PURPOSE

1. This paper informs Members of the Standards Committee of an issue with significant ethical and standards implications and seeks guidance for the Monitoring Officer in revising the approach to indemnity of Members by the Isle of Wight Council.

BACKGROUND

2. Appendix 1 sets out the current summary of indemnity arrangements and the advice to Members in relation to indemnity issues contained within the current Members’ Handbook. Appendix 2 contains advice (including indemnity issues) for Members serving on outside Bodies. Although the advice is set out in full; for reference paragraph 8 on (page C – 9 of this report) is the relevant section. For these purposes indemnity means the Council underwriting a financial loss or penalty and/or costs incurred by an Elected Member arising as a result of their duties as a Member.

3. Indemnities are backed by insurance although there are deductibles (i.e and excess) of £125,000 on each and every claim across the Liability and Libel and Slander Policies and therefore any valid claim under this limit would be paid from the Council's Insurance Fund and not by the Insurer. Additionally the Libel and Slander Policy only provide 90% of indemnity leaving the Member to cover 10% personally.

4. The Local Government Act 2000 provides for secondary legislation to be enacted regulating this area of local government activity in some detail. No such regulations have been made and the legislative timetable for the next year does not include indemnity issues. Members will be aware that the ODPM has a poor record in delivering technical local government regulations on time.

5. The Council therefore has a decision to make as to whether or not it seeks to fill the legislative gap by reviewing and modernising the current indemnity provisions. As discussed below the detail of any such revision will impact on the area of responsibility of the Standards Committee and an early debate on the principles will be of value to the Council.

Principles

6. Some principles are uncontroversial :

(i) There should be some indemnity in order that current and potential members are not deterred from taking public office by a few of the financial consequences.

(ii) Indemnities should be extended to co-opted members of Committees including Schools Admissions and Exclusion Appeals Panels, Select Committees and this Standards Committee, again so there is no deterrent to Members accepting co-option.

(iii) The law does, and will, continue to impose some restrictions on the extent of indemnity, for example a general principle of law is that no individual should be indemnified or insured against a fine imposed for a criminal offence.

(iv) Members nominated as members of outside bodies such as Trusts, Companies etc owe duties to those companies and should be indemnified by those bodies.

7. Other principles are more open to debate, particularly, should the Council adopt a blanket indemnity such as “the maximum allowed by law from time to time”? The drawbacks of such an approval are that :

(i) There may be uncertainty about the state of the law at any given time and therefore lack of clarity for Members and potential partners.

(ii) The Council is denied an opportunity for self regulation – effectively saying that it relies on the changing standards imposed by law, rather than setting its own standards which may be higher than those allowed generally at law.

(iii) Conversely, the Council misses the opportunity to challenge the existing boundaries of the law where it considers it is inadequate in providing for the comfort necessary to allow Members to fearlessly discharge their duties in an increasingly complex world.

(iv) The Council misses an opportunity to debate individual ethical issues raised by a detailed and specific consideration of difficult cases.

8. Indemnity does not, following the defamation arrangements referred to in paragraph 3, have to be 100%. There may be merit in a partial indemnity in other areas of council activity.

9. There are a number of examples of the margins of the current law which may illustrate the dilemma which the Council faces :

(i) The Council establishes a local authority controlled company (not an outside body), to what extent can and should the indemnity extend to Members appointed as directors in, say, insolvency proceedings?

(ii) Relying on advice an Elected Member commits a criminal offence in relation to publicity at an election. Can or should the Council indemnify the Member for the costs of their criminal defence? What about the position of a Member of the Executive who votes against the criminal decision?

(iii) Perhaps most pressingly, can or should the Council seek to indemnify Members against the costs of defending themselves against an allegation of a breach of the Code of Conduct to either the Standards Board for England and Wales or this Standards Committee.

10. It is not suggested that Members of the Select Committee make recommendations in each or any of these three examples, but that they may illuminate a debate of the principles.

