A mutual break-up?


The future of the public sector insurance market has been cast into uncertainty with a court case, to begin next year, which strikes at the centre of the government's shared service agenda and questions the legality of the mutual, writes Ed Vinales

Risk managemenT Partners' decision to take legal action against Brent London Borough Council for placing its insurances with a local authority mutual has left the landscape of public sector insurance market in a state of uncertainty (Post, 9 August, p1).

Post has learnt that the court case is set to commence next January with a judgement expected to be handed down before April 2008 - the start of the local authority renewal season. However, it has emerged that the both sides may have been preparing for this fight well before the High Court writ was issued two months ago.

After the legal challenge became public knowledge, RMP, which is a subsidiary of broker Arthur J Gallagher and Company and acts as AIG's primary agent in the public sector market, told Post that Brent contravened its statutory duties under European regulations and acted ultra vires - beyond its legal powers. It added that the claim was the only way it could seek clarity on the process by which local authorities place their insurances.

A landmark case

London Authorities Mutual, the recipient of Brent's business, is taking the case very seriously. It has suggested that the challenge strikes at the very heart of the government's shared service agenda by questioning the legality of the mutual.

The LAM stated robustly and publicly that it sought extensive legal advice - believed to have cost £200,000 - before and while establishing the mutual. It has also announced that its sponsoring partner, the London Centre of Excellence, has recognised the "gravity of the implications of the challenge" and agreed to help fund the costs of defending it.

Meanwhile, the Councils' Alternative Risk and Insurance Group, a second association of councils seeking to form a mutual, has confirmed it has temporarily suspended its plans and is seeking legal advice on how best to proceed.

So what are the likely outcomes of the case and should the market really be surprised it has come about at all?

According to documents filed in June by RMP's lawyers Halliwells, on 23 February the intermediary responded to a tender put out three weeks earlier by Brent council for its insurance business. But on 7 March it was "informally" notified by Marsh, Brent's insurance agent, that the tender process might be abandoned. On 27 March Brent officially notified RMP that it was "in a process of awarding these insurances to the LAM".

Area of contention

The case is expected to hinge on a European Court ruling known as the 'Teckal exemption'. Brent believes this ruling means it does not have to go through a full procurement process to place business with the mutual. RMP feels the exemption is unclear and is seeking clarity on the issue.

LAM's swift response to the legal challenge should not be surprising as it appears the mutual had anticipated it. In a document published last September by LAM's advisor Charles Taylor Consulting, it outlined how the mutual should use the Teckal exemption to respond to a legal challenge brought against it.

The document also suggested that the London councils would be acting well within their legal rights if they decided to terminate a public procurement process and move their business into LAM.

However, RMP managing director Kaz Janowicz stressed that challenging LAM's legality is not the intention. "Raising the Ultra Vires point was the only way we could get the case brought before the court. The idea that we want to crush the LAM is absurd. The real issue is whether public bodies can place insurance with another body without going through a tender process."

He added: "Their argument is the Teckal exemption but we feel it's not clear so we are seeking a clarification. This issue threatens to knock out competition in the local authorities insurance sector.

"For years public sector bodies have been complaining that there is not enough competition for their insurance business and now they seem to be taking steps to remove the competition altogether. If Teckal applies then fine - but we need clarification," he added.

But Malcolm Davies, chairman of the LAM's initial project steering group, has no doubts about RMP's intentions. "This has everything to do with the Teckal ruling. How can they argue that this isn't to do with the shared service agenda when the LAM is a prime example of a shared service. By challenging it they are challenging the powers of the Local Government Acts of 1972 and 2000."

He added: "They are potentially challenging and restricting our powers to set up companies in the future, that is what is at stake. We feel bullish about our position as both the LAM and Brent have spent a large amount of money on legal consultation."

Competition defence

Mr Davies also refutes the idea that the LAM is destroying competition. "There are only a few insurers that write insurance for local authorities and it's not beyond the bounds of possibility that one or two could merge. To say we are avoiding competition is not true. The LAM puts out reinsurance, claims handling and loss control contracts."

He concluded: "The Local Government Act 2000 is designed to give public bodies collaborative powers to the benefit of the tax payer. So if it is challenged by RMP the public sector could be significantly impacted."

AIG refused to comment but a spokesman for St Paul Travelers - one of the few insurers to underwrite local authority business - confirmed it would be watching developments on the case closely, adding that the insurer advocated a fair and transparent tendering process.

Joe Murphy, director of sales and risk management at Zurich Municipal said: "The legality of these mutuals has been an issue for some years. However, I don't believe this will seriously threaten the shared service agenda. Local authorities should have to seriously consider our quotes in the future if they go through a tender process."

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