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Liability Insurance – Rolls Royce Take Hit

When Rolls Royce declared the cost of the Qantas engine blast, no mention was made of how much the liability insurance policies will have to pay out, but this whole saga was a reminder of the importance of such cover.

Liability insurance is there to help manufacturers and producers of goods mitigate against potential legal claims for damages. So when the Rolls Royce Trent 900 engine blew a gasket on a Qantas Airbus A380 in November last year and forced an emergency landing, once the relief went around that no-one was injured, the big question was asked, how much will it cost the manufacturers?

Rolls Royce has a superb and well earnt safety reputation, but like all manufacturers, it is at the mercy of so many things that could go wrong with materials, suppliers and processes, that inevitably even in the best companies, problems do occur.

Some £56 million has had to be forked out by the jet engine manufacturer to cover the explosion which, the company admitted some weeks earlier, was due to a small component malfunctioning. No mention was made of how much Derby based Rolls Royce can claim on their liability insurance cover, but experts believe that it all depends on who, or what was ultimately responsible, and if the company can, in turn, claim from a supplier for the faulty component.

The £56 million hit has been accounted for as a one-off cost which was one of the reasons why the company announced reduced annual pre-tax profits which fell from £2.96 billion in 2009, to £702 million in 2010. Other reasons for the profits drop were interest rate and foreign exchange costs, plus fuel hedging contracts.

But despite the drop in profits and the engine problems, Rolls Royce said it wasn’t all bad news, with underlying pre-tax profits actually up by 4% to £955 million. The company says this is a better indication of the company and its performance in 2010.

Indeed, in PR terms, the company has used the jet engine explosion to turn around and say far from irreparably damaging their reputation, it shows their ability to put in place a “…rapid and effective response…” to a crisis.

Nonetheless, few would dispute that it has tarnished the company’s track record in front of customers, investors and airline passengers alike.

But, for those in the liability insurance industry, the really interesting point is whether Rolls Royce had the appropriate cover in the first place and whether they will be able to claim back from their policies, or indeed, their suppliers’ policies. Some conjecture that Rolls Royce have taken the hit on the latest accounts, so that the City and customers can have a degree of transparency and see that the company has coped well.
It may well be in the future that some of those 56 millions might be coming back.

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