Westminster City Council has undertaken an audit of outside organisations that councillors and senior staff members belong to in a bid to ensure they are legally protected from liability claims.
The council has issued a questionnaire to about 120 councillors and senior staff to uncover their involvement in companies, trusts and other outside organisations.
Westminster's pioneering move follows last year's Burgoine and Cooke v London Borough of Waltham Forest case where the court ruled that council employees who had been involved in a company as directors were financially liable for its subsequent collapse.
The court said that although the Local Government Act 1972 indemnified officers against claims, it was not all-embracing.
If a conflict of interest arose for a councillors or officers carrying out dual duties they may not be covered by council insurance. Furthermore, if a council was acting outside its statutory powers in entering a private venture council officers could be financially liable.
Westminster chief executive Bill Roots said his council had now established who was covered by in-house indemnity insurance. "We kicked this work off in May and it has been amazing how complex it has been," he said. "What we've had to do is go through a whole raft of bodies and put them into different categories"
Six lists of organisations have been drawn up, of which the first three are covered by indemnity insurance. But staff on a fourth list, made up mainly of community organisations that receive grants from the council, risk a potential conflict of interest, so they may not be covered by indemnity.
Roots said that to get around the problem such staff should attend meetings as observers who would have influence on how a council grant is spent rather than as members of the governing body who would make the final decision.
Council members on a fifth list have been warned that they will not be covered by council indemnity insurance.
Roots said staff who sat on these organisations were not directly representing the council and should take out their own insurance.
A sixth list contains 17 organisations whose status is being further investigated.