LONDON—London Authorities Mutual Ltd., the United Kingdom's only mutual insurer for local governments, has gone into runoff after an appeals court ruled its members can't participate in such a venture under current law.

Lobbying efforts under way to change the law could resurrect LAML, but the appeals court ruling precludes U.K. public sector bodies from taking part in risk retention groups for now, experts say.

Interest in public sector mutual insurers was revived in 2007 with the launch of LAML—the first local government mutual insurer to be established in the U.K. for more than 100 years—and the creation of the Fire & Rescue Mutual Ltd.

But one insurance provider, concerned insurers would be excluded from the public sector market, challenged t—-he use of such mutual insurers and began legal proceedings in May 2008.

Risk Management Partners—a London-based managing general agency owned by Itasca, Ill.-based Arthur J. Gallagher & Co.—brought two complaints against the London Borough of Brent, with LAML joining as an interested party. The complaint challenged whether Brent, under its statutory powers, had the right to set up and participate in the mutual insurer and whether it should have followed European rules that require public sector entities to put large procurement contracts out to bid.

The U.K. High Court ruled in favor of RMP, and the Court of Appeal in London last week upheld that decision.

The case could go on to further appeals in the House of Lords or even the European Courts of Justice. But on the basis of the Court of Appeal judgment, public sector mutual insurers such as LAML no longer are viable, said Jolyon Patten, partner at the London office of Sedgwick Detert Moran & Arnold L.L.P., the law firm that represented RMP.

“In its judgment, the Court of Appeal said that LAML was a "speculative' venture, and that by opening itself up to very substantial liabilities of other local authorities, Brent's participation in such a mutual insurance company went beyond government's intentions” under the Local Government Act, which limits the activities of public sector bodies, he said.

RMP welcomed the Court of Appeal ruling that local authorities must put their insurance out to bid, even if alternative risk sharing structures are developed in the future, Mr. Patten said.

Martin Fone, chief executive of the nonmarine department at Charles Taylor Consulting Ltd., which manages LAML, said that until there is a change in legislation broadening the powers of local government, it is unlikely any public sector risk retention group, association captive or insurance mutual can be formed in the United Kingdom.

Various local authorities and their representative bodies are urging government to change the law. LAML chairman Nathan Elvery last week sent a letter to the Secretary of State for Communities and Local Government, requesting legislation to allow public sector bodies to participate in risk-sharing insurance pools, Mr. Fone said.

A spokesman for LAML said it was considering whether to appeal the latest ruling. He noted the mutual insurer had widened access to the insurance market, which previously was restricted to just three players, and its creation had been encouraged by government. LAML will continue to lobby for further clarification on the issue, he added.

Legislative changes could resurrect LAML and revive plans for another local authority mutual, Councils Alternative Risk & Insurance Group, Mr. Fone said.

When the eight active members of LAML come to renew, they are likely to approach the market as a collective, said Andrew Jepp, head of local government at Zurich Municipal, a unit of Zurich Financial Services Group. When the Fire & Rescue Mutual went into runoff after the High Court ruling last year, its members approached the insurance market at renewal as a consortium, he said.