The English High Court recently considered whether a local authority in London, the London Borough of Brent (Brent), was empowered to set up, with other London authorities, a mutual insurance company, the London Authorities Mutual Limited (LAML).

In November 2006 Brent’s brokers Marsh met the Claimant, Risk Management Partners Limited (RMP), and advised RMP that although Brent was committed to LAML it was uncertain whether LAML could provide cover when Brent’s policies expired and also whether it could provide all the cover Brent required; for these reasons Brent would continue with a full tender exercise to place its insurance cover. In February 2007 RMP submitted a tender within the specified deadline and approximately one month later was informed that the contracts had been awarded to LAML. Brent along with certain other local authorities became a participating member of LAML as of 1 April 2007. In doing so it paid £160,500 to capitalise LAML and £520,000 in premium for terrorism, liability, property and contents insurance.

Having given RMP permission to apply for judicial review of Brent’s decision, Lord Justice Burnton had to consider whether Brent was acting within powers granted by s.111 Local Government Act 1972, s.1 Local Government (Contracts) Act 1997 or s.2 Local Government Act 2000 (LGA 2000).  RMP argued that Brent had acted ultra vires in participating in LAML. Brent argued that it was empowered by statute to arrange insurance, that participating in a mutual is one way of arranging insurance and that the costs savings and better risk management practices as a result of membership of LAML would lead to benefits to the borough.

The judge decided that Brent’s participation in LAML, which involved paying or guaranteeing certain capital payments to fund the mutual, and the provision of insurance to other boroughs was not incidental to taking insurance (which itself was incidental to the functions of a local authority) but went beyond the incidental and was not within Brent’s powers. Similarly, the judge decided that there was no evidence to show that Brent considered that participating in LAML would promote the economic, social or environmental well being of the area as required by s.2 of the LGA 2000: although Brent’s Director of Finance had raised the possibility that LAML would reduce Brent’s premiums, there was no evidence that the borough had based its decision to participate in LAML on this factor, rather than s.111.

RMP’s remedy for Brent’s ultra vires actions remains to be decided. It seems likely that this decision will be appealed – the judge wryly noted that he was little more than the juge rapporteur for the Court of Appeal. Until then, the powers of local authorities to craft insurance solutions to suit their needs remains uncertain.