The Lloyd's Working Party, chaired by Sir Jeremy Morse, set up to identify "the framework within which the Society should, ideally, be trading 5 - 7 years hence". This was widened to include proposals on a new structure of governance for the Lloyd's Market including a separation of the regulatory body. This was originally rejected by the Council, but public outcry forced Lloyd's to alter its stance.

There have also been consolidations in both the New York State Court and the New York Federal Court involving former workers at the Brooklyn Navy Yard. In a jury verdict handed down in the federal action in January of 1991, 52 individuals obtained verdicts totalling approximately $31 million. There are approximately 500 additional cases pending in this action.

Declaratory Judgment Decisions: Asbestos Property Damage - U.S. Gypsum

Following months of trial, the Circuit Court of Cook County, Illinois, handed down its decision in U.S. Gypsum v. Admiral Insurance in January 1991. This litigation involved eight test cases and was tried without a jury. The London Market was a direct defendant in this litigation. The case is significant in that it involved a full trial of he issues and was not a summary disposition on motion.

-The Court rejected the assured's request for a triple trigger of coverage, and he adopted a "first discovery" trigger. This decision was based on expert testimony, as well as the fact that U.S. Gypsum had initially tendered the building claims to its primary carrier from 1979 to 1982, the discovery years. There was also evidence that U.S. Gypsum had treated other non-asbestos claims on a "first discovery" basis.

US tax: New US Closing Agreement takes effect for the 1991 year of account.

Trial Results: Asbestos Property Damage - New Hampshire-Vermont Blue Cross/Blue Shield

U.S. Gypsum and U.S. Mineral did not fare as well in a January 4, 1991 verdict, where the jury awarded total damages in the amount of $532,000. The plaintiff, not satisfied with the damages, sought a new trial, and the court found that the damages were insufficient and granted the plaintiff's motion. This case was significant in that it represents the first verdict in favour of a privately-owned building.

Bankruptcy Filings:

On January 7, 1991 Eagle-Picher Industries also sought bankruptcy protection by filing Chapter 11 proceedings in the U.S Bankruptcy Court for the Southern District of Ohio in Cincinnati. The company cited in its bankruptcy petition past payments totalling $600 million issued to 65,000 asbestos claimants and the inability to pay an additional $45 million in negotiated settlements.

Agency Agreements (Amendment No. 2) Byelaw (No. 1 of 1991, 9 January 1991).

Syndicate Accounting (Amendment No. 4) Byelaw (No. 2 of 1991, 9 January 1991).

This reversed the previous requirement under Lloyd's Syndicate Accounting Byelaw No. 1 of 1990 (Amendment No. 2) where it was a mandatory requirement for managing agents to produce summary annual reports with effect from 31 December 1990.

Celotex and Carey Canada filed before the Bankruptcy Court a global declaratory judgment adversary Complaint against forty-two insurers including Lloyd's Underwriters and London Company Insurers seeking liability coverages for claims separately involving asbestos bodily injury and asbestos property damage as well as environmental bodily injury and property damage. This adversary proceeding suit remains in the pre-trial discovery stage and the defendant insurers have filed motions challenging the Bankruptcy Court's jurisdiction to preside over the coverage action.

Membership (Amendment No. 7) Byelaw (No. 3 of 1991, 5 February 1991).

Multiple Syndicates (Amendment No. 2) Byelaw (No. 4 of 1991, 5 February 1991).

Syndicate Accounting (Amendment No. 5) Byelaw (No. 5 of 1991, 5 February 1991).

Trial Results: Asbestos Property Damage - State of Maryland

Bankruptcy Filings: H K Porter

H.K. Porter filed under Chapter 11 of the Bankruptcy Code on February 15, 1991. Porter was a defendant in approximately 70,000 asbestos-related bodily injury claims and had virtually no remaining insurance coverage for these claims.

The Lloyd's Underwriting Agents Association (LUAA) release a report on the "S & L" debacle. While not quantifying the final bill, the report at least tries to debunk the comparison between the S & L calamity and the asbestosis and pollution crisis.

Financial Institution Working Party Committee set up, composed of leading Non-Marine Underwriters, its initial aim is to establish the focal point and conduit to collate and disseminate information within Lloyd's in respect of the S & L's debacle. S L R Merrett Chairman, A Sharpe Committee Member.

Lloyd's List: Massive bill looms over insurance market

A COMPARISON has already been made between the asbestosis and pollution crisis, which rocked the insurance markets in the 1970s and 1980s, and the potential impact of the Savings & Loans debacle.

It has also been suggested that even if insurers only have to pick up 10% of the cost of tackling the S&L disaster, they could still be facing a bill of $30 billion.

London solicitors Davies Arnold Cooper are in no doubt about the seriousness of the situation. It was they who first compared the problems of the S&Ls, or thrifts, with asbestosis and pollution and they who put a figure on its potential impact.

Since the firm's December report was published, concern has mounted. Two weeks ago Lloyd's chairman David Coleridge warned of the insurance industry's potential exposure to claims, and last week it emerged that Lloyd's was setting up a working party to tackle the issue.

The main reason is the sheer scale of the S&L crisis and the cost of bailing out individual institutions which have failed. Deposits of up to $100,000 in S&L accounts are federally insured - guarantees that will have to be met by the US taxpayer unless others can be found to share the load.

This, in essence, explains the determination of the US authorities - principally the Federal Deposit Insurance Corp. (FDIC) and the Resolution Trust Corp. (RTC) - to recoup funds in any was they can. That includes pursuing litigation against directors and officers of an S&L and any professional advisers who are believed to have contributed to losses through negligence.

An indication of the commitment, according to Davies Arnold Cooper, is that the FDIC earmarked $500 million in 1990 alone to pay lawyers retained to pursue over 100,000 recovery actions.

Insurers are at risk in a variety of ways: through directors and officers (D&O) policies, errors and omissions (E&O) and professional indemnity policies (covering, for example, advising lawyers and accountants) as well as through fidelity and bankers blanket bonds.

Already a number of successful claims have been made in the US, including:

• In 1989, malpractice insurers for a law firm settled a case for $22m in respect of the Dallas-based Vernon S&L which failed in 1987.
• A pay-out of $21.5m has been made on a D&O policy in relation to First Federal of Maryland.
• Last July, D&O insurers paid out $68.7m in respect of the collapse of the Eureka S&L in California.
• A D&O pay-out of $23.6m was made last year in respect of Flushing Federal S&L in New York.

London is likely to be exposed to the problem both directly and through reinsurance, but just how much will depend heavily on the wording and conditions of individual policies.

Davies Amold Cooper has projected a possible London market exposure of $3-5bn. "It would be most unwise for Lloyd's and the London market to turn a blind eye towards what could burgeon into a loss scenario at least comparable with asbestosis and pollution," the firm stated in its December report.

One of the reasons for this is that the causes of the S&L crisis are far from clear-cut. Government deregulation, political interference and ineffectual regulatory supervision have all played their part, as have simple economic causes, such as the real estate collapse experienced in several territories. Pinning the blame on directors or professional advisers for individual S&L failures therefore becomes all the harder against this background

Then there are the exclusion clauses which many lawyers will no doubt cite as part of their resistance to claims. Many D&O policies, for example, are said to contain a regulatory exclusion clause which aims to exclude coverage for actions brought on behalf of failed institutions by regulators such as the FDIC.

While not quantifying the final bill, a report released earlier this month by the Lloyd's Underwriting Agents Association at least tries to debunk the comparison between the S&L calamity and the asbestosis and pollution crisis.

The report states: "this is the first time the liability sector of the insurance market has been faced with a potentially serious situation affecting current policies the result of which will differ for the following reasons:

• If not all, certainly most of these policies are written on a claims made basis, the effect of which is to trigger current policies as opposed to those written by our underwriting predecessors, many years ago.
• With regard to the limits of liability, the majority of these policies provides for defence costs and expenses to be inclusive within limit, unlike the past general liability and products policies where costs and expenses were typically payable in addition.
• Most of the policies contain an aggregate limit of liability which is the most the underwriters are obligated to pay in any one period of indemnity, regardless of the number of claims…..

The report accepts that "undoubtedly there will be claims affecting insurance policies and reinsurance programmes provided by Lloyd's underwriters." But it stresses the picture will not become clearer until a great deal more data has been collated.

In March of 1991 by awards in the state court action totalling $70 million in favour of 34 plaintiffs, also former Brooklyn Navy Yard workers.

Major consolidations are currently underway in Maryland, where as many as 9,000 claimants could be involved; in Mississippi, where there are approximately 6,000 cases and in West Virginia where there are approximately 2,000 cases.

