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POST OFFICE LTD BOARD
Insurance issues arising from the Complaints and Mediation scheme
1. Purpose
The purpose of this paper is to set out the insurance-related issues for the Complaints
and Mediation scheme and is an update to the paper submitted to the Board reading
room in December 2013.
2. Introduction
Until September 2012, insurance for Post Office was provided by an RM Group insurance
programme. Following separation, it was decided to mirror the existing insurance
programme to ensure Post Office had no less cover than when part of RM.
Post Office’s post-separation insurance programme, which was put together with Post
Office’s newly appointed broker, Miller, covers Property (£250m), Business Interruption
(£10m), Employers’ Liability (25m), Public Liability (50m), Motor (Comprehensive Full
Cover), Crime (£400m), Kidnap and Ransom (£20m), and Directors’ and Officers’ Liability
(£20m).
3. Nature of the risk
So far c150 applications have been received of which only about a third have been
worked through so the assessment below is based on our estimation of the issues. It is
possible, but unlikely, that the pattern of cases might develop in a way that changes this
assessment.
4. I How much might the compensation cost?
The legal and financial risks arising from the process are covered in a separate Board
paper. However, for insurance purposes, it is important to be clear which costs are
incurred as a direct consequence of specific legal obligations. Whilst cover would
theoretically extend to costs incurred as well as compensation paid, insurers will argue
that anything above the level relating to legal obligations represents a ‘goodwill’ payment
that must be funded by the policyholder.
5. I What insurance cover might respond?
Summaries of the relevant insurance policies can be found in the annex attached to this
paper.
Based on the current position none of our existing policies are expected to respond for
the following reasons:
e there is no legal obligation to make material payments
e the levels of excess that would apply
e the precise nature of the cover in place.
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6. Can this assessment be independently verified?
Independent advice has been sought to provide a definitive view on all aspects of
insurance ie organisational and personal. This advice will cover what policies Post Office
has and what they cover, as well as the actions Post Office has undertaken to fulfil its
obligations under these policies. This view will be provided at the Post Office Board
meeting.
7. Impact of mediation process on potential claims
As noted above, only payments made due to a legal obligation would be covered so if an
insurer did face a claim from a mediation process they would insist on being involved in
order to be certain that any payments related to a legal obligation and were not simply
goodwill.
8. Directors’ liabilities
Directors are highly unlikely to be personally liable in respect of past prosecutions unless
a court determines that they have acted maliciously or in bad faith, which is very hard to
envisage. In any event the D&O policy provides cover up to £60 million and has a
£25,000 excess for claims by the Company but no excess for claims brought against
individual directors. It is also retrospective so applies to historical claims. Whether or not
the policy will respond in relation to a claim will depend on the circumstances of the claim.
However, we have notified our brokers of the circumstances which may give rise to a
claim.
9. Our strategy with insurers
In August 2013, we formally notified the insurers for our D&O, Public Liability and
Professional Indemnity policies. They have also all received a copy of the Second Sight
report.
All the insurers have noted the contents of the report. There has been no further
comment from insurers, though this is normal given there are no claims or notifications at
this stage.
Post Office’s legal advisors (Bond Dickinson) have been instructed to review each
application submitted into the Mediation Scheme to identify any matters which could
trigger insurance coverage (none have been identified to date).
The strategy remains to keep insurers updated via our brokers. Post Office, Bond
Dickinson and Miller will meet once Second Sight provides its report on the Horizon-
related “themes” it has identified.
At this meeting, which will be within a week of receiving the Second Sight report, we will
discuss next steps including whether:
e insurance cover is available from RM’s captive (which is complicated as it is 100%
RM controlled);
¢ individual cases can be treated as connected or interrelated claims for insurance
purposes;
e adifferent approach should be followed in light of the independent report;
e adopting a different approach to dispute resolution to the current Scheme would
assist in obtaining insurance cover; and
«insurers should be more fully engaged.
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More generally, we will continue to monitor the position as more cases are submitted to
the Mediation Scheme (as mentioned above, to date, only c25% have been received),
though clearly the final position will not be known until all the cases have been submitted.
10. Recommendation
The Board is invited to note the position on insurance.
Chris Day
March 2014
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Annex
Directors and Officers Liability (D&O)
D&O Liability provides full cover for Post Office (PO) directors and officers where they are sued
as a result of a wrongful act resulting from something allegedly done while acting as a PO
manager. The policy will also respond if there is a formal external investigation into an
individual's actions or the affairs of the company.
This policy is a joint and several contract between Insurers and each insured individual, which
means that any individual can make a claim under the policy, with or without PO’s consent.
The policy covers claims against individuals, not PO, so an individual has to be named in a
claim for the D&O policy to apply. If there were to be an official external investigation, the
policy might also cover some investigation costs (e.g. the costs for a director attending the
investigation).
The policy is unlikely to cover mediation, which on its own is neither a claim against an
individual nor a formal external investigation.
Public Liability (PL
Public Liability covers injury or damage to Third Parties arising out of PO’s actions. We have
notified our PL insurers because a claim against PO for “stress” arising out of this matter could
be classed as a third party “injury”. This policy however carries a high excess of £250k per
claim.
Professional Indemnity (PI
Professional Indemnity insurance covers a breach of professional duty by PO resulting in a third
party loss. This policy covers Civil Liability, Defence Costs and Expenses, Libel and Slander
(committed by PO or any person employed by PO), and Breach or Infringement of
copyright/intellectual property rights. This policy also carries a £250k excess for each and every
claim.
PO’s PI cover was purchased last year to cover specific Government Services contracts, which
will make it difficult to make a Project Sparrow-related claim.
Further, in addition to the general uncertainty as to whether any PI policy would provide
insurance cover for Project Sparrow-related claims, there is also an issue of when PO first
became aware of the matters which would give rise to a PI claim. Given that the Second Sight
report refers to problems with the Horizon system (and the resultant issues with the sub-
postmasters) occurring prior to the PI policy's inception date, underwriters may claim that this
was a “known” issue and therefore excluded from the cover.
On separation, PO did not to take out company-wide PI cover principally because it was difficult
to foresee a scenario whereby PO would have an exposure for professional negligence (from
the information available, there is no evidence of any circumstances or claims being made
against PO for professional negligence since it was created c30 years ago, or indeed the RM
Group over that period).
This position was supported by historical advice and aligned with RM and their broker's (JLT)
view, and the purchase of a PI insurance policy in September 2012 was specifically to meet
contractual requirements for the two Government contracts and not because of any foreseen
increase in exposure.
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Whilst there is some evidence that PO were misinformed by RM and there was PI cover from
2002 to 2012 it was via RM's captive, therefore any claim will be complex as PO doesn't have
any access to any records from the captive. In addition there was an excess of £1m per case.
Further action may be taken on this depending how the claims develop.
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