LONDON—Legislation that would allow public-sector organizations in the United Kingdom to use mutual insurance companies is expected to pass this year, observers say.

Earlier this month, the government introduced amending legislation that would enable local authorities and other public-sector bodies to form mutuals to insure their risks.

The move came just three months after the United Kingdom's only local government mutual insurer, London Authorities Mutual Ltd., went into runoff after an appeals court ruled that its members cannot participate in such a venture under current law (BI, June 15).

A “vociferous campaign” by local authorities and their representative bodies that followed the ruling convinced the government to change the law through an amendment to the Local Democracy, Economic Development and Construction Bill, said Martin Fone, London-based head of specialty risk at Charles Taylor Consulting P.L.C., which manages LAML.

“The amendment gives local authorities and other bodies like the police and fire services the power to set up and participate in bodies incorporated for the purpose of providing insurance and assuming the obligations that arise” from their participation, Mr. Fone said. “There is a significant level of interest in creating and resurrecting insurance company mutual insurers in the public sector.”

Jo Dungey, senior policy consultant at the Local Government Assn. in London, welcomed the legislation, saying the LGC wants local authorities to have the flexibility to decide whether to participate in mutuals.

The bill, having successfully passed its third reading in the House of Commons on Oct. 13, is nearing the end of the legislative process and is expected to take effect in early 2010, Mr. Fone said.

But there may yet be complications from subsequent guidance from the Department of Communities and Local Government related to the legislation, he said. For example there are questions over whether mutual insurers would have to be based in the United Kingdom and licensed by the Financial Services Authority, he added.

The amendment specifically addresses whether public-sector bodies can participate in a mutual, but it does not deal with other issues raised by the appeals court ruling, said Michael Green, a partner based in Liverpool, England, for law firm Weightmans L.L.P., which represents LAML and its members. For example, the court ruled that participants in a public-sector mutual insurer must put their insurance out for bids; but that is contrary to European case law, Mr. Green said.

The London Borough of Harrow, a member of LAML, is taking the case on to the Supreme Court, the highest court in the United Kingdom, and may go on the European Court of Justice to challenge other issues on which the appeals court ruled that are not addressed by the legislation, Mr. Green said.