OPTIONS

11. The Standards Committee may support :

(i) The development of an indemnity which seeks to offer the widest possible protection to Members allowed by law from time to time.

(ii) The undertaking of further work designed to present a range of options to the Full Council targeting the indemnity offered.

(iii) If option 2 is supported a further opportunity for this Committee to consider the options developed.

RECOMMENDATIONS

Option 2

BACKGROUND PAPERS

Contact Point : John Lawson, F 823207

JOHN LAWSON

Monitoring Officer

Appendix 1

COUNCIL INSURANCE ARRANGEMENTS AFFECTING MEMBERS

This note summarises four major aspects of the Council's insurance arrangements which are most likely to affect Members. The information provided is necessarily brief, but more detail on any aspect of insurance as it affects the Council, Council Members or the Council's activities, may be obtained from my Insurance and Risk Manager, Mrs Chris Stocker, telephone extension 823624 - Room 135c, or by writing to me at County Hall.

PERSONAL ACCIDENT INSURANCE

Cover is provided for Members should they sustain bodily injury by violent accidental external and visible means whilst engaged on official duties on behalf of the Council, including journeys directly connected therewith and journeys directly between private residence and place of Council business. Injury by violent or criminal assault arising solely from the person being a Member of the Council is also included. The capital sum insured is at present £150,000 for death, loss of sight, limb etc and/or permanent total and absolute disablement, with a sliding scale of lesser benefits in the event of permanent partial disablement. A weekly benefit, currently £300, is payable to a Member suffering temporary total disablement (£150 temporary partial disablement) arising from such an incident as described above.

LIABILITY INSURANCES

The Council has protection against claims by third parties in the event of their suffering injury, disease or loss or damage, by a range of insurance policies, all of which extend to protect Members, employees or voluntary helpers, should an action alleging negligence be taken against them personally. The policy conditions require that the action could have been directed at the Council, that the person concerned was acting within the scope of his/her authority, that the insurers are given complete control in handling the claim, and, most importantly, that all reasonable precautions had been taken to prevent the incident occurring. It is most important to recognise that liability policies operate only when an aggrieved party is able to establish legal liability against the insured, ie when the Council, (through the actions of Members, employees, or approved voluntary helpers) has done something wrong or has failed to take steps to prevent that which could have been reasonably foreseen. It is equally important to appreciate that insurers are not concerned with questions of moral or social responsibility, nor are they benevolent societies set up to come to the aid of everyone in distress.

LIBEL AND SLANDER INSURANCE

The conditions of this policy insofar as it concerns Members, provides only a 90% indemnity in the event of a successful legal action being taken against him/her. Slander indemnity is confined to oral utterances made in the course of and in pursuance of official procedures, and libel indemnity refers to publication in a permanent form normal to the conduct of the Council's business. A libel contained in a letter to a newspaper, for example, would be outside the scope of the policy.

MOTOR VEHICLE INSURANCE

Motor vehicle insurance arranged by the Council protects only Council-owned or Council-hired vehicles and their drivers, and does not extend to the use of privately owned vehicles used in the course of Council business. Such vehicles must be insured, normally, but not necessarily, by their owners, but in any event the insurance MUST INCLUDE BUSINESS USE BY THE DRIVER, WHO MAY OR MAY NOT BE THE POLICYHOLDER. Any persons, including Members, driving a private vehicle on the business of the Council who becomes involved in a motor vehicle accident is in exactly the same position as regards the Road Traffic Act requirements, the possible loss of No Claim Discount, and the payment of any policy excesses, as if he/she were driving for his/her own benefit. Within the various mileage allowances paid by the Council is an element for insurance cover which includes the extra cost for business use, even though some insurers include this within their basic premium rates. Should an individual's private motor policy be brought into operation as a result of an accident whilst he/she is engaged on the business of the Council, however unfortunate, the Council cannot be held responsible, and it is for this eventuality that the allowance is paid. The Council will not be liable to make good any such losses.