It is clear that the court systems in the United States will no longer deal with individual claims if at all possible. In an effort to clear their court calendars, judges will attempt to consolidate and dispose of as many cases as rapidly as possible. This may create tremendous cash flow problems for the defendants and their insurers.

Declaratory Judgment Decisions: Asbestos Property Damage - Wilkin Insulation

-The Court rejected the "occurrence" defence (fortuity), finding that the damage caused by the asbestos to the buildings was neither expected nor intended from the point of view from the insured Wilkin Insulations.

-The Court, as did the judge in U.S. Gypsum, rejected all of the policy exclusions which defendants argued would preclude coverage.

The Wilkin Insulation decision is significant as it represents the first ruling by a state supreme court on the issues of whether asbestos in buildings constitutes property damage, the "occurrence" defence, and the potential applicability of policy exclusions.

A significant decision in both the asbestos-related bodily injury and property damage coverage litigation was rendered on March 1, 1991 when Magistrate Leonard Bernikow of the United States District Court for the Southern District of New York issued his opinion in the declaratory judgement action of Maryland Casualty Company vs. W.R. Grace & Co. The Court's decision as to asbestos building claims will be discussed in the separate year-end Market letter. The trial court was asked in part to rule upon the insured's Motion for summary Judgment seeking continuous coverage under policies issued between 1955 and 1973 for its asbestos bodily injury and property damage claims. The defendant insurers in turn sought a declaration that they had no duty to defend or indemnify the insured for liability for any asbestos-related claims. The London Insurers were not a defendant in this action.

The U.S. District Court applied New York law to the trigger of coverage issue for asbestos bodily injury claims. Citing as precedent other federal court decisions interpreting New York law, the trial court concluded that coverage for asbestos bodily injury claims is triggered by an "injury-in-fact" theory. The court conceded that disparate evidence exists as to when injury-in-fact actually occurs in asbestos bodily injury claims. However, the District Court appeared to accept the theory that even sub-clinical injury to lungs does not occur simultaneously with inhalation of asbestos and that damage occurs some time subsequent to exposure. Thus, the court declined to enter Summary Judgment on this issue and ruled that the onset of asbestos bodily injury should be resolved on an individual case basis.

In addition, the District Court found that the insurer has the burden of proving that a settled claim does not involve a covered loss; however the insured has the burden of establishing the insurer's duty to defend. The District Court characterised the insured's burden as minimal, noting that the insured need only demonstrate that the complaints in the underlying action do not exclude the possibility that injury-in-fact occurred during the policy period. The insurer's duty to defend terminates only if the insurer establishes as a matter of law that there is no factual or legal basis for indemnifying the insured. Significantly, the District Court ruled that the insurer's duty to defend survives the exhaustion of policy limits.

Finally, the District Court held that New York law prohibits an insurer from reimbursing an insured for a punitive damage award even if such an award is rendered by an out-of-state court.

Trial Results: Asbestos Property Damage - Kansas City Airport

In a judgment which represents the largest jury verdict to date, Keene Corporation was assessed $8 million in compensatory damages and $6.25 million in punitive damages in an April 1991 verdict. Keene is seeking re-argument, and an appeal is certain.

Seminar held in London, entitled "The Savings & Loan Crisis: Implications for the London Market", jointly presented by Davies Arnold Cooper, solicitors, and Wilson, Elser, Moskowitz, Edelman & Dicker, U.S. attorneys. Insurers are at risk in a variety of ways: through directors and officers (D & O) policies, errors and omissions (E & O) and professional indemnity policies (covering for example, advising lawyers and accountants) as well as through fidelity and bankers blanket policies. Already a number of successful claims have been made in the U.S., including:-

• In 1989, malpractice insurers for a law firm settled a case for $22m in respect of the Dallas Vernon S & L, which failed in 1987;
• A pay-out of $21.5m has been made on a "D & O" policy in relation to First Federal of Maryland;
• In July 1990, "D & O" insurers paid out $68.7m in respect of the collapse of Eureka S & L in California;
• A "D & O" pay-out of $23.6m was made last year in respect of Flushing Federal S & L in New York;
• In 1992, Ernst & Young, one of the big six audit firms, paid out $400m; and
• in 1993, the Resolution Trust Corporation, the U.S. Government Agency handling the clean up of the $500bn savings-bank fiasco is now seeking more than $1.4bn from Deloitte & Touche, the U.S. arm of the international accountancy firm Deloitte Ross Tomatsu.

Two cases have addressed the liability of reinsurers to cedants for asbestos losses and expenses paid pursuant to the Asbestos Claims Facility set up under following the 1985 Wellington Agreement. The leading case in the UK on reinsurance coverage for Wellington claims is Hiscox -v- Outhwaite (Queens Bench Division, Commercial Court, April 1991). The court generally affirmed the arbitration panel's award in favour of the reinsurers that the Wellington payments by the cedants were not automatically binding on the reinsurer, emphasising the distinction between two types of payments made pursuant to the Wellington Agreement.

The court found that loss payments made by the cedant on claims for which the injured-producer would have been liable would ordinary be covered by the reinsurer. But if the cedant's payments included non-insured claims "which by definition would not be within the scope of the reinsurance contract", the reinsurer was found not to be contractually required to indemnify the cedant.

In contrast, in the only reported case in the US on a reinsurer's obligations for a cedant's asbestos payments relating to the Wellington Facility, Unigard Security Insurance Company Inc. -v- North River Insurance Company, (762 F. Supp 566 SDNY 1991), it was held that the reinsured, North River, was entitled to reimbursements by its reinsurer Unigard for asbestos losses paid under its excess policy.

North River made loss payments on Owens-Corning's behalf pursuant to its upper layer excess liability policy, after its lower layers from other insurers were exhausted by payments made under the Wellington Asbestos Claims Facility. The losses paid by North River did not come under the Facility, as North River had withdrawn by that time. The court ruled that North River was entitled to indemnification from Unigard on the asbestos claims paid on behalf of Owens-Corning, as the cedant had a reasonable basis to pay such losses by following the "triple trigger" asbestos coverage approach applied to other asbestos disputes.

The court ruled that a cedant under a reinsurance contract can validly settle claims using its discretion if it acts in good faith in resolving claims arguably covered by its policies. "An insurer may possess and waive arguable defences to coverage without altering the duty of a reinsurer to indemnify the ceding insurer for the coverage payment. In the absence of fraud or bad faith on the part of the cedant, the reinsurer, by the terms of the policy ... is in no position to object to the mode of adjustment made by the cedant".

The court determined that no evidence existed that the Wellington Facility's settlement of claims against Owens-Corning by its lower level carriers caused a quicker penetration of Unigard's excess layer. The court said that although the underlying excess carrier, Aetna, had contributed to losses on which it had no coverage or liability, it directly benefited from similar loss payments by other insurers. The court was not troubled by the findings of the UK court in Hiscox that insurers under the Wellington Facility were incurring losses not covered by their policies and ceding such losses to their reinsurers. While it might be possible to reconcile the Outhwaite and Unigard decisions, they appear to reach diametrically opposed conclusions on whether a cedant's losses under a Wellington-type market approach are covered under a reinsurance contract. A reinsurer resisting the Wellington losses should apply the reasoning of Outhwaite, while a cedant who seeks coverage should advocate the approach in Unigard.

Reinsurance Disputes:

A significant court ruling involving a dispute between two U.S. reinsurers was rendered on April 23, 1991 by the U.S. District Court for the Southern District of New York in Unigard Security Insurance Company vs. North River Insurance Company. In this decision, Unigard Security was ordered to indemnify North River for its facultative share of loss and expense payments made to resolve asbestos-related bodily injury claims against Owens-Corning Fiberglas Corp. Judge Sweet rejected Unigard's late notice defence on the grounds that under the applicable New York law a reinsurer can use late notice as a defence only if it can prove that it was prejudiced by the late notice.

The Court also rejected Unigard's claim that North River's participation in the Asbestos Claims Facility materially altered the risk insured by the facultative certificate. Judge Sweet found that North River's participation in the "Wellington" Agreement, its payments on the underlying second excess policy through the Asbestos Claims Facility and its payments on its third excess policy following Owens-Corning's withdrawal from the Facility were good faith resolutions of issues reasonably within the scope of the policies. In so ruling, the Court specifically rejected Unigard's argument that the "Wellington" Agreement's adoption of the producer generic shares expanded Owens-Corning's liability.

