Councils face insurance headache

Local authorities are facing an increase in insurance claims and legal disputes as budgets and workforces are chopped and the trend for outsourcing raises the risk of service failures.

With councils facing funding cuts of almost 30 per cent over four years, local authorities are trying to save money by commissioning services instead of providing them in-house, bringing in the private sector to run, for example, road maintenance programmes.

But although councils may have outsourced services, they are still usually responsible by law for the upkeep of facilities such as roads, lifts and stairs and get the bill if insurance premiums go up or someone makes a claim because they have an accident.

Andrew Jepp, the director of public services at Zurich Municipal, the largest provider of local authority insurance in the UK, said: “Councils need to look at the bigger picture. For example, if a local authority knocks 20 per cent off the highways budget, it may not be a saving if you get more claims for tripping on a pavement.”

Local councils have also seen a rise in the number of contractors taking legal action. This is because of the introduction of stricter rules on procurement, which came into effect in 2009. More contractors are now arguing that a competition for a contract was not carried out properly and are challenging its award to a rival.

High-profile disputes over procurement include the challenging by Sita, the recycling company, of the award of a £320m waste disposal contract by Manchester city council and a High Court case between Mears, a social housing and care services group, and Leeds city council over the £420m award to rivals of 10-year contracts for work on housing stock.

Nick Maltby, partner in government and infrastructure at Bircham Dyson Bell, a law firm, said the number of cases was increasing all the time. “The whole culture has changed over the past 10 years. There used to be a feeling that if you took action you’d be blacklisted, but now that’s not the case and there’s a lot to play for in some of these contracts.”

Zurich said claims had almost tripled in number over the past year and had the potential to cost councils millions. As a result, the insurer has increased by more than 90 per cent the funds set aside for these claims from 2010 to 2011, which could cost councils multimillions of pounds.

“If you cut budgets, it increases risk disproportionately and premiums are likely to rise in the long run,” said Mr Jepp. “In 2008, no money was reserved for such claims as incidents of this kind were insignificant, demonstrating the very recent nature of this trend.”

Three big insurance companies dominate the market for local authority insurance – Zurich Municipal, Travelers and Chartis. Chartis said it was scrutinising local authorities’ procurement procedures more closely because of concerns that claims would rise. Travelers declined to provide figures but people familiar with the company said it was likely the insurer had also seen a rise.

Nicola Lashmar, senior associate at Eversheds, the law firm, said local authorities were in a difficult position.

Cuts to their budgets meant there was less money to go around, but their obligations to maintain the roads remained. “There’s nothing to stop local authorities appointing an outsourcing firm to mend roads but the buck still stops with them under the Highways Act. It’s not a defence open to the council to say that they’ve run out of money.”