JOHN PULSFORD

Director of Finance and Information

Appendix 2

OUTSIDE BODIES - INVOLVEMENT OF MEMBERS AND OFFICERS

Both Councillors and officers of the Council are involved in outside bodies. This note draws attention to the legal position.

1. Form of outside body

Outside bodies can take many forms. They may be an unincorporated association, a company limited by guarantee or by shares, or a trust. Any of these may be a registered charity or be charitable even though not registered. The table below should help to identify these.

	Association	Limited Company	Trust
membership	may be numerous, usually individuals	from two to large number of members. The Council may be a corporate member	none
Who is responsible for day-to-day management?	management or executive committee or similar body	directors	trustees
legal responsibility	members of management committee	corporate	trustees
can the body have charitable status?	yes	yes	yes
governing document	constitution	memorandum and articles of association	trust deed
can the Council as a corporate body be involved?	only if the constitution allows corporate members	yes as a member, not as a director	yes as a trustee

In addition to the above there may be statutory committees which do not have an independent legal status but are part of the sponsoring organisation.

2. Involvement of Councillors and Officers

The Council diary lists a large number of outside bodies on which the Council is represented. Normally this is by a Councillor who is appointed to the management committee or directors or board of trustees of the organisation.

In addition the Council provides professional and administrative services to a number of bodies, and officers may therefore be doing work for them.

3. Understand the role

Although members may be appointed by the Council to represent its interests, in law they have the same role and responsibility as the other members of the management committee, or board of directors or trustees. They do not have the power to commit the Council to any action or liability without the Council’s specific and separate agreement. Their first responsibility in law is to the outside body, to safeguard its interests. They have what is known as a fiduciary duty to act in the best interests of the body. This is the case irrespective of whether the individuals were elected by members of the body itself, or nominated by the Council. The duty varies according to the type of organisation, as follows.

Members of the management committee of an association are personally responsible for the running and funds of the organisation. If the organisation faces legal action they jointly have to defend that and jointly are responsible for the costs if the association does not have the necessary funds itself. If the association becomes bankrupt they will jointly be responsible for any shortfall in its liabilities.

Directors of a company do not generally have personal responsibility. Any legal costs or damages are payable out of company funds. If the company goes out of business they do not have to meet its liabilities. However, there are a number of areas where they may have personal liability. These include trading whilst the company was insolvent and fraudulent trading. Directors can also commit offences such as failing to file documents at Companies House within statutory time limits.

Trustees are personally responsible for any shortfall in trust funds or property, and would have to make these up out of their own pocket.

4. Corporate Killing

The Government is considering amendments to the criminal law. The key proposal is that there will be a new offence of corporate killing which will be committed only where the conduct of the company or other corporate body in causing death falls far below what could reasonably be expected. A death should be regarded as having been caused by the conduct of a corporation if it is caused by a failure in the way in which the corporation's activities are managed or organised to ensure the health and safety of persons employed in or affected by those activities. It would be possible for a management failure on the part of the corporation to be a cause of a person's death even if the immediate cause is the act or omission of an individual. The maximum penalty for corporate killing would be an unlimited fine and a remedial order to correct the original cause of any accident. These proposals would relieve directors of some personal responsibility although consideration is still being given to an offence which can be committed by individual directors if they can be shown to have been responsible for the failure.

5. Advice

The Policy Strategy Committee at its meeting on 11 June 1997 issued the following advice to Councillors. This advice still holds good.

Before accepting a directorship of an external company (or trust) you should consider how onerous your responsibilities are likely to be and should only accept the office if you are satisfied that you have the time and the capacity to undertake them.

1. You should also consider whether there is, or likely to be, any significant conflict of interest between your role as director and your role as Councillor - if such a conflict of interest exists or is likely to arise you should seriously consider whether it is prudent to take on the office.

2. You should assess the risk of things going wrong which might raise the spectre of personal liability. Matters to be taken into account are the nature of the functions of the company/trust and the amount of money it handles/deals with. Some external companies are handling considerable sums of money during the course of each year. Before taking on such a directorship you need to be comfortable with the role - if you are not you should refuse to accept it.