In May, 1991, the EPA awarded $46 million to both public and private schools for asbestos abatement. The funds, authorised pursuant to the Asbestos School Hazard Abatement Act ("ASHAA"), provided $12.8 million in grants and $33.5 million in interest-free loans to a total of 123 school districts. The funds are expected to help cover costs associated with 272 abatement projects in 201 schools. Since 1985, the EPA has awarded $291.5 million for 2,672 projects in 1,907 schools.

The EPA also published an "Advisory" in the Federal Register on April 2, 1991, regarding asbestos removal. The following is a brief summary of the facts listed in this "Advisory":

Market Bulletin: US Tax: Closing Agreement Implemented - New Arrangements for Names with Personal US Income

Names who receive such other US income will therefore need to consider separate arrangements to report this income in the future. This bulletin gives some guidance on what needs to be done. It should be noted that it is non US Names only who are affected i.e. Names who are neither US citizens nor resident in the United States.

Under the new Closing Agreement, non-US Names are still subject to tax on US connected underwriting profits and syndicate investment income and gains. LeBoeuf, Lamb, Leiby & MacRae will therefore continue to submit tax returns for that income on behalf of all the Names for whom they currently file. In addition, they will also, in respect of that income, submit tax returns on behalf of US Names and those who are currently self-filers. These returns, however, will report only US connected underwriting profits/losses and syndicate investment income and gains. They will not include:-

Names with such income will, therefore, with effect from the 1991 US tax year, be responsible for reporting it to the US Internal Revenue Service themselves.

(i) US Names -

(iii) Non-US Names where Returns filed by LeBoeufs include other US Income -

Names may) if they wish, consult Jeffrey H Mace and F Roy Sedore of LeBoeuf, Lamb, Leiby & MacRae to discover whether they may have a US tax filing requirement. They can be contacted at:

Syndicate Accounting (Amendment No. 6) Byelaw (No. 6 of 1991, 1 May 1991).

Trial Results: Asbestos Property Damage - Jordan Perlmutter

The owner of a shopping mall in Denver, Colorado, obtained a verdict against U.S. Gypsum in the amount of $950,000 on May 10, 1991.

It has been almost three years since the Center for Claims Resolution (CCR) first commenced operations in October of 1988. Since that time, a total of 64,564 claims have been filed against CCR members as of May 26, 1991. Over the past year, new claims have been filed at a rate of approximately 1,852 per month. New claim filings appear to have levelled off over the last three years; however filings have not yet begun to decline.

The CCR has settled 42,886 claims from the time of its inception through May 28, 1991 for a total payment of $521 million or an average per claim of roughly $11,900. This is an increase over the $11,100 per claim average indemnity payment reported in last year's Market report.

As of May 26, 1991 there were 79,400 claims pending against CCR members. Eight states account for 72% of these filings: Pennsylvania, Maryland, Texas, Ohio, California, Mississippi, New York and New Jersey.

Owens Corning Fiberglas is still experiencing substantial loss and expense payments despite its attempt to spread the litigation among multiple defendants. On a gross basis Owens Corning has reportedly paid $816 million in indemnity and $384 million in expenses to close a total of 62,588 claims as of May 31, 1991.

Another assured which presented reserving difficulties at year-end 1990 was Babcock & Wilcox. This assured's claims philosophy has been to settle claims as quickly as possible. At year-end 1990 it was reported that Babcock had closed 72,659 claims and had only 6,733 BI claims pending. However, as of May 1991, Babcock had closed an additional 19,260 more claims to bring its total closed claims count to 91,919 with an additional 13,307 claims pending. Thus, because Babcock settled more claims than were known to exist at the time the 1990 year-end reserve reports were submitted, the suggested year-end reserves were less than the actual amounts paid in settlement by this assured. For year-end 1991, reported indemnity payments are $195 million and expense payments are $7.5 million, as compared to payments of $137 million indemnity and $1.8 million expense in 1990.

Trial Results: Asbestos Property Damage - Baltimore Board of Education

Keene won its first defence verdict in the past year in June 1991 in this litigation. It is not known whether an appeal will be filed.

Trial Results: Asbestos Property Damage - Blue Cross/Blue Shield of Greenville, South Carolina

Obtained a jury verdict in the amount of $3.8 million against W.R. Grace on June 1, 1991. This was the first verdict against Grace in approximately four years, and ended Grace's string of defence verdicts. However, Grace advises that the verdict was significantly below the lowest settlement demand, and Grace was not altogether dissatisfied with the result. Grace's post-trial motions for a new trial were recently denied by the trial judge.

Council and Committee (Amendment No. 4) Byelaw (No. 7 of 1991, 5 June 1991).

5 Jun 91

Run-Off Accounts (Intermediaries) Byelaw (No. 10 of 1991, 5 June 1991).

Post Magazine: Syndicates take cover in excess policies

Increasing numbers of hard-pressed Lloyd's syndicates are turning to time and distance and aggregate excess of loss policies to hedge against claims from their long-tail business.

Some 93 syndicates have bought such policies with a total indemnity of almost £1. 3bn, covering 101 syndicate years, according to Charles Sturge of specialist publisher Chatset.

In a recent survey Chatset found that on average these syndicates had time and distance or aggregate excess of loss policies which represented 38% of their traditional reinsurance to close, but 20 had ratios greater than 55%.

Top of the league were D J Walker syndicate 387 (100%): R A Lissenden syndicate 404 (96%); D H Forrest syndicate 602 (88%); P N Christmas syndicate 17 (82%); and J L Dobson syndicate 660 (87%).

Time and distance policies are similar to annuities. The underwriter seeking to provide against expected claims pays a lump sum to buy a policy which will make available a greater sum in fixed instalments in future years. The aggregate excess of loss policy is more expensive because the benefit is paid when needed, rather than to a set timetable.

Most such policies are written through Bermudan companies for tax reasons, with Sedgwick subsidiary Mendip and Heath subsidiary Pinnacle among the leaders.

"The requirements of the current Names, to whom the investment earnings on a syndicate's reserves belong, must be balanced with the risk to the future generation of Names. They will pick up the bill if the indemnity under a T&D policy proves to be insufficient to pay future claims, or cash flow proves inaccurate because claims have to be paid sooner. This will mean rescheduling a T&D policy and that can prove costly." Mr. Sturge described the contracts as "a way of disguising losses which syndicates should have presented their Names with."

He added: "The brokers make money and the banks make money. What we are never told when these T&D policies are taken out is the APR (annual percentage rate). If we were it would perhaps enable us to judge whether the syndicates were getting good value foe money. I think these people are taking a substantial gamble on the future."

As an example of what can go wrong when such policies are employed, Mr. Sturge quoted the case of non-marine syndicate 602, which bought an aggregate excess of loss policy which was commuted, then bought a T&D policy to replace this. However, the auditors pointed out that this would not pay out until 2005, leaving an £8m hole in the accounts in the meantime.

Barbara Merry of Lloyd's solvency division said that the use of T&D policies is not limited to Lloyd's and is regarded as a prudent device in some situations. "When you face long term liabilities which can't be accurately quantified, you need the protection that T&D policies offer".

Time and distance business is also the subject of considerable industry debate. The Institute of Accountants has raised questions over whether some policies are reinsurances or fall into the category of investments. The Department of Trade and Industry and the Inland Revenue are also reported to be looking at this area.

Post Magazine: Industry ‘will expire without drastic action'

The insurance industry could be a "dying industry" unless it takes drastic action to return to making underwriting profits, warned Maurice Greenberg, president of the American International Group, speaking in London this week.

He told the Geneva Association's annual assembly that the industry produced very bad returns for its shareholders and he was clear where the blame lay. "The industry has given up making an underwriting profit and adopted a market share philosophy instead."

He said this meant that insurance had been sold cheaply with loose policy wordings and, consequently, had become a safety net for failures of the market economy. He pleaded for an end to this approach suggesting that the industry should no longer pick up the bill when a fellow insurer failed because they sold cheap policies: "We have to be prepared to let companies fail without bailing them out."

The audience of senior insurance executives from Europe and Japan also heard a warning about solutions to the environmental crisis. He said that the American experience with the Superfund approach of joint and several retrospective liability should not be repeated elsewhere. The Superfund bill had "turned out to be the more litigious piece of legislation our country has ever adopted," proving a bonanza for lawyers.

Mr. Greenberg estimated that between 40% and 60% of the Superfund money had been spent in the court room rather than on cleaning up the environment.

He said that AIU's proposed alternative of a 2% levy on all commercial insurance premiums was "gaining momentum both in our administration and in Congress."

General Meeting of Members: Statement by David Coleridge, Chairman - A Course for the Future

As we are all well aware, this is a critical time for Lloyd's. This morning I want to address the problems as I see them, explain what we are doing to try to solve them and, finally, talk about the future of our Society.

