scotland Act 1998 (Consequential Modifications) No 2) Order 1999)) the Scottish Ministers hereby certify that any claim established against [name of body] in respect of any liability of the kind mentioned in section 1(1) of the Employers' Liability (Compulsory Insurance) Act 1969 will, to any extent to which it is incapable of being satisfied by the aforementioned employer, be satisfied out of the Scottish Consolidated Fund." 19. In the case of any cross border public authorities / jointly established bodies receiving grant in aid from both the SG and UK Government Departments, sponsor Directorates should consider, together with their Whitehall counterparts and in consultation with their portfolio Finance Team, the most appropriate treatment (e.g. issue a certificate in respect of Scottish employees only, or arrange the issue of a joint certificate).
Liabilities of Office-holders and Board Members
20. Office-holders appointed by the Scottish Ministers and individual board members of bodies sponsored by the SG (including independent external members of board committees) who have acted honestly and in good faith should not have to meet out of their own personal resources any personal civil liability which is incurred in the execution or purported execution of their functions, save where the person has acted recklessly. Claims established against a relevant office-holder or board member will therefore be met from funds provided by the Scottish Ministers. Additions to grant or grant in aid and/or adjustments to targets may be considered by the sponsor Directorates of sponsored bodies on a case by case basis. 21. It should not therefore be necessary to issue formal indemnities to relevant office-holders and board members in connection with personal civil liabilities. However, such indemnities may be provided by the SG on a case by case basis. (Indemnities resulting from the policy of self-insurance should be regarded as arising within the normal course of business - see the guidance on Contingent Liabilities.) 22. Sponsored bodies for which self-insurance is considered inappropriate (see paragraph 9) may take out commercial insurance against the personal civil liabilities of board members and independent external members of board committees.
Vehicle Insurance in the EU 23. Vehicles travelling in other countries of the European Union must comply with relevant Directives.. These require vehicles of a member state operating in another member's territory to be covered by insurance to the extent required by the legislation in that territory, unless acceptable alternative arrangements or indemnities exist or are instituted.
Uninsured losses or Claims 24. Where a loss occurs or a third party claim is received the first question to consider is whether the loss should be made good or the claim accepted. In the case of loss of or damage to assets the question of repair or replacement should always be carefully considered taking account of the need for the asset. A repair or replacement decision is, in effect, a new investment decision and should be appraised accordingly. Claims against constituent parts of the Scottish Administration (and claims against relevant sponsored bodies that fall outside any delegated authority) should be carefully considered in consultation with the Scottish Government Legal Directorate and the relevant portfolio Finance Team. 25. Where it is decided that an asset should be repaired or replaced or a claim met, the presumption is that the costs will be met from within existing allocations of resources. It is, however, open to the SG to consider whether it should make any additional funds available to a relevant sponsored body and/or adjust targets. 26. Losses which are not fully covered by commercial insurance or made good by a third party are subject to the guidance on Losses and Special Payments.
Insured Losses or Claims 27. Where commercial insurance policies have been taken out the claim should be handled under the terms of the policy. Receipts from insurers in settlement of claims by constituent parts of the Scottish Administration which are not covered by Budget Act authority must be surrendered to the Scottish Consolidated Fund. The budgets of sponsored bodies should be adjusted to enable receipts from insurers in settlement of claims to be used to meet expenditure resulting from the losses or claims. However, the use of any such receipts for any other purpose will be subject to approval by the sponsor Directorate on a case by case basis. Back to top Page Published / Updated: September 2008 |