12.4 Compulsory Insurance in the UK

Learning outcome 11 opens by asking candidates to explain the reasons for compulsory insurance and describe the types of insurance which are compulsory in the UK. It is a self-contained topic with a small number of hard figures, which makes it reliable marks.

Why Some Insurances Are Compulsory

The state does not compel people to insure their own property. It compels insurance where someone else bears the consequences of an uninsured loss. Four reasons run through every compulsory class:

1. Protection of third parties who did not choose the risk. A pedestrian does not consent to being exposed to a negligent driver; an employee cannot negotiate away the hazards of the workplace. Neither can protect themselves by declining the exposure.
2. Certainty that funds will exist. A legal right to damages is worthless against a defendant with no assets. Compulsory insurance ensures a solvent payer stands behind the liability.
3. The state is not the insurer of last resort. Without compulsion, the cost of uncompensated injury falls on public services and the benefits system.
4. Support for the regulatory perimeter. Compulsory insurance must be bought from an authorised insurer, which pulls large volumes of business inside the regulated market and inside the consumer-protection framework.

The common thread is liability to others, which is why the compulsory classes are almost all liability classes rather than property classes.

Motor Third-Party Liability — Road Traffic Act 1988

Part VI of the Road Traffic Act 1988 is the principal regime.

• The offence. Under section 143, a person must not use, or cause or permit another to use, a motor vehicle on a road or other public place unless there is in force a policy of insurance, or a security, meeting the requirements of the Act. Using a vehicle without it is a criminal offence.
• What must be insured. Under section 145, the policy must be issued by an authorised insurer and must cover liability for death or bodily injury to any person, and liability for damage to property, caused by or arising out of the use of the vehicle on a road or other public place.
• The limits. Cover for death or bodily injury is unlimited — the Act sets no ceiling. For property damage, the policy is not required to provide more than £1,200,000 in respect of any one accident. That figure was substituted with effect from 31 December 2016 by the Motor Vehicles (Compulsory Insurance) Regulations 2016; the older £250,000 figure that appears in out-of-date material is wrong.
• The gap-filler. Victims of uninsured or untraced drivers are compensated by the Motor Insurers' Bureau (MIB) under agreements with the Secretary of State, funded by a levy on motor insurers. The MIB is not an insurer and is not the FSCS; it exists because a compulsory-insurance regime is only as good as its enforcement.

Note what is not compulsory: cover for the driver's own vehicle. Comprehensive and third-party fire and theft cover are commercial products bought voluntarily on top of the compulsory minimum, which is why own-damage claims attract only 90% FSCS protection.

Employers' Liability — the 1969 Act

Under the Employers' Liability (Compulsory Insurance) Act 1969, every employer carrying on business in Great Britain must insure, with an authorised insurer, against liability for bodily injury or disease sustained by employees arising out of and in the course of their employment.

• The minimum. The Employers' Liability (Compulsory Insurance) Regulations 1998 set the minimum at £5 million in respect of any one occurrence, inclusive of costs. In practice most insurers issue £10 million or more as standard, because £5 million inclusive of costs can be eroded quickly by a catastrophic injury claim with long-term care needs.
• The certificate. Employers must display or make available a certificate of insurance at each place of business, so employees can see that cover is in force.
• Enforcement. Failure to insure is an offence enforced by the Health and Safety Executive, punishable by a fine of up to £2,500 for each day the employer is without suitable cover, with a further penalty for failing to display the certificate.
• Retention. Because industrial disease claims can emerge decades after exposure, employers are expected to retain records of their employers' liability cover for long periods.

Limited exemptions exist — for example, for certain public bodies and, in defined circumstances, for a company whose only employee also owns the majority of its share capital.

The Other Statutory Classes

Compulsory in law versus required in practice

Two categories are frequently confused in exam questions:

• Compulsory by statute — the classes in the table above. Not buying the cover is unlawful.
• Required by contract — buildings insurance imposed as a mortgage condition, or public liability cover required by a landlord, local authority or contract. These are commercially unavoidable but are not legally compulsory, and the sanction is breach of contract rather than prosecution.

Public liability insurance is the standard trap: despite being carried by almost every business, it is not compulsory under UK law in general.

Why Compulsion Changes the FSCS Position

Compulsion carries through to the compensation regime described in Section 12.1. Because motor third-party liability and employers' liability are compulsory, claims under those policies are protected by the FSCS at 100%, with no upper monetary limit, when an insurer fails. Voluntary general insurance — home, travel, pet, own-damage motor — is protected at 90%.

The logic is consistent throughout: a person the law required to be protected should not have that protection cut by a tenth because the insurer they were compelled to deal with became insolvent.