I use the word ‘critical' because, after 20 consecutive years of profits, the global result for the market in 1988 is a loss and, sadly, a large one. Although 260 syndicates out of 370 have reported profits to their Names this year and although the pure underwriting year 1988 actually produced a small profit of £68 million, the need to strengthen reserves for business written in earlier years means that the final global result for 1988 is a loss of £510 million. Even so, around 10,000 Names made profits this year from their underwriting activities.

In this difficult situation, it is right that you, the members of Lloyd's, should not only expect me as Chairman to tell you about the scale of the losses that have been incurred, but you also have a right to hear a proper explanation of their causes. Some of the reasons for these poor results are well known. The insurance industry world-wide, of which Lloyd's is an integral part, suffered huge losses in the years from 1988 to 1990 from an unprecedented series of catastrophes. These coincided with a time of low and falling premium rates. We must expect this to be reflected in our results for 1989 and 1990, although I cannot, at this stage, give you any meaningful numbers.

Anyone who has studied the financial columns of the press over the last year or two will know that the whole insurance industry has suffered. In the United States alone many insurance companies have become insolvent. In the United Kingdom the composite insurance companies have recorded massive underwriting losses over the same period running into several billions of pounds. The Association of British Insurers revealed last week that its member companies recorded underwriting losses for the 1990 year of £5,000 million.

In addition to the current trading problems, many syndicates with long-tail liabilities have taken the prudent step of strengthening their reserves for earlier years of business. In so doing they have put Lloyd's in a much stronger position to cope with the legacy of North American long-tail business. Taking this step was not easy. But underwriters could not ignore the potential threat from American long-tail liabilities and simply hope to be able to fund claims, as they arose, out of their future profits; that would simply guarantee disaster in the long term.

Facing up to the problems of the past by strengthening our reserves now, however painful in the short term, gives Lloyd's syndicates an improved competitive position from which to face the challenge of the future. For, make no mistake, these long-tail problems are not unique to Lloyd's. Our competitors in the company market, both in the UK and overseas, also have to set aside reserves to meet these potential claims arising from past business.

There is one other aspect of losses on which I should comment. The run of catastrophes which I mentioned earlier has resulted in an aggregation of claims in the retrocession account - normally described as the excess of loss spiral. I see many letters from Names questioning how such large losses can have accumulated without adequate reinsurance and why they were exposed to the risks of such syndicates.

It is indeed an irony that only a few years ago syndicates underwriting this class of business were riding high in the much publicised league tables of profitability and members were clamouring to join them. The fact that this situation has now reversed should surprise no-one. High returns in insurance as in other businesses mean high risk. In years when the unexpected happens, members of high risk syndicates are likely to face substantial losses.

What this illustrates most clearly are two fundamental points about insurance and about Lloyd's. First, past performance can be no guarantee of future profit; second, insurance is a cyclical business and membership of the Society must be viewed as a long term venture. There were three loss-making years in the mid-1960s, since when we have enjoyed two decades of profitability and growth. To promise that history will repeat itself at this time would be to offer a hostage to fortune. Later in this speech I will talk about the future. But first I shall tell you of some of the steps that have been and are being taken in our current situation.

At a time of losses, when Names are suffering distress - with which I and the Council really do sympathise deeply - it is entirely natural that people ask ‘what is going on?' and ‘what are you doing about it?' The questions are usually addressed directly to me. My answer today is that we have done - and are doing - a great deal.

Changes take place in two ways at Lloyd's, through the effects of market forces and in response to perceived needs. Market forces have already contracted the market and will probably reduce capacity and the numbers of syndicates again for 1992. Allied with this is a clear commitment to cost reduction, improved efficiency and a return to profitable underwriting. A hardening market and rising rates are of little use on their own unless the cost base of our operations is properly competitive, there is a more realistic attitude to the acceptance of risks by everyone, and members' agents are seen increasingly to support only those syndicates which display both these characteristics. This approach to syndicate participation will accelerate and, while centrally we cannot dictate it, we certainly applaud it.

In recent years the Corporation's record in this respect has been creditable. Much of its expenditure is determined by the service standards set by the market; and each year since 1988, these have been examined in consultation with the market association committees to see whether there was room for cuts without reduction in service levels. The internal costs of the Corporation, by which I mean those which do not so directly affect the market, have been subjected to an even more rigorous examination and reduction.

The results of this process have been encouraging. In 1989, for example, costs were held steady in money terms as compared with 1988, despite inflation and the fact that over one third of our expenditure is on items such as public utility charges and local authority levies, over which we have little or no control. Again, as a result of a planned programme, the Society's debt has been reduced by over £100 million since the end of 1986, so that this year we expect to pay no net interest. This situation in present circumstances is saving us something of the order of £13 to £14 million a year.

But the process of reducing central costs is one which must continue. At the end of last year the Chief Executive decided that, in the light of the situation in the market, it was necessary to reduce the number of Corporation employees, whose salaries and associated costs - as in any service operation - are a principal item of expenditure, by something of the order of ten per cent in a planned and orderly way. This will not be easy but, by the middle of 1992, it will have been achieved.

Five key initiatives have been taken by the Council in this area. The most visible for individual Names have been the setting up of the Hardship Committee and the recent establishment of Centrewrite Limited which we announced earlier this month.

The Hardship Committee exists to help those members of Lloyd's facing underwriting losses who are willing, but unable, to meet them. It is not a charity; it cannot dispense the Society's money. What it can and does do is to tailor-make, on an individual basis, arrangements whereby losses can be met in whole or in part, now or on a deferred basis. Lloyd's does not drive members into bankruptcy. While a casual reading of the newspapers would have us all believe that every member of Lloyd's is queuing before the Committee, this is not the case. The number of applicants is actually just over 100 and there is no doubt that Dr. Mary Archer and her colleagues are achieving much for those Names.

Centrewrite Limited, Lloyd's own insurance company set up to offer reinsurance to open year syndicates, is the culmination of much hard work over nearly two years. We have emphasised consistently that its creation will not, of itself and overnight, put an end to the great uncertainty with which open years face many of our members. I say this because there is a natural tendency in all of us to want instant solutions to our problems. Centrewrite's first priority will be to help those syndicates in run-off with no successor year. I don't think any of us should underestimate the task which faces its directors and consultants in arriving at a commercial premium, given the very nature of the business it is set up to accept. Nevertheless, I expect it will make a significant contribution to resolving the open year problem.

As for current losses, we have just introduced a byelaw whereby major syndicate losses will be subject to automatic, independent review. Such reviews are not aimed at apportioning blame and are quite separate from our normal disciplinary procedures. These reviews are designed to provide members with an objective view of how the losses were incurred. For losses reported as at 31 December 1990, we have set the trigger point at 100 per cent of a syndicate's capacity. This percentage will be kept under review and may be adjusted from year to year.

In May I wrote to members to inform you that we were asking the Government to include members of Lloyd's in the three-year carry-back of loss provisions which had been proposed for companies in this year's Finance Bill. We believe that this was a reasonable request since our competitors will benefit from the carry-back.

Unfortunately, the Government felt unable to extend this provision to Names. But, in the debate on the relevant amendment, the Financial Secretary, Francis Maude, did say that the Government had, without commitment to the outcome, already authorised the Inland Revenue to explore with Lloyd's whether there was a case for new taxation arrangements for a personal reserve which we would expect to replace the Special Reserve Fund. Discussions are now taking place and we shall be pursuing them as rapidly as we can.

The basis of our case will be that the European competition that we shall increasingly face, both in Europe and elsewhere, enjoys a much greater ability to set aside tax-free reserves than is possible in this country. This is not solely a point which Lloyd's is making; it is a matter on which we are entirely at one with the Association of British Insurers, with whom we have joined in our representations to the Government. This is no more than a sensible approach to a very real problem but one which is vital to the financial health of us all. I sincerely hope it can be achieved, it will enable us to plan even more confidently for the future.

Finally, while on the subject of initiatives, I have just returned from two speaking engagements in California where I was able to lend support to a new scheme which is designed to tackle the problem of pollution. The scheme was first advanced by a leading American insurer and provides for an environmental trust fund, which would be generated by a levy on all commercial and industrial insurance premiums which, at approximately two per cent, would produce some $4,000 million annually.

The intention behind the plan, which is now gathering momentum, is that this new fund would handle all past instances of contamination, leaving the Federal programme - otherwise known as ‘Superfund' - to concentrate on future cases.

