Setting up a local authority trading company (LATC) offers a number of benefits to local authorities. But, as Alison Goodwin, Public Sector Practice Leader at Aon explains, the insurance requires careful attention.
With budgets tight, setting up a trading company offers local authorities the opportunity to create new income streams. But, while these arrangements can deliver financial benefits, it’s essential not to overlook the insurance requirements.
Wholly owned by the local authority but operating as a separate entity, an LATC can be set up to deliver a wide range of services such as cleaning, catering and property services. It can either provide its services directly back to the local authority, or a group of authorities, or it can be more of a commercial venture, selling goods or services to other organisations or members of the public.
As well as the potential to generate additional income, an LATC has greater flexibility around how it operates. This can enable it to deliver services more efficiently or address recruitment issues the local authority might have experienced.
For instance, an LATC is not tied to public sector pay agreements and can adjust its remuneration package to attract the best staff to provide a better range of services. Reducing the pension contribution and increasing basic pay could maintain the same overall cost, but might be more appealing to employees and help to ensure a more stable workforce.
It’s also essential to consider the insurance requirements of any LATCs, including the provision of insurance advice and support. LATCs do vary in size and complexity and there is no single insurance solution which will suit all circumstances.
As they’re separate entities, the local authority’s insurance covers will only trigger if an LATC experiences a loss if it has been specifically added to the authority’s insurance arrangements. While this is an acceptable approach, many authorities choose to keep the insurance arrangements for an LATC completely separate. This helps with the allocation of costs and creates clear divisions in risk.
LATCs also face some additional risks which may not form part of a standard local authority insurance programme, including:
- Directors & Officers insurance
This is necessary to cover the liabilities of the trading company’s senior management. This is not usually purchased by the owning authority and must be put in place from the time the LATC starts to make decisions and not from the date it starts trading.
- Professional indemnity insurance
This may also be required where the company is providing any professional services such as architect or legal advice. Operating as a commercial organisation can bring challenges with regards to insurance arrangements as many contracts stipulate a minimum level of professional indemnity. This is easy to access as a large local authority, but can be prohibitively expensive as a small trading company.
It is also worth remembering that a professional indemnity policy will not trigger for claims made by the trading company’s parent company.
The arms-length nature of the relationship can mean many local authorities leave their trading companies to look after their own insurances. Access to independent insurance advice and broking services is very important but this may not always be supported by the owning authority. Where separate arrangements need to be put in place, a broker will be able to assist.
In our experience, LATCs need specialist support, particularly during the early stages of operation. As start-up organisations, most LATCs will change dramatically during the first year of operations and it is worth noting that premiums and fees will need to be scaled to reflect the future potential of the organisation.
The trading company will need to identify someone who has responsibility for arranging its insurance who can work closely with their broker. As well as providing expertise on cover requirements, forecasting premium, designing and procuring an insurance programme, this arrangement can also ensure valuable support is available in the event of a large claim.
Working within a trading company can be very exciting, offering opportunities that aren’t always available in a larger local authority. However, with both organisations ultimately sharing the same responsibility towards their citizens, it’s essential that both parties make the necessary expertise and support available to manage risk.