The insurance industry is to cover part of the cost of Chester Street Insurance's collapse through a new Financial Services Compensation Scheme.

The scheme was announced last week by Treasury chief secretary Andrew Smith in response to a parliamentary question by Scottish MP Tony Worthington. It will be set up no later than November this year.

There had been worries that some asbestosis sufferers would miss compensation because many policies written by Chester Street related to injuries incurred before the Employer's Liability (EL) Act came into force in 1972. Pre-1972 EL claims are not covered by the Policyholder's Protection Board (PPB).

Under the scheme, the PPB will pay 100% compensation if the award was made before the liquidation of Chester Street on January 9. If the award was made after January 9, the insurance industry will pay 90% of the money awarded.

The government will fund compensation owed to former public sector employees. The scheme applies only if the employer no longer exists or is insolvent. If the employer still exists, or its liabilities have been carried to another company, the employer is still liable to pay compensation.

The Financial Services Authority has been asked to look at new rules to cover employee third-party rights in cases where both the employer and insurer are insolvent, to ensure victims receive adequate compensation.

Smith congratulated the insurance industry on its “constructive and co-operative approach” to the complex legal situation. Thompsons Scotland solicitor Frank Maguire, who headed the battle for compensation following Chester Street's collapse, also praised the industry.

“It gets a lot of pasting in the media so it's excellent they've recognised their responsibility,” he said.

“Now they've just got to make sure it's set up and done because, in the end, we're dealing with dying people here.”

An Association of British Insurers (ABI) spokesman said the ABI wanted to ensure victims did not have to take legal action to get compensation.

“It seemed wrong that people should lose out so we said we'd make an arrangement to cover them.”

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