Much of what I have said so far is concerned with the past and present. But what about the future? At our first meeting of the year, the Council appointed a Task Force under the chairmanship of David Rowland, chairman of the Sedgwick Group, to undertake a radical examination of our trading structure. The membership of Lloyd's is well-represented; there are eight members of Lloyd's on it, including the chairman of the Association of Lloyd's Members. Two distinguished outsiders have also been included to provide a fresh perspective.

To avoid a preoccupation with the short term, the Task Force was asked to lift its sights to the right trading structure for Lloyd's five to seven years hence and to report back by the end of this year. A year is a cracking pace for an assignment of this kind especially when it involves, as I think it must, busy practitioners who are fully alive to the current needs of the business and the membership. They began by inviting views from members, market practitioners and others by Easter. They have now received and sifted over 200 submissions which contain a great wealth of ideas and constructive proposals for Lloyd's future. Shortly after its formation, the group appointed McKinsey, the leading international management consultancy firm, to help the Task Force with an assessment of Lloyd's competitive position.

I have no intention here of making our competitors' jobs any easier by describing their preliminary conclusions. But I can tell you that the work has already generated a full agenda of ideas for reducing the cost and complexity of doing insurance business at Lloyd's. In every category of business there is at least some scope for reducing costs and eliminating needless duplication of effort, without sacrificing the important principle of autonomous decision-taking at a level where the incentives to get it right are sharply felt.

While a programme for radical action to find new methods and to reduce costs is being developed with McKinsey, work is also progressing in the Task Force on the way in which capital is provided to the trading units. Altogether, the costs of placing your capital in the hands of underwriters are simply too high. During most of the 1980s, a period of rapidly increasing membership, widening syndicate participation and increasingly complex regulation, layers of extra costs were added to the Society.

The Task Force is examining many issues. They include the need of Lloyd's customers for a longer-term commitment than can easily be provided by the one-year joint venture we know as a syndicate; the needs of Lloyd's brokers who sometimes find the spreading of risk through very large numbers of syndicates excessively expensive and especially the needs of Lloyd's members for a larger slice of the profit that is earned on the risks that they take. Its search extends from radical alternatives such as the ending of unlimited liability, through incorporation in one form or another, to mitigating its effect by centrally managed schemes which would seek to protect individual Names from the worst effects of very large losses.

They have not reached any conclusions yet. They have, however; been impressed by the consistency of several themes running through the submissions that have come from many quarters within our community. These include a need to re-examine the relationship between underwriters and brokers which has changed under the pressures of divestment; the growing strengths and activities of our company competitors at home and abroad; and the relentless competition that is so much a feature of the insurance world. Another common feature of the submissions is the growing recognition that the problems of the past which affect the whole insurance industry, not just Lloyd's, need to be clearly distinguished and dealt with separately from the issues of the future.

It is still a fact that there is more concentrated insurance expertise in this building than anywhere else on earth. We are the pre-eminent market for marine and energy risks, meeting about a fifth of the whole world's marine insurance needs. Together with the rest of the London market, we are a major force in aviation insurance, which, for many years including 1988, has produced excellent results. Although aviation rates have been too low recently there is now evidence of rating improvements in this area of our business.

The advertisements which many of you will have seen over the past ten days in the national press represent a small but important part of our campaign. They will continue throughout the year and will be especially directed at buyers of insurance, Lloyd's brokers, non-Lloyd's brokers and intermediaries, all of whom we wish to encourage to bring more business to this market.

Our marketing strategy is geared to the future, which we face with confidence. In developing that strategy we will be working closely with the Lloyd's brokers, who are the best marketing arm of any market in the world. Hand-in-hand with efforts to promote ourselves must go efforts to improve our products and services, if we are to grasp the opportunities the future holds. We have, therefore, invested heavily as a market in information technology to provide still more effective services. This investment, too, is vital to our future.

We should also recall that, during the Gulf War, the world turned to Lloyd's as the one place that had the expertise and capability to provide the war risk cover they needed. For the first time ever, we threw open our doors on a Sunday in order to respond immediately to the needs of our customers and we received world-wide recognition for doing so.

GAF successfully defended a floor tile case in Colorado, obtaining a defence verdict in July of 1991.

On July 29, 1991, the Judicial Panel on Multi-district Litigation issued an Order centralising all asbestos bodily injury lawsuits filed in federal courts to one forum.

The Panel issued an Order signed by five of the eight judges transferring all asbestos bodily injury and wrongful death cases pending in all federal district courts to Judge Charles R. Weiner of the U.S. District Court for the Eastern District of Pennsylvania for pre-trial management. The transfer Order affects parties to 26,639 actions pending in 87 federal districts throughout the country and excludes approximately 4,000 actions. The excluded cases consist of actions on trial, cases concluded as to all defendants except those in bankruptcy proceedings and claims inadvertently excluded from the Order. The transfer grants Judge Weiner substantial discretion to manage pre-trial proceedings. It is unclear whether Judge Weiner will preside over trials or whether cases shall be returned to their original jurisdiction for final disposition.

The Panel cited various reasons for its decision to centralise all federal asbestos bodily injury claims. The Panel noted that it had denied transfer on five prior occasions beginning in 1977. The Panel defended its earlier decisions on grounds that it had not been presented with compelling evidence to justify transfer and because the asbestos litigation through 1984 appeared to present unique factual questions. However, beginning in 1984, asbestos claims were filed in virtually every federal district and by 1990 accounted for one-third of all asbestos filings nation-wide.

Insurance Intermediaries (Amendment) Byelaw (No. 11 of 1991, 7 August 1991).

Lord Bissell & Brook and Mendes & Mount report to Underwriters at interest

1991 Year-End Reserves Asbestos Bodily Injury Claims

We submit to Underwriters our annual report to the Market summarising developments which have arisen over the past year in the asbestos-related bodily injury litigation. There have also been many significant developments in the asbestos-related building damage claims over the past year and these will be highlighted in a separate Market letter.

Lord, Bissell & Brook and Mendes & Mount have collaborated in preparing this overview of the asbestos bodily injury litigation and the views, observations and recommendations presented herein represent the combined efforts of our respective firms. The reserving philosophy adopted for bodily injury claims is the result of discussions held at our year-end reserve meeting which was attended by Lord, Bissell & Brook; Mendes & Mount; London Market Claims Services, Ltd. and by members of the London Market Direct and Reinsurance Claims Committees. Representatives from Peterson Consulting and Ropes & Gray were also present for a part of the meeting.

The full Asbestos Working Party has been briefed on the reserving philosophy and the reserve recommendations contained herein and the Working Party has concurred in these recommendations.

The reserve recommendations reached at the 1991 asbestos reserve meeting are based upon the claims experience of the Center for Claims Resolution in its handling of asbestos bodily injury claims on behalf of its members and are also based upon the current results achieved by major asbestos producers who are independently defending the asbestos claims filed against them. These results will be reported and analysed in this report.

Over the past year, an average of approximately 1,850 asbestos-related bodily injury claims were filed per month. It is this continued rate of high filings which has caused a serious backlog in the dockets of many state and federal courts across the U.S. Two committees were established to consider the problem and suggest solutions and on July 29, 1991, the Judicial Panel on Multi-district Litigation issued an Order centralising all asbestos bodily injury lawsuits filed in federal courts to one forum. We report herein on the impact this order will have on the asbestos litigation nation-wide.

The volume of cases and corresponding enormous expense have also forced several major corporations to file for bankruptcy protection over the past year. These Chapter 11 filings and their significance to the London Insurers will also be discussed. And lastly, we discuss herein significant developments over the past twelve months which have arisen in reinsurance matters.

I. CLAIMS EXPERIENCE OF THE CENTER FOR CLAIMS RESOLUTION

It has been almost three years since the Center for Claims Resolution (CCR) first commenced operations in October of 1988. Since that time, a total of 64,564 claims have been filed against CCR members as of May 26, 1991. Over the past year, new claims have been filed at a rate of approximately 1,852 per month. New claim filings appear to have levelled off over the last three years; however filings have not yet begun to decline.

The CCR has settled 42,886 claims from the time of its inception through May 28, 1991 for a total payment of $521 million or an average per claim of roughly $11,900. This is an increase over the $11,100 per claim average indemnity payment reported in last year's Market report.

