Hampshire Fire and Rescue Authority Item

24 June 2009

Fire and Rescue Authorities Mutual Limited (FRAML) - update

Report by the Treasurer and Clerk

Contact: Paul Carey-Kent Telephone: 01962 847525

Kevin Gardner Telephone: 01962 847381

1

Summary

1.1

A recent decision made by the Court of Appeal - concerning the mutual insurance company operated by a group of London boroughs (LAML) - means that, as a consequence, the Fire and Rescue Authorities Mutual Limited (FRAML) will probably be wound up. This is an extremely frustrating and disappointing outcome. Together, the two mutual's have provided a significant competitive challenge to the conventional insurance marketplace and substantially reduced the premiums paid by their member authorities. In noting the latest position, members of the Authority are asked to urge the new Secretary of State for Communities and Local Government to give the necessary legal powers to local authorities so that they can participate in the operation of insurance mutuals in the future.

2

Recommendation

2.1

That the Authority notes, as a consequence of the Court of Appeal's judgement in respect of R (Risk Management Partners) v Brent LBC and others, the Fire and Rescue Authorities Mutual Limited (FRAML) will probably be wound up as a fully authorised and capitalised insurance entity; and

2.2

That, on behalf of the Authority, the Chairman writes to the Secretary of State of Communities and Local Government urging him to put in place, as soon as practically possible, legal powers that will enable local authorities to participate in the operation of an insurance mutual.

3

Background

3.1

Following the creation of the Fire and Rescue Authorities Mutual Limited (FRAML) in 2007 members of the Authority have received periodic reports on its progress. While the company was initially highly successful in securing savings for the participating authorities, a court case brought against the London Borough of Brent and the London Authorities Mutual Limited (LAML) resulted in the need for FRAML to cease underwriting insurance cover with effect from 21 April 2008

3.2

In essence, the judge determined that local authorities could not rely on Section 111 of the Local Government Act 1972 as providing sufficient power to participate in the operation of an insurance mutual. He did not, however, rule out the use of the `well-being' powers granted to local authorities in the Local Government Act 2000. Unfortunately, the `well-being' powers do not extend to Combined Fire Authorities. So while LAML continued to operate, FRAML could not because it was assumed that it would be acting beyond its powers (ultra vires).

3.3

In the wake of this, action was taken to secure interim cover and subsequently the participating authorities formed a successful purchasing consortium to secure alternative insurance cover. Since then, the Board of FRAML has been monitoring developments and last met on 8 April 2009 to consider the future of the mutual. Three options were considered:

_ Whether or not FRAML should be maintained as a fully authorised and capitalised insurance entity.

_ If FRAML was to be maintained as a fully authorised and capitalised insurance entity, should any of the operating surplus be released to the participating authorities and, if so, how much?

_ If FRAML was not to be maintained as a fully authorised and capitalised insurance entity, how much of the operating surplus and capital contributions could be released to the membership and on what basis?

An extraordinary general meeting of FRAML will take place on 1 July. It had been expected that the participating authorities would probably decide to maintain FRAML as a non-authorised insurance entity - effectively putting the company into a state of dormancy until the legal powers issue for Combined Fire Authorities had been resolved. The Court of Appeal's judgement changes all that.

4

Current position

4.1

The original court decision found against Brent and LAML. The Court of Appeal dealt with the appeal and announced its decision on 9 June 2009. The Lord Justices found against Brent on the question of vires and in their interpretation of the extent of powers under section 2 of the Local Government Act 2000 (the well-being powers) went further than the court of first instance. Whilst acknowledging that section 2 powers are wide, they held that the participation in an insurance enterprise which involves giving guarantees to the company and exposing an authority to potentially "very substantial liabilities" to other local authorities does not fall within the well-being powers.

4.2

In the light of this judgement it is highly probable that FRAML will be formally wound up at the extraordinary general meeting. This will mean that the original paid-up capital contributions made by the participating authorities will be returned together with a proportional share of any remaining operating surplus.

4.3

Given the positive impact that the two mutuals have had on reducing the cost of insurance cover for their members, it would seem wrong to simply let matters rest. Members of the Authority are therefore asked to urge the new Secretary of State for Communities and Local Government to give the necessary legal powers to local authorities so that they can participate in the operation of insurance mutuals in the future.

5

Supporting our corporate aims and objectives

5.1

The Authority has taken a leading role in the establishment of FRAML and there is no doubt that this has challenged the conventional insurance marketplace to an extent that has achieved lower premiums for all fire and rescue authorities - not just those that are members of FRAML and the subsequent consortium. The imitative was highlighted as innovative good practice by the Audit Commission in its recent `Rising to the Challenge' national report on efficiency in the fire and rescue service.

6

Risk analysis

6.1

The Board of FRAML has taken a very cautious approach in managing FRAML - particularly in responding quickly to the implications and risks following the legal challenge to LAML. The participating members have taken steps to maintain full insurance cover and still achieved excellent value for money.

7

People Impact Assessment

7.1

The proposals in this report are considered compatible with the provisions of the European Convention on Human Rights, the Human Rights Act 1998, and the Race Relations (Amendment) Act 2000.

8

Resource implications

8.1

On the assumption that FRAML is wound up, the return of capital contributions to this Authority will be about £282,000 and the potential share of operating surplus could be in the order of £70,000.

9

Background papers

9.1

The following documents disclose the facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of the report:

Decision of the Court of Appeal in the case between BRENT LONDON BOROUGH COUNCIL (Appellants) and RISK MANAGEMENT PARTNERS LIMITED (Respondents) and LONDON AUTHORITIES MUTUAL LIMITED &
HARROW LONDON BOROUGH COUNCIL (Interested Parties)

See: http://www.bailii.org/ew/cases/EWCA/Civ/2009/490.html

The list excludes: (1) published works; and (2) documents that disclose exempt or confidential information defined in the Act.