Staking a claim

What happens to claims against maintained schools that are converted into academies? And what should authorities advise schools in relation to liability insurance? William Hunter reports.

Suppose that there is an actual or potential claim against the local authority and/or the governing body in respect of an alleged tort by a maintained school. What happens to that claim if the school becomes an academy under the provisions of the Academies Act 2010?

Voluntary or foundation schools that become academies: who is the new defendant?

Let us suppose that the academy used to be a voluntary or foundation school. In that case the claim would almost always have been against the governing body.

Section 36(1) of the School Standards and Framework Act provides 1998 that “Each maintained school shall have a governing body, which shall be a body corporate constituted in accordance with Schedule 9.”

Para 5 of Schedule 1 of the Education Act 2002 sets out the circumstances in which this corporate body is dissolved. Para 15 of Schedule 2 of the Academies Act 2010 inserts a new paragraph 5(2)(a)(iv) into Schedule 1 of the Education Act 2002. This provides that the body corporate that is the governing body of a maintained school is dissolved upon: “the date on which a local authority are required to cease to maintain the school under section 6(2) of the Academies Act 2010”.

Section 6 of the 2010 Act provides that:

“(1) This section applies if an Academy order has effect in respect of a school.

(2) The local authority must cease to maintain the school on the date (“the conversion date”) on which the school, or a school that replaces it, opens as an Academy (“the Academy”).”

So if an Academy order is made so that the maintained school is turned into an academy, the body corporate that governing body of the former maintained school used to be is dissolved. Plainly there is no point in suing or continuing to sue a dissolved corporation. Who, if anyone, is the new Defendant, actual or potential?

The 2010 Act tells us little about the legal nature of a school that is converted from a maintained school into an academy. Plainly it is not the same legal person as the former governing body. The old governing body is a dissolved corporation.

Section 1 of the 2010 Act tells us this:

“(1) The Secretary of State may enter into Academy arrangements with any person (“the other party”)

(2) “Academy arrangements” are arrangements that take the form of: (a) an Academy agreement, or (b) arrangements for Academy financial assistance

(3) An Academy agreement is an agreement between the Secretary of State and the other party under which— (a) the other party gives the undertakings in subsection (5), and (b) the Secretary of State agrees to make payments to the other party in consideration of those undertakings.”

Section 1 gives no clue as to who “any person” and “the other party” may be. However we know from the DfE website that “the other party” will be “an academy trust” and a company limited by guarantee. So one arrives at the answer by discovering how the Secretary of State intends to exercise an administrative discretion rather than by reading primary or secondary legislation.

Voluntary or foundation schools that become academies: is the new academy trust liable for the torts of the previous governing body?

This analysis merely gives us the name of a possible Defendant. Is the new academy trust actually liable for the torts of the governing body that was its predecessor?

There are a number of loose ends in the 2010 Act and this is one of them. Section 8(2) of the 2010 Act does make some provision for the transfer of liabilities from the old body to the new but the wording is odd:

“The Secretary of State may make a scheme (a “property transfer scheme”) in relation to property, rights or liabilities which are—

(a) held for the purposes of the school by a local authority or the school's governing body, and

(b) specified in, or determined in accordance with, the scheme.”

Suppose there are claims in tort, actual or potential, against local authorities or the governing bodies. The phrase “liabilities which are … held for the purposes of the school by a local authority or the school's governing body” is an odd way of describing such claims.

Evidently the Secretary of State must have realised how odd section 8(2) is. Clause 56(2) of the Education Bill presently going through Parliament, proposes a new section 8 (2) for the 2010 Act in this form:

"(a) property used or held for the purposes of the school by a local authority or the school’s governing body, and

(b) rights and liabilities (including rights and liabilities in relation to staff) of the local authority or the governing body which were acquired or incurred for the purposes of the school.”

That makes more sense though it is still rather odd to talk about incurring a liability in tort “for the purposes of the school”.

Sub-sections (4), (5) and (6) of Section 8 of the 2010 Act make things a little clearer:

“(4) A property transfer scheme may provide for the transfer of property, rights and liabilities to the proprietor of the Academy.

(5) A property transfer scheme may—

(a) create rights, or impose liabilities, in relation to property, rights or liabilities transferred by virtue of the scheme;

(b) provide for anything done by or in relation to the current owner in connection with any property, rights or liabilities transferred by the scheme to be treated as done, or to be continued, by or in relation to the transferee;

(c) apportion property, rights and liabilities;

(d) make provision about the continuation of legal proceedings.

(6) The things that may be transferred by a property transfer scheme include—

(a) property, rights and liabilities that could not otherwise be transferred;

These sub-sections are not changed by the Education Bill save that “property transfer schemes” are now called “transfer schemes”.

So it looks as if the problem of what happens to claims in tort against a voluntary or foundation school that turns into an academy depends on the terms of the “property transfer scheme” (as of now) or the “transfer scheme” (when the Education Bill is enacted) if and when the Secretary State makes one. Apparently, the Secretary of State believes that transfer schemes will be rare since transfers will be dealt with by agreement. That is optimistic.

There is no precedent or model transfer scheme on the DfE website. There is however a Commercial Transfer Agreement Model 3 September 2010 V3 (see here). It has a lot to say about claims by employees but nothing about claims by third parties.

Quite how a solicitor representing a claimant is to discover whether a new academy has a transfer scheme or transfer agreement or what they say it is impossible to tell.

Community schools that become academies

So far I have discussed former voluntary and foundation schools. The position is a little simpler with community schools but not much. Claims against community schools are often brought against the maintaining authority as employer of the teachers and other staff. So our hypothetical Claimant can sue or continue to sue the former maintaining authority notwithstanding the making of an academy order in relation to the particular school.