The CCR has also experienced a slight increase in defence costs over the past year. The current ratio of indemnity to defence is 75% indemnity and 25% defence costs as compared to a ratio of 77% indemnity and 23% defence costs last year. One reason for this increase is that, because of the recent consolidation of all federal court cases and pending proposals that all state court cases also be consolidated, the CCR is currently only dealing with claims which are listed for trial and which therefore require substantial defence activity. A second contributing factor is Keene Corporation's resignation from the CCR effective June 22, 1990. Contrary to our expectation at year-end 1990, Keene's departure did not reduce the indemnity payments made by the CCR to any noticeable extent; however it did cause an increase in the remaining members' allocated share of defence costs. Nevertheless, even with the increase, the current indemnity to defence ratio of the CCR is still immensely superior to that experienced by most non-CCR members who are independently handling the asbestos claims filed against them. Thus the defence savings continue to be a major benefit provided by the CCR to its producer members and, ultimately, their insurers.

As of May 26, 1991 there were 79,400 claims pending against CCR members. Eight states account for 72% of these filings: Pennsylvania, Maryland, Texas, Ohio, California, Mississippi, New York and New Jersey. We note that there has been a geographic shift in the source of new claim filings. States such as California, where the average indemnity payment for asbestos bodily injury claims has been relatively low, have shown decreased filings over the past year while states such as Pennsylvania and Florida, with historically high per claim indemnity averages, have remained steady or have experienced increased filings. This shift in the geographical source of new claim filings has been taken into consideration when establishing reserves and is a contributing factor to the increase in indemnity reserves per claim.

There has also been a shift in the occupational source of the new claim filings. We note that 60,700 (or 76%) of claimants were involved in occupations which have traditionally given rise to asbestos claims, such as shipyard workers, construction workers and insulators. The remaining 24% derive from non-traditional sources such as rubber and steel workers.

Underwriters may recall that last year a special claims category had been created for 1,757 Ohio Maritime workers who had filed claims. These claims have been dismissed with no loss payments. While it is possible these claimants could re-file, the CCR believes such re-filing is unlikely and therefore we no longer recommend a reserve for the Ohio Maritime claims. These claims previously were reserved for $19,450 per claim or a total of $34,173,650.

One new "special claims category" from last year is the Virginia Shipyard Workers grouping which is comprised of claimants exposed while working at a shipyard jobsite. C.E. Thurston, a major supplier of asbestos at Shipyards in Virginia, has been apportioned 35% of the liability on these claims.

II. CCR RESERVE RECOMMENDATIONS FOR YEAR-END 1991

Based upon the information summarised above, the universe of claims projected as of December 31, 1991 has been agreed at 163,367. This total has been computed as follows:

Our universe of claims at year-end 1991 includes 24,236 more claims than existed in our universe at year-end 1990. This increase is explained in large part by the new claim filings. However, a significant change in our methodology also contributes to the increase. Underwriters will recall that at year-end 1990 the claims count for rubber and steel worker claims was discounted by 50% and 20% respectively in order to reflect the CCR's expectation that only some of the claimants employed in these industries would be able to prove exposure to asbestos in the workplace. For this year-end, we now have two years of historical data on which to draw and this statistical data reflects a high dismissal rate of these rubber claims without loss payments. This statistical information permits us to set accurate per claim reserves for these categories rather than simply reducing the claims count. Therefore for the first time our year-end universe of claims includes a count for all the rubber and steel claims which have been filed.

One further point concerning the methodology of the claims count should be made. The universe of claims does not include 9,093 claims which are inactive. These inactive claims are made up of 2,995 claims which have been dismissed without prejudice, 2077 claimants who filed Green Cards, 3,750 claims filed under the Pleural Registry systems established by various state courts and 271 undocumented administrative claims. It will be recalled that Green Cards and Pleural Registries were adopted as methods to deal with cases where a claimant's condition arguably does not constitute a compensable injury at present but the claimant wishes to preserve his right to return his claim to active status on a court's calendar should his condition deteriorate. The Statute of Limitations is tolled for the Green Card and Pleural Registry cases and therefore these claims cannot be regarded as closed. Nevertheless these claims do not have any recognised indemnity value because of the absence of injury and historically very few of these claims have been activated. Therefore these claims continue to be excluded from the tally of pending claims.

Lastly, it must be stressed that the universe of claims only includes those claims filed or projected to be filed at December 31, 1991. As in years past, the reserve recommendations are based only upon the known claims data and do not include an IBNR factor beyond December 31, 1991.

OCCUPATION	AVERAGE PER CLAIM INDEMNITY
Shipyard	$13,882
Construction	$21,791
Insulator	$16,312
Other	$13,310
Rubber	$ 85
Steel	$12,617
AVERAGE:	$14,101

Based upon the payment history of the CCR, the recommended per claim indemnity reserve for year-end 1991 is $14,000.

The CCR intends to continue to focus its attention on trial-listed cases over the next year and does not expect to enter into a significant number of group settlements, which have historically lowered the defence ratio. For this reason, an increased defence ratio of 35% of indemnity or $5,000 per claim, has been set.

III. CCR CONTRIBUTION

IV. CURRENT EXPERIENCE OF MAJOR ASBUREDB OUTSIDE OF THE CENTER FOR CLAIMS RESOLUTION

Many of the principal asbestos producers did not join the Center for Claims Resolution following dissolution of the Asbestos Claims Facility in 1988. The most recent departure from the Center involved Keene Corporation on June 22, 1990. We have continued to track the experience of the major producers who are independently handling the asbestos claims filed against them. The number of asbestos claims filed against these various producers has steadily grown since 1988. For the most part the non-CCR producers have experienced increased indemnity and defence obligations during the past year.

We reasonably anticipate that the same major asbestos producers previously identified in the litigation will remain the target defendants in the nation-wide asbestos litigation. However, we must now report that substantial numbers of minor and even obscure producers may soon experience a surge in the number of asbestos claims filed against them. This is principally due to a recent publication by Owens Corning Fiberglas of a three volume book identifying hundreds of asbestos producers and their products, photographs of labels and asbestos products and each producer's corporate assets. Our information is that Owens Corning distributed this book to claimants' lawyers nation-wide so that claimants could identify multiple defendants for the asbestos litigation and purportedly dilute the financial burden imposed upon those producers most frequently named in asbestos actions.

We anticipate that this publication will result in a proliferation of newly identified defendants in the asbestos litigation. For example, we understand that Owens Corning suggested to claimants in the New York Powerhouse cases that certain producers identified in the Owens Corning book be added as defendants. When claimants declined to name new defendants, Owens Corning filed third party complaints against an estimated 200 asbestos producers and premises owners.

Owens Corning Fiberglas is still experiencing substantial loss and expense payments despite its attempt to spread the litigation among multiple defendants. On a gross basis Owens Corning has reportedly paid $816 million in indemnity and $384 million in expenses to close a total of 62,588 claims as of May 31, 1991.

Since leaving the Facility, Pittsburgh Corning Corporation has paid in excess of $88 million in indemnity and $102 million in expenses to dispose of 13,822 claims.

Other asbestos manufacturers who experienced a slight decline in indemnity payments immediately after departing the Facility are now showing increased losses. Flintkote has reportedly paid $10.7 million in indemnity and $29.7 million in expenses since it undertook to independently handle its asbestos claims. Overall, Flintkote's per claim indemnity average has increased from $538 per closed claim to $704 per closed claim.

Similarly, ACandS previously reported an average per closed claim payment of $500. This average has increased to $647 per claim and its defence expenses are 330% of indemnity.

We must report that Owens-Illinois' indemnity and expense figures are substantially lower than reported in our 1990 Market report. Current data indicates that 137,331 claims have been filed against Owens-Illinois and that 43,500 claims have been closed for gross indemnity payments of $150 million. Owens-Illinois now reports that its total defence costs are approximately $188 million resulting in an average per claim indemnity payment of $3,453 and an average per claim expense payment of $4,321. We were previously advised that Owens-Illinois' defence payments were 200% of indemnity; this ratio now drops to 125%. The change in reserve figures is a result of the acquisition of a new data source which receives information directly from Owens-Illinois. Because the London Insurers did not issue direct policies to Owens-Illinois covering asbestos products liability claims, at year-end 1990 our reserves were based upon secondary information sources which did not have complete data and were also based upon Owens-Illinois' substantial settlement in the Cimino case in Texas, which in retrospect can be seen to have disproportionately skewed Owens-Illinois' average indemnity payment per claim outside of the Asbestos Claims Facility. We are confident that our information for year-end 1991 is comprehensive and historically accurate.

Another assured which presented reserving difficulties at year-end 1990 was Babcock & Wilcox. This assured's claims philosophy has been to settle claims as quickly as possible. At year-end 1990 it was reported that Babcock had closed 72,659 claims and had only 6,733 BI claims pending. However, as of May 1991, Babcock had closed an additional 19,260 more claims to bring its total closed claims count to 91,919 with an additional 13,307 claims pending. Thus, because Babcock settled more claims than were known to exist at the time the 1990 year-end reserve reports were submitted, the suggested year-end reserves were less than the actual amounts paid in settlement by this assured. For year-end 1991, reported indemnity payments are $195 million and expense payments are $7.5 million, as compared to payments of $137 million indemnity and $1.8 million expense in 1990.

