Local Government Reorganisation (LGR): What it Means for Councils’ Insurance Cover

The proposed new regime presents many challenges for existing authorities and for those who advise them.  Whilst there remains over two years until the proposed deadline, local authorities are well advised to start the process of preparing for the insurance challenges ahead, without delay.

One of these challenges will be ensuring that the new entities emerge with adequate insurance cover for the new level of risks they will face, writes Kella Bowers, Head of Insurance at Forbes Solicitors.

 We took soundings from our Local Authority clients as to the level of involvement that they have had to date in LGR conversations which will be ongoing within their Authorities. Surprisingly, most of the Insurance and Risk Managers had not been approached to contribute to the discussions to date.

At Forbes, we’ve worked with all aspects of Local Government for more than 50 years. During this time, we’ve seen that whilst insurance is accepted to be an inevitable necessity, it is often overlooked when considering long term strategy.  Making insurance arrangements central to the strategic future planning of Local Government would ensure that risks are appropriately considered, mapped out, and worst-case scenarios provided for.

Our experience reminds us that the fallout from previous Local Government reorganisations in the 1970s and 1990s were still being felt many decades later, not least because of the failure to appropriately ensure that insurance arrangements were considered alongside organisational changes.  Only by the involvement of insurance professionals in discussions when planning for future change, will risks be mitigated and appropriate safeguards be put in place.

What key challenges will Local Government need to consider?

Timing

A tender process will most likely be required when arranging new insurance provisions for the newly formed authorities and although most Local Authorities renew around March or April, this is not guaranteed. Different lines of insurance may be with different insurers, renewal dates may not line up, and larger risk profiles will inevitably lend themselves to discussions as to the potential change required to levels of deductible.

In anticipation of the reorganisation, some Local Authorities may choose not to renew their policies, but rather to take advantage of an extension made available as part of the policy. This will help to align the point at which the new policy for the new entity can start, without leaving a period without insurance being in place. However, this assumes that everything goes to plan.

There may be situations where the new entity is delayed and the maximum possible extension has been used up, resulting in the potential for a period lacking coverage. Who would pick up any risk in that period, particularly if the old entity where the incident occurs ceased to exist? It may be that the Government will put in place bridging insurance or some other form of contingency for this eventuality, but the situation needs to be considered and prepared for. It also needs to be raised as part of discussions with Central Government during the reorganisation process.

Those leading the negotiations need to know what the insurance arrangements are for all the relevant Authorities. This information needs to be collated by the project group and coordinated as part of the strategic plan. Inevitably, LGR will be a major undertaking and will have a significant impact on both the council’s and the insurers’ resources to deal with all the new tenders. As an example, Lancashire currently has 15 individual authorities with the expectation of them merging into between two and five new unitary authorities, based upon the various proposals just submitted.

There is usually a nine to 12 month timeline for setting up new insurance cover, notwithstanding the complications caused by LGR. Although 2028 seems a long way away, it will be here in the blink of an eye and the absence of Insurance and Risk Managers currently from the decision making table has the potential to delay reorganisation, or to leave a new entity exposed. A major goal of LGR is to ensure more efficient spending of funds for the benefit of local communities as well as costs savings by amalgamation, to reduce duplication of roles and processes. Costly uninsured claims will without doubt undermine that stated intention.

Insurance teams

Other risks include the potential to lose local expertise and knowledge. As the Authorities integrate, this will inevitably impact on their insurance teams and result in some form of amalgamation and restructuring exercise. The risk is that older, more experienced staff may opt for voluntary redundancy, taking all their valuable knowledge and years of experience with them.  An inexperienced insurance team, without former experienced colleagues to mentor them, is likely to cause issues with insurance tenders, complicated further by the amalgamation of authorities resulting in larger authorities containing risks perhaps less familiar to those remaining given the larger geographical area.

The drain of insurance and risk expertise in Local Authorities, due to retirement, lack of succession planning and recruitment difficulties, was an increasing issue even without LGR. The historic undocumented knowledge of senior colleagues, knowledge of where things are stored and even what was agreed could be lost. Efforts should be being taken to capture that knowledge now.

Each Council will bring their own distinct risk characteristics, existing coverage agreements, and historical claims histories. Having a clear understanding of these differences, and how they will shape the new authority’s insurance requirements, is essential.

The upshot is that if insurers are unable to assess the risk effectively, it could lead to significant premium rises and/or huge deductibles being imposed on the newly formed structures, further contradicting the stated aims of the reorganisation.

It would be beneficial to at least set out some guidelines for a future strategy and start detailed discussions within, and between, councils for the new entities.

What can Local Government teams do to prepare?

These challenges need to be met head on and there are steps that local authorities, and indeed those who presently insure them, can take now to mitigate their impact.

Collect the data

The new entity will need to have details of all its assets, as well as the insurance arrangements that are currently in place for all its component parts. It’s worth collecting up to 10 years’ data from each current entity where possible as this will enable claims analysis to support the new insurance programme.

This process can take many months, especially where each organisation has its own approach and specific preferences over formats and spreadsheets.

Liaising with organisations such as current and past insurers and brokers and with legal partners, all of whom will have historical data collected on behalf of constituent authorities, is vital.

Rationalise the approach

Once collected, the data will likely show a range of variables from types of cover and indemnity limits to levels of deductible. These variations could well be significant in presenting a challenge in assessing the cover required for the combined entity.

Since the newly formed organisation will have different risk characteristics than the former councils, gaining a perspective of claims histories can provide a valuable understanding of the most economically advantageous strategy.

Be aware of the history

The new authority could find itself receiving historic claims from each of the merging councils, such as claims for abuse and occupational disease claims. It’s important to determine how these claims would be allocated, especially where an existing authority is being divided. A specific fund to cover historic claims is one option, especially in instances where councils have previously covered some of the liability themselves. However this will require someone at the new entity to be the controlling mind over this, otherwise the new entity faces the prospect of attempts to pass responsibility.

This is the area where Councils became unstuck after the 1970s and 1990s reorganisation. Abuse claims became more prevalent in the late 1990s and into the 2000s, but they were not necessarily in the minds of the people dealing with reorganisation in the 70s and 90s. Who was responsible for what, and for what period, soon became very important as this claims area began to expand. Documented agreements about which policy covers what, as social care departments particularly get recognised, split and reformed will be essential so that the story can be traced back through its various iterations to the coverage at the time of the incident. In the absence of a clear strategy, Local Authorities may find themselves facing costs and damages not accounted for in current budgets.

In short…

The Government’s declared aim of LGR is to drive efficiencies across the new organisations, with benefits for both residents and the broader society. However, a lack of preparation in planning for the major upheaval ahead has the potential to cause serious problems. By taking the necessary steps to prepare, engaging early with your peer organisations, insurers, brokers and legal partners, Local Authorities should be able to mitigate risks, ensure continuous cover, and optimise insurance procurement for the new, larger, unitary authorities.

This article was first published in Local Government Lawyer.