But suppose that the Education Bill is enacted and that in due course the Secretary of State makes transfer orders passing liabilities for tort claims from the former governing and maintaining authority to the new Academy Trust. That will let the maintaining authority off the hook.

Insurance

So far I have said nothing about liability insurance. This is of course a matter of great practical importance to everyone, whether claimant or defendant. The Academies Act 2010 says nothing on the subject.

Most, if not all, liability insurance policies for schools and local authorities are based on the date that the cause of action arose rather than date that the claim is made. Suppose the tort was committed in 2009 and that in January 2011 the school becomes an academy. The claim will then be covered by whoever the insurer was in 2009 – commonly the Zurich Municipal. But the insured is the former governing body or maintaining authority. It is not the new academy trust. Consequently the academy trust cannot claim on the policy unless the benefits of the policy have been assigned to it by a transfer order under the 2010 Act.

I have already explained the muddle that that procedure has got into.

In theory the new academy schools could take out insurance for claims arising before the policy began but I do not know whether any insurer is offering such a policy.

What should former maintained schools that have turned into academies do about insurance and what advice or assistance can or ought local authorities to give?

The DfE’s current guidance on the matter was given in August 2010 (see here).

The major points are these:

(1) “Academy trusts are responsible for making arrangements for the insurance of the academy. It is imperative that a converting academy is insured from midnight of the date of conversion so that there is continuity of cover”

(2) “Reimbursement is made at actual costs on receipt of invoices, not as part of a formula allocation”

(3) In obtaining insurance, trusts must follow “normal public procurement rules”

(4) trusts must first of all approach the local authority, which will have a group policy for schools tendered in compliance with EU rules

(5) However, the authority or its insurer may not be willing to extend the cover to include an academy for a number of reasons:

(a) “the LA scheme may have a high threshold (typically £250k) which the authority would have to meet before any payment by the insurer. The LA would naturally not wish to meet this for an academy.” My comment: That makes a lot of sense and is a very important practical problem.

(b) “the LA or the insurer may take the view that the LA has no 'insurable interest' in the academy and therefore cannot be covered by the LA's policy.” The DfE’s view is that LAs do have an insurable interest in academy buildings. My comment: That may well be right but is irrelevant for present purposes.

(c)  In most cases the LA and insurer would not consider that there is an insurable interest for liability insurance. My comment: That is plainly right.

(d) the LA “may take the view that offering insurance to academies is trading outside its statutory powers”. My comment: For the reasons I give later I think that that this is a mistake and that there is no ultra vires trading involved.

(6) “If LA insurance is not available the next source which should be considered is the framework established in conjunction with the Department by the Crescent Purchasing Consortium, whose website is at: http://www.cpc.salford.ac.uk/”.

(7) “Apart from these sources it is open to an academy trust to approach an individual insurer either direct or through a broker.… If an insurer is approached direct or through a broker the trust must ensure that either it carries out an EU compliant tender exercise or that it limits any insurance agreement to a value below that specified in the EU procurement directives. That will normally mean having a one year agreement only, and then seeking a multi-year agreement in subsequent years through an EU-compliant route”.

What, if anything, can local authorities do? At one stage last year it was thought that the government were going to amend the law in order to permit academies to take advantage of the favourable insurance rates available to local authorities. But there is absolutely no sign of this amendment of the law in the Education Bill 2011 or on the DfE website. However it is thought that the problem will be dealt with by the Localism Bill going through Parliament at the moment. Certainly Clause 1 of the Bill, if enacted, will put an end to any doubts about the powers of local authorities to assist academies about insurance. But it goes no further than that.

Clause 1(1) provides that: “A local authority has power to do anything that individuals generally may do.” That is all very well but the one thing that an individual cannot do is enter into a contract of insurance in respect of a matter in which he has no insurable interest. So Clause 1 deals with the vires problem mentioned earlier but it does not begin to deal with the insurable interest problem. The latter, of course, has nothing to do with local government law but is part of the insurance law. So far as I can tell there is nothing else in the Localism Bill which helps with the insurable interest problem.

Zurich’s position about insuring Academies is this: “We haven’t stopped marketing a policy to Academies, but have a three pronged approach: We will offer a policy direct to the Academy i.e. a separate arrangement from the LA.

If the LA feel that they can incorporate the Academies arrangements into their current insurance programme, we will go along with that, but the LA must clarify the legal position. We're all fairly clear that whilst they have a limited Insurable Interest, this is far from ideal, hence the awaited law change.

Where a LA wishes to offer a facility to the Academies in their area, we are happy to arrange a 'block' policy which the Council will administer but essentially the covers are separate from the LA's arrangements and the wording will broadly follow our separate schools wording. The cover will be ground up and in essence, the LA are providing and advisory and admin service to the Academies in the same way that they would if the school was an LEA school.”

Plainly Zurich is very much alive to the difficulty about insurable interest and that it is not surprising. Like everyone else, it is waiting for a change in the law. It may have to wait longer than it expects.

For all the reasons I have set out, this area is a legal minefield. The less local authorities say the better. Academies must seek their own salvation without local authority assistance.

If authorities insist on giving insurance advice to academies they do not have to obtain authorisation from the FSA. First, they will not be doing so “by way of business” (see section 22 of the Financial Services and Markets Act 2000). Second, Para 5.14.5 of the FSA’s Perimeter Guidance Manual provides that as follows: “In addition to certain named persons exempted by the Exemption Order from the need to obtain authorisation, the following bodies are exempt in relation to insurance mediation activities that do not relate to life policies …local authorities but not their subsidiaries”

My overall view is that there is no advice or assistance that local authorities can give academies about insurance beyond referring them to the DfE guidance summarised earlier.

William Hunter is a barrister at 1 Chancery Lane (www.1chancerylane.com).