V. BANKRUPTCY FILINGS OF MAJOR ASBESTOS PRODUCERS

A number of the major asbestos producers have filed · f or Chapter 11 Bankruptcy during the past year. On October 12, 1990 Celotex and Carey Canada filed Chapter 11 Bankruptcy proceedings in the U.S Bankruptcy Court for the Middle District of Florida in Tampa. Jim Walter Corporation is not a party to this bankruptcy proceeding. Celotex and Carey Canada reported at the time of the bankruptcy filing that 192,142 asbestos bodily injury claims had been filed against them and that 141,524 claims remain pending. Celotex and Carey Canada asserted that they had paid $361 million in indemnity and $196 million in expenses to dispose of 50,618 claims and that they owed $95 million in outstanding awards of compensatory and punitive damages. On January 18, 1991 Celotex and Carey Canada filed before the Bankruptcy Court a global declaratory judgment Complaint against at least 42 defendant insurers including certain Underwriters at Lloyd's and London Market Companies seeking among other things liability coverages for asbestos bodily injury claims.

Similarly, National Gypsum Co. filed Chapter 11 bankruptcy proceedings on October 29, 1990 in the U.S. Bankruptcy Court for the Northern District of Texas in Dallas. National Gypsum reported to the bankruptcy court that 38,500 asbestos bodily injury claims were pending against it and that its monthly indemnity and expense payments were averaging $1.5 million to $2.0 million. We should point out that National Gypsum was a member of the Center for Claims Resolution at the time of its bankruptcy filing and that National Gypsum has been authorised by the bankruptcy court to continue its association with the Center for purposes of administering its bodily injury claims.

H.K. Porter filed under Chapter 11 of the Bankruptcy Code on February 15, 1991. Porter was a defendant in approximately 70,000 asbestos-related bodily injury claims and had virtually no remaining insurance coverage for these claims.

On January 7, 1991 Eagle-Picher Industries also sought bankruptcy protection by filing Chapter 11 proceedings in the U.S Bankruptcy Court for the Southern District of Ohio in Cincinnati. The company cited in its bankruptcy petition past payments totalling $600 million issued to 65,000 asbestos claimants and the inability to pay an additional $45 million in negotiated settlements.

Underwriters will note that Celotex, Carey Canada, National Gypsum and Eagle-Picher have all filed for reorganisation under Chapter 11 of the Federal Bankruptcy Code as opposed to filing for liquidation under Chapter 7 of the Code. The objective of Chapter 11 is to enable an insolvent company to restructure its affairs so that it can continue its business, or at least the parts worth continuing. To achieve this end, the trustee in bankruptcy has the task of marshalling all the available assets of the corporation. It is well established that the rights to payment on insurance policies are assets of the bankrupt company which fall within the jurisdiction of the bankruptcy court. By filing a Chapter 11 proceeding, all legal proceedings against a company in bankruptcy are stayed by operation of the bankruptcy laws or, in some cases, by separate order of the bankruptcy court. The stay will cover disputes with respect to the interpretation of insurance policies pending outside the bankruptcy court.

Past experience and the present position being taken by some assureds indicate that bankruptcy courts will seek to exercise at least a supervisory jurisdiction over the resolution of coverage disputes and may in fact undertake to resolve those disputes. Certain assureds have argued in bankruptcy court and other jurisdictions that coverage in addition to products liability coverage applies to some asbestos bodily injury claims. In this connection it is important to note that a filing in bankruptcy does not alter the obligations of insurers under their contracts of insurance nor does it, by itself, increase the rights of the assured. To the extent coverage disputes are drawn into the bankruptcy proceedings, however, they will be decided in the context of efforts to maximise the assets available to the bankrupt corporation. It is for this reason that insurers generally view the bankruptcy court as a very unfavourable forum in which to litigate coverage disputes.

VI. CONSOLIDATION OF MULTIDISTRICT LITIGATION

The Panel cited various reasons for its decision to centralise all federal asbestos bodily injury claims. The Panel noted that it had denied transfer on five prior occasions beginning in 1977. The Panel defended its earlier decisions on grounds that it had not been presented with compelling evidence to justify transfer and because the asbestos litigation through 1984 appeared to present unique factual questions. However, beginning in 1984, asbestos claims were filed in virtually every federal district and by 1990 accounted for one-third of all asbestos filings nation-wide.

The number of asbestos claims pending in federal courts prompted U.S. Supreme Court Chief Justice William Rehnquist to appoint a committee of ten federal judges to study the problem. The Panel quoted from this Judicial Conference Ad Hoc Committee on Asbestos Litigation which concluded in September, 1990 that the asbestos filings were "a disaster of major proportions to both the victims and the producers of asbestos products." Then in November, 1990 eight federal district court judges whose dockets were clogged with asbestos filings petitioned the Judicial Panel on Multi-district Litigation to revisit the issue of centralisation. The Panel determined that the beleaguered federal judiciary could no longer wait for congressional legislation to control the asbestos litigation.

The most extreme example of this procedure was the Cimino consolidation, tried by Judge Parker in the U.S. District Court for the Eastern District of Texas in Beaumont. Judge Parker selected a total of 160 representative claims for trial and the jury awarded total compensatory damages in these cases of $122 million. The jury also was asked to consider punitive damages and decided on punitive awards calculated by use of multipliers applied to the compensatory awards for the four defendants found liable. The defendants, with their multipliers, are as follows: Carey Canada - 1.5, Celotex - 2.0, Fibreboard -1.5 and Pittsburgh Corning - 3.0.

Judge Parker has indicated that it is his intention to apply these "representative" verdicts to the remaining claimants who are part of the Cimino consolidation, a group which is currently in excess of 2,000 claimants.

There have also been consolidations in both the New York State Court and the New York Federal Court involving former workers at the Brooklyn Navy Yard. In a jury verdict handed down in the federal action in January of 1991, 52 individuals obtained verdicts totalling approximately $31 million. There are approximately 500 additional cases pending in this action.

These verdicts were followed in March of 1991 by awards in the state court action totalling $70 million in favour of 34 plaintiffs, also former Brooklyn Navy Yard workers.

Major consolidations are currently underway in Maryland, where as many as 9,000 claimants could be involved; in Mississippi, where there are approximately 6,000 cases and in West Virginia where there are approximately 2,000 cases.

It is clear that the court systems in the United States will no longer deal with individual claims if at all possible. In an effort to clear their court calendars, judges will attempt to consolidate and dispose of as many cases as rapidly as possible. This may create tremendous cash flow problems for the defendants and their insurers.

VII. SIGNIFICANT DEVELOPMENTS IN ASBESTOS BI COVERAGE LITIGATION

A significant decision in both the asbestos-related bodily injury and property damage coverage litigation was rendered on March 1, 1991 when Magistrate Leonard Bernikow of the United States District Court for the Southern District of New York issued his opinion in the declaratory judgement action of Maryland Casualty Company vs. W.R. Grace & Co. The Court's decision as to asbestos building claims will be discussed in the separate year-end Market letter. The trial court was asked in part to rule upon the insured's Motion for summary Judgment seeking continuous coverage under policies issued between 1955 and 1973 for its asbestos bodily injury and property damage claims. The defendant insurers in turn sought a declaration that they had no duty to defend or indemnify the insured for liability for any asbestos-related claims. The London Insurers were not a defendant in this action.

The U.S. District Court applied New York law to the trigger of coverage issue for asbestos bodily injury claims. Citing as precedent other federal court decisions interpreting New York law, the trial court concluded that coverage for asbestos bodily injury claims is triggered by an "injury-in-fact" theory. The court conceded that disparate evidence exists as to when injury-in-fact actually occurs in asbestos bodily injury claims. However, the District Court appeared to accept the theory that even sub-clinical injury to lungs does not occur simultaneously with inhalation of asbestos and that damage occurs some time subsequent to exposure. Thus, the court declined to enter Summary Judgment on this issue and ruled that the onset of asbestos bodily injury should be resolved on an individual case basis.

In addition, the District Court found that the insurer has the burden of proving that a settled claim does not involve a covered loss; however the insured has the burden of establishing the insurer's duty to defend. The District Court characterised the insured's burden as minimal, noting that the insured need only demonstrate that the complaints in the underlying action do not exclude the possibility that injury-in-fact occurred during the policy period. The insurer's duty to defend terminates only if the insurer establishes as a matter of law that there is no factual or legal basis for indemnifying the insured. Significantly, the District Court ruled that the insurer's duty to defend survives the exhaustion of policy limits.