3. You should, before you accept such an appointment, establish whether the body has appropriate insurance covering you. If not you should find out whether such insurance can be taken out. If there is no insurance protection consider seriously whether you wish to proceed without it.

4. Having taken on the role you must take your responsibilities very seriously and, on a continuing basis, you should look very closely at what your organisation is doing. You should read all the papers carefully; attend meetings whenever possible (absence from meetings will not necessarily protect you if things go wrong); probe the officers if you do not believe you have been given sufficient information or if you have concerns; ensure that you understand your responsibilities and the responsibilities of the officers, including the extent of officer and Chairman delegated powers; when necessary ensure that the organisation takes external professional advice; generally keep tabs on the affairs of the organisation. If you have concerns you should raise them and, if need be, you should stand up and be counted (keeping you head down will not protect you).

5. The following points deal with the nature of the responsibilities of a company director:

(a) The directors owe to the company fiduciary duties of loyalty and good faith. They must always act in what they believe to be the best interests of the company. They must not fetter their discretion as to how they should vote or act as directors. They should not exercise their powers as directors for any purposes other than those which the powers were given. They must avoid placing themselves in a conflict of interest between their duties as directors and their personal interests or obligations to others (the Council). When carrying out their duties, they must apply reasonable standards of care and skill. In the exercise of these duties, it is possible that circumstances could arise which require the interests of the company to be put above the Council representatives’ instructions from the Council.

(b) As directors of the company, the Council’s representatives will be subject to rules of confidentiality. It would be improper for the Council’s representatives to disclose the company’s confidential information without the consent of the company.

(c) Directors of a company have a continuous responsibility to consider the financial affairs of the company and to ensure solvent trading. If a company director fails in his duty and does not seek to avoid potential losses by creditors, that director may be liable to a claim by creditors or a liquidator to contribute towards the debts of the company.

6. Charitable bodies

Any of the above forms of outside body may be charitable. If that is so then the members of the managing body are in law regarded as the charity trustees. They together have full responsibility for the affairs of the charity and can be personally liable if it makes a loss. A summary leaflet from the Charity Commission is attached which sets out the main duties and responsibilities of the role.

7. Insurance

All the above bodies can insure to some extent against the liabilities of members of their governing body. However, that insurance cannot cover acts which are wilfully or carelessly unlawful.

8. Indemnity

The Council does have power in certain circumstances to give an indemnity to members and officers, so that while they are carrying out lawful business of the Council or acting on its behalf the Council could agree to meet any liabilities they might incur. In respect of officers this can be done either specifically or by incorporation in the contract of employment under s.112 Local Government Act 1972.

In respect of members a similar indemnity can be given provided they are carrying out business on behalf of the Council. Activities undertaken as a representative of the Council would be covered.

However, there are limits to an indemnity by the Council in that it cannot cover matters which are outside the powers and duties of the Council. This rule was established in the case of Burgoine and Cooke v. London Borough of Waltham Forest (1996). Since a company director, trustee or member of a management committee has duties to the organisation which are duties beyond the powers of the Council, it will always be the case that an indemnity cannot cover all eventualities. That is why it is important to check the insurance position, and to carry out the fiduciary duty to the outside body carefully and thoroughly. In addition it may be thought that an indemnity would only apply where the Council has appointed the Councillor concerned to the outside body.

The Government has recently introduced an amendment to the Local Government Bill which will give the Secretary of State the power to make regulations conferring on local authorities the power to give an indemnity to Members against civil liability. Note that this will not cover criminal liability.

An indemnity can however cover professional and administrative services provided by officers to an outside body in circumstances where the Council has power to provide those services. Often the provision of such services is done for a fee which provides an income for the Council.

There is a statutory indemnity under s.265 Public Health Act 1875 which covers both officers and Councillors but only in respect of that Act.