Legal report: TAKING ON THE GOVERNMENT

Until recently, the insurance industry was content to lobby the government and enjoy victories such as a flood agreement and continuous enforcement of motor insurance. But the truce has been broken over pleural plaques, and insurers want their day in court.

As Insurance Times went to press, a group of insurers was preparing to mount a legal challenge against the Scottish government following the passing of the Asbestos Bill allowing compensation for pleural plaques (a symptomless condition caused by exposure to asbestos).

Matthew Scott, head of liability claims for Axa, told Insurance Times: “All the medical evidence is that [pleural plaques] don’t cause future harm. But they’re effectively legislating to say the opposite is true” (19 March 2009).

Insurers said they were even prepared to take on the UK government if it follows Scotland’s lead. Taking the government to court is a rare and bold move, and shows just how up in arms insurers are. But how exactly does one go about suing an entire government?

For starters, get a good lawyer. Award-winning Brodies, which has offices in Edinburgh and Glasgow, is the firm leading the charge on behalf of insurers, which include Axa, Norwich Union, RSA and Zurich. The Association of British Insurers (ABI) is helping the group coordinate its approach with Brodies. Christine O’Neill, a partner at the firm, is a specialist in judicial review, the type of litigation that insurers are planning to use to sue the government.

Judicial review is used to determine whether a decision was made lawfully: whether a person or party had the power and authority to make a ‘decision, and whether they followed the correct procedures in making that decision. Judicial review is usually used in planning and immigration cases.

Gail Whealing, legal director for DLA Piper Insurance Services in Edinburgh, says it’s becoming more common, with around 400 cases brought in Scotland in 2008 compared with 229 cases in 2005. But she adds: “I haven’t seen it at this level in insurance ever.”

Originally, insurers, including smaller providers, had planned to run test cases on the issue of pleural plaques. But they have been holding off this process pending the outcome of a judicial review.

Test cases that are fully defended can easily cost each side more than £25,000. In a judicial review, the court has a tighter rein on the procedure and oral evidence is not necessary. This means the costs are not as high as they might be for bringing a similar action for damages.

The judicial review procedure begins with the applicant lodging a petition. Then it goes to first order, during which the case can be thrown out – but this is unlikely. It then goes to a first hearing, where the judge listens to the parties. Most petitions are decided at this stage, but the case can go to a second hearing for conclusion.

In Scotland, judicial review is held in the Court of Session – which means if insurers lose there, they’ll have more to worry about in the UK.

“It’s the highest court in Scotland, so it’s not a bulk standard thing raised at low level court,” says Whealing. “The Court of Session is regarded by other courts in other jurisdictions accordingly, so any Scottish decision will be seen as persuasive in England and Wales.”

Insurers plan to challenge the Scottish Parliament on its law-making ability. Because Scotland has a different legal system from the UK, the courts might also consider devolution issues. There are six devolution issues listed in Schedule 6 of the Scotland Act 1998, which specify the conditions under which they might be considered.

For example, a devolution issue means “a question whether an Act of the Scottish Parliament or any provision of an Act of the Scottish Parliament is within the legislative competence of the Parliament”.

But the principles of a judicial review are basically the same in England and Scotland.

Parliament was created by a statute which defines its powers. The courts can look at the statute and decide if actions taken by parliament are lawful. The courts only consider whether the actions are lawful; they do not look at whether they agree with the decision itself unless the decision is found to be “irrational”.

VIEW?FROM?THE?US: AIG TAKES ON FEDERAL GOVERNMENT

It’s bold enough to sue the government when your relationship is separate or at least at arm’s length. But when the government owns the majority of your company, such a move is positively brazen. Yet that’s exactly what AIG is doing.

The crisis-hit American insurer, which has taken about $170bn (£116bn) from the US federal government to stay alive, is suing the government in an attempt to recover more than $300m in tax breaks that the insurance company says were improperly denied. It’s trying to recover the money from the Internal Revenue Service.

In a statement, AIG said: “On February 26, 2009, AIG filed a complaint in federal district court, Southern District of New York. AIG is seeking a refund of approximately $306m in taxes, interest, and penalties paid with respect to its 1997 taxable year.

“Two of the primary issues in the suit involve the allegation that foreign tax credits were improperly disallowed by the IRS and that AIG’s taxable income should be reduced as a result of AIG’s restated financial statements. AIG is taking this action to insure that it is not required to pay more than its fair share of taxes.”

As recently reported by the Washington Post, AIG is, among other things, challenging an IRS decision last year that the company improperly claimed $61.9m of tax credits associated with complex international transactions. The Post also reported that the insurer has asked a court to make the government reimburse it for money spent suing the government.

However surprising the case might be, an AIG spokesman told the Post that the company has an obligation to press its case. Ironically, it sees legal action as a way to ensure it fulfils its duty to its shareholders – which of course include the government. And there’s bound to be a hefty legal bill.

Judicial review played a part in the landmark test case brought by Risk Management Partners (RMP) against the London Borough of Brent, the main defendant, along with London Authorities Mutual (LAML), a mutual insurer for London borough councils and an interested party.

RMP – a managing agency owned by Arthur J. Gallagher and providing cover underwritten by AIG to the UK public sector for more than a decade – used judicial review to establish whether Brent acted unlawfully in awarding its insurance services direct to LAML. RMP won that case in April 2008.

Then in May 2008, RMP brought a regular damages claim to challenge whether Brent had acted in breach of public procurement regulations and dodged a required tendering process in signing up to insure with LAML. Once again, RMP won its case.

Brent and LAML have appealed against both judgements. The decision is due within weeks.

“We are waiting to hear what the judgment is on it, so we’re in sort of a limbo at the moment. We’d hope to get a decision within the next month or two,” says Jolyon Patten, a partner with Sedgwick Detert Moran & Arnold which is representing RMP.

Patten says this type of legal challenge, which started in the lower courts, is “very rare”. “The only reason RMP has done it is because . . . LAML has notions to take [its offering] nationwide more generally. So if you have a situation where there’s an open competitive market, and then suddenly that’s all completely closed off and it becomes a monopolistic situation with only one provider, a mutual, that would obviously not do business any good.”

Insurers that provide services to councils obviously want procurement rules to be followed because it gives them a better chance of getting business. QBE and Zurich, for example, operate in this space. But so far, RMP is the only one to take legal action against LAML.

Patten says: “The other insurers who are in the market have been content to sit back and let RMP run this case for them, so they haven’t been actively involved. This is because if we’re winning, it’s benefiting them too.”

Andrew Jepp, head of local government at Zurich Municipal, says: “As the leading local government insurer, it’s just not an appropriate course of action from our perspective. We’d rather engage with them and discuss the issues that we feel are appropriate.”

But he adds: “It’s of significant interest to us of course. We do agree with the principle of fair competition, and we do discuss with our customers the risks involved in setting up a mutual – it’s not without its pitfalls. So we try to educate our customers on the pros and cons.

“If [councils] are happy with those risks, then it’s certainly a decision for them. But we do feel it appropriate that public sector bodies should have to have a fair and open competitive process.”

LAML has insisted the Brent case does not affect the other councils as they relied on a different act of parliament to take part. IT