Who Is the Insurance For?

The lease appears to require public liability insurance for the protection of the estate and its leaseholders. So why is the insurance we are told about focused on protecting the directors?

There is something rather striking about the insurance position at Noble Court. The lease contains an express covenant by the Management Company. Not a suggestion. Not a recommendation. A covenant.

It states that the Management Company must:

“At all times during the said term keep insured the Lessor and the Lessee against legal liability related to all third party claims usually insured against under public liability insurance…”

The lease then expressly identifies the risks: bodily injury, illness, disease and loss of or damage to material property arising from the use of the Estate.

Read plainly, this is an obligation to maintain insurance protecting the freeholder and leaseholders against specified third-party liabilities arising from the Estate.

Yet we understand that the directors have Directors & Officers insurance, while there is no separate public liability insurance.

That deserves an explanation.

Insurance for the directors. What about everyone else?

D&O insurance has its place.

Directors take decisions. They can face allegations concerning how they have exercised their responsibilities. Insurance designed to protect directors against certain claims arising from their conduct as directors can therefore be entirely appropriate.

But that is not what this clause of the lease is talking about.

The lease does not say:

Keep the directors insured.

It says:

“keep insured the Lessor and the Lessee”

And it refers specifically to liabilities normally insured under public liability insurance.

That is a very different proposition.

Public liability insurance exists to address the risk of claims by third parties arising from injury or property damage connected with the activities, premises or areas for which the insured is responsible.

In other words, it is insurance concerned with the people and property exposed to the risks of the Estate.

D&O insurance is concerned with something else entirely.

The words in the lease matter

There is a tendency in estate management to regard insurance as a box to be ticked.

Policy? Yes.

Insurance? Yes.

Directors covered? Yes.

Job done.

But leases do not work on that basis. The question is not simply whether the Management Company has some insurance. The question is whether it has the insurance that it has covenanted to maintain.

Clause 4(B) is remarkably specific.

It requires the Management Company, “at all times during the said term”, to keep the specified parties insured against the specified category of third-party liability. That is a continuing obligation.

If the required public liability protection is absent, the issue is not merely whether the board has chosen a different insurance product.

The issue is whether the contractual obligation in the lease is being fulfilled.

A curious imbalance

This is where the situation becomes difficult to ignore. On one side, the directors have insurance designed to protect them in their capacity as directors.

On the other, we appear to have an express lease covenant requiring insurance protecting the Lessor and Lessees against public-liability risks associated with the Estate.

If one form of protection exists while the other apparently does not, leaseholders are entitled to ask why.

Not as an attack on the directors. 

AS a matter of governance.

As a matter of contractual compliance.

And, frankly, as a matter of priorities.

Because the lease does not appear to have been written to ensure that the people running the Management Company are protected while leaving the people living on the Estate to carry the risk.

What exactly is covered?

There is an obvious question that should be answered before anyone declares the insurance position satisfactory:

Where is the public liability cover required by clause 4(B)?

If it exists within another policy — perhaps as an extension to buildings insurance or another estate-management policy — then fine.

Produce the policy schedule.

Show the cover.

Identify the insured parties.

Identify the limit of indemnity.

Identify the relevant exclusions.

Demonstrate that it covers the liabilities described in the lease.

If it does not exist, then the next question is even simpler:

Why not?

And if the answer is that the RMC has D&O insurance instead, that does not answer the question.

It merely describes a different insurance product.

The cost argument does not really answer it

Perhaps public liability insurance costs money.

So do buildings insurance, contractors, maintenance, professional advice and virtually every other obligation associated with running an estate.

But if the lease requires something to be done, the relevant question is not whether the board would prefer to spend the money elsewhere.

The relevant question is whether the Management Company has complied with its covenant.

And there is something particularly uncomfortable about a situation in which insurance expenditure appears sufficient to protect those making the decisions, while the insurance expressly contemplated by the lease appears absent.

That deserves scrutiny.

This is about more than insurance

The deeper issue is accountability.

An RMC is not a private club for its directors.

It exists to manage the estate in accordance with the legal and contractual framework governing it.

The lease is part of that framework.

When the lease says the Management Company must maintain insurance for the protection of the Lessor and Lessee against specified third-party liabilities, that obligation should not disappear simply because modern management arrangements have become more complicated.

Nor should it be replaced by an assumption that another insurance policy must be “close enough”.

Insurance is not interchangeable.

A D&O policy cannot simply be treated as public liability insurance because both happen to carry the word insurance.

The questions the board should answer

There should be no need for speculation.

The directors should be able to provide clear answers to a short list of straightforward questions:

1. Does the RMC currently have public liability insurance?

2. If so, where is it within the insurance programme and what is the limit of indemnity?

3. Does the policy insure the Lessor and Lessees as required by clause 4(B)?

4. Does it cover bodily injury, illness, disease and property damage arising from use of the Estate as contemplated by the lease?

5. If no such cover exists, why has the Management Company not maintained the insurance required by clause 4(B)?

6. On what basis does the board consider that its current insurance arrangements comply with the lease?

These are not unreasonable questions.

They are precisely the sort of questions that responsible corporate governance should welcome.

Read the lease. Then read the policy.

The answer should not depend upon interpretation by committee, management agent or assumption.

It should be possible to place the two documents side by side:

the lease says what must be insured;

the policy says what is actually insured.

Then compare them.

If they match, the matter is settled.

If they do not, the discrepancy needs to be addressed.

That is how accountability works.

Not by assurances.

Not by descriptions.

Not by saying that the directors have insurance.

Show us the cover.

The lease appears to require protection for the Estate’s leaseholders and freeholder against public-liability risks. If the directors have insurance protecting themselves, but the insurance required by the lease is absent, that is not a detail to be brushed aside. It is a question that deserves a clear answer.

It is quite possible that the freeholder’s buildings insurance also contains public liability/property owners’ liability cover, because that is common in block insurance policies.

However, the fact that the freeholder’s policy contains PLI does not necessarily mean that the RMC’s separate contractual obligation to maintain PLI is redundant.

The lease structure is particularly important here:

• Freeholder: insures the building.
• RMC: separately covenants to maintain public liability cover protecting the relevant parties against third-party claims.
• Therefore, the two insurance obligations appear to have been deliberately separated in the lease.

The key issue is what risks each policy is intended to cover.

For example, the freeholder’s policy might contain property owners’ liability covering claims arising from the building itself, whereas the RMC’s PLI obligation might be intended to cover liabilities arising from the RMC’s management and use of the estate/common areas.

The investigation continues.