Compensation and MMI: Andrew Bibby on the possibilities for refunds if the insurer goes under

THE UNCERTAINTY over the future of Municipal Mutual Insurance, Britain's ninth-largest general insurer, has focused attention on the industry's compensation arrangements.

While local authorities would face severe problems if MMI collapsed, around a million individuals would also be affected following the company's recent expansion into general insurance business.

The Policyholders' Protection Board was established by an Act of Parliament in the mid-1970s after the spectacular collapse of Vehicle & General. It pays compensation at 90 per cent of full claims to individual policy-holders whose insurer has gone into liquidation. Full compensation is available to individuals and limited companies where the insurance is legally necessary (the obligatory element of motor policies and employers' liability cover). The compensation is paid for by a compulsory levy on insurance companies.

There are special arrangements for payments on long- term life and investment business, such as that managed by Prosperity Life, which is part of MMI and has 68,000 policyholders.

Where money is already due from a policy, the normal 90 per cent rule applies. But where the policy has not yet matured, the PPB has to arrange for the insurance to continue, with 90 per cent benefits guaranteed. If this proves impossible, the PPB pays off the policy-holder with a sum equivalent to 90 per cent of the value of the cover.

Until recently, the PPB had a peaceful existence. But then the collapses of London United Investments in 1990 and Continental Insurance and Trinity Insurance earlier this year obliged it to take on extra staff and to levy the industry for the substantial sum of pounds 38m.

According to Derek Wright, the PPB's part-time secretary, it tries to deal with compensation claims quickly - 'in straightforward cases without any legal complexities, I would hope within three months'. But it has no real experience of a large insurance crash, such as the possible liquidation of MMI.

The reassurance provided by the PPB is limited by two factors. First, it has been engaged in a complex legal case to determine its exact powers and duties. A High Court ruling earlier this year appeared to exclude from compensation those policyholders whose claims had not been processed and accepted by the insurer before it went into liquidation. A more recent Court of Appeal judgment has overturned this interpretation, but the case may yet go to the House of Lords.

Second, the PPB's legal duties only apply to insurance companies actually in liquidation. It has discretionary powers to assist only in the more common situations where a firm is trying to avoid formal liquidation by adopting a 'scheme of arrangement', or where a provisional liquidator has been appointed. While the PPB has agreed to make interim payments in the case of Trinity Insurance, which is in provisional liquidation, Mr Wright says this decision does not necessarily dictate future policy.

Jean Eaglesham of the Consumers' Association advises: 'If you have time still to run on your insurance and you have not made a claim during the current period of insurance, you may benefit from cancelling your policy, but this is unlikely.

'If MMI resolves its financial difficulties, you will have cancelled your policy unnecessarily. If its financial difficulties are not resolved, you will get a refund of the premium from the liquidator belatedly, if at all.'

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