Finally, the District Court held that New York law prohibits an insurer from reimbursing an insured for a punitive damage award even if such an award is rendered by an out-of-state court.

VIII. INWARD REINSURANCE CONSIDERATIONS

We reported to Underwriters in our 1990 Market report that the London Market Reinsurers were involved in 11 pending arbitrations concerning a number of different coverage issues in the asbestos product liability litigation. A key issue concerns coverage where the reinsurance contract does not contain an aggregate extension clause. We can now report that in October, 1990 a decision was rendered in one of these arbitrations, Canadian General Insurance Company vs. Underwriting Members of Lloyd's. At issue in this arbitration was whether the reinsured Canadian General could submit its settlement payment made to its insured Lake Asbestos of Quebec, an asbestos mining company, as one occurrence under the reinsurance contracts with Underwriters, despite the absence of aggregate wording in these contracts. By a two to one margin, it was the conclusion of the majority that all asbestos losses involved one occurrence or event, that being the Assured's failure to warn Claimants of the danger of asbestos fibres. A strong dissenting opinion was written stating that losses arising out of the sale of asbestos to many parties in many places over many years were not one "occurrence" or "event" as these terms are understood in the insurance context.

Other arbitration panels in the past have also dealt with the issue of whether asbestos losses can be aggregated under treaties which do not contain clear aggregate extension clause wording. Another significant decision on point was General Accident Insurance Co. of America vs American Re-Insurance Co. in which the arbitration panel concluded that a continuing failure to warn of the harmful effects of asbestos fibres was not an "event" as the term was used in the reinsurance treaties and that all asbestos losses were not one occurrence.

A significant court ruling involving a dispute between two U.S. reinsurers was rendered on April 23, 1991 by the U.S. District Court for the Southern District of New York in Unigard Security Insurance Company vs. North River Insurance Company. In this decision, Unigard Security was ordered to indemnify North River for its facultative share of loss and expense payments made to resolve asbestos-related bodily injury claims against Owens-Corning Fiberglas Corp. Judge Sweet rejected Unigard's late notice defence on the grounds that under the applicable New York law a reinsurer can use late notice as a defence only if it can prove that it was prejudiced by the late notice.

The Court also rejected Unigard's claim that North River's participation in the Asbestos Claims Facility materially altered the risk insured by the facultative certificate. Judge Sweet found that North River's participation in the "Wellington" Agreement, its payments on the underlying second excess policy through the Asbestos Claims Facility and its payments on its third excess policy following Owens-Corning's withdrawal from the Facility were good faith resolutions of issues reasonably within the scope of the policies. In so ruling, the Court specifically rejected Unigard's argument that the "Wellington" Agreement's adoption of the producer generic shares expanded Owens-Corning's liability. The Court noted that while the allocation formula may have caused Owens-Corning to contribute to settlements on claims for which it might not be legally liable, at the same time Owens-Corning benefited from the fixed percentage contributions that other producers made to claims on which Owens-Corning would have been chiefly liable. For this reason, the Court found no evidence to support Unigard's claim that the use of producer allocation shares increased Owen-Corning's liability.

Another significant area of dispute involves the question of whether U.S. domestic subscribing insurers to the Asbestos Claims Facility can obtain reinsurance recoveries for accelerated cash flow, surcharges and Insurance Defence Program (IDP) payments. Underwriters may recall that when the Facility was first established in 1985, subscribing insurers met with leading U.S. and London reinsurers to discuss reinsurance reimbursement for the insurers' payments made to the Facility. The "seven cornerstones" agreement was reached where Reinsurers advised that they generally would accept policy payments made pursuant to the terms of the "Wellington" Agreement subject to the reinsurance terms and conditions but they would not provide reimbursement for certain "Wellington" obligations such as accelerated cash flow payments, surcharges, and defence costs paid by pre-1966 policies under the "Wellington" Insurance Defence Program. The subscribing insurers reserved their rights on these issues but they have not, until recently, pressed reinsurers for payment on these disputed items.

It appears that these disputed issues are now coming to a head. In view of the large amounts of money involved and the absence of any historical or legal precedence to guide the parties in determining what if any reinsurance obligation exists for these payments, it appears inevitable that reinsureds and reinsurers will be unable to resolve these issues among themselves and arbitrations will be necessary.

Lord Bissell & Brook and Mendes & Mount report to Underwriters at interest c/- London Market Claims Services Ltd

1991 Year End Reserves Asbestos Building Claims

As in the past years, the reserving philosophy for asbestos property damage claims is the result of discussions held at the year-end reserve meeting, which was attended by Mendes & Mount, Lord, Bissell & Brook, members of the London Market Direct and Reinsurance Claims Committees, as well as representatives of London Market Claims Services.

The full Asbestos Working Party has been briefed on the reserving philosophy and the reserve recommendations contained herein, and the Working Party has concurred in these recommendations.

There have been a number of significant developments in both the underlying building claims as well as in declaratory coverage litigation. Results in the underlying cases continue to be mixed, as both the plaintiff building owners and the defendant product manufacturers have had some success in trials which have been concluded. In addition to the cases which have been tried, a number of other cases have been favourably resolved on summary judgment motions, while still other cases have been settled, including several for significant amounts.

New cases continue to be filed, and we remain unable to predict with any certainty the future course of new claims.

With respect to the declaratory coverage litigation, we will in this report discuss recent significant decisions involving London Market assureds U.S. Gypsum and W.R. Grace. We do believe that discernible trends are starting to develop, at least in respect to the major producers, as all of the court decisions to date have concluded that asbestos in buildings constitutes "property damage" as defined in the policies, and a number of courts have now adopted a "discovery" type of trigger for asbestos building claims.

With regard to reserving, we would direct the Market's particular attention to the methodology which we are utilising for 1991 purposes for U.S. Gypsum, W.R. Grace and National Gypsum, the three main property damage defendants, known as the "3 G's". Underwriters will note that we have now changed the basis of reserving for these assureds, as well as using a more objective and scientific basis than in past years.

We had previously advised that the Environmental Protection Agency ("EPA") was expected to release guidelines on the applicability of the Asbestos Health Emergency Response Act ("AHERA") to public and commercial buildings. Presently, the AHERA regulations are binding only on primary and secondary schools, and the EPA has been charged by Congress to make recommendations with respect to privately-owned commercial buildings.

The EPA had been expected to decide by July 1, 1991, whether to begin a similar rule-making procedure with respect to public and commercial buildings. Recently, however, the EPA has stated that it will not release its decision until 45 days after its receipt of a report on the matter from the Health Effects Institute-Asbestos Research. The EPA apparently expects this report to be available in the near future, although no new timetable has been established.

The major asbestos producers continue to be named in lawsuits in which the claimants seek damages for the presence of asbestos in their buildings. Since the time of our last Market Letter, the main defendant, W.R. Grace, has been named as a defendant in 35 new suits. Four of these suits involved school districts and two involved municipal entities. Interestingly, approximately 15 of the suits were filed in Minnesota, which is an unfavourable jurisdiction for defendants in asbestos building claims. Grace recently reached a settlement with five Minnesota school districts, and, as it could not recover the settlement amount from its insurers, assigned its policy rights to the schools. The schools have now commenced a garnishment action against Grace's insurers, including Underwriters.

U.S. Gypsum, another major producer of asbestos products utilised in building construction, reports 38 new suits during the past year. Other major defendants report rather fewer new suits.

We continue to believe that most of the school districts with asbestos problems have already filed suit, either as part of the National Class Action or in their own right. We do anticipate that new suits will continue to be filed into the foreseeable future, however, we expect that these suits will be primarily on behalf of commercial building owners and municipal entities.

It is encouraging to note that only a limited number of new building claims have been filed during the past few years, nevertheless, we do not have sufficient information to determine whether this trend will continue. We can only point out that the 1988 study conducted by the EPA concluded that there were approximately 733,000 commercial buildings in the United States which contain some form of friable asbestos, and the number of potential claimants is obviously very large. Unlike the bodily injury cases, the quantum of cases may not accurately indicate the potential damages which a particular assured may face in certain major cases.

We believe that some future claims are likely to be barred by the running of various Statutes of Limitations, despite the fact that issues exist as to whether such Statutes are effective to bar claims by state, municipal entities, or, in some cases, school districts.

A trial of certain issues in Phase I of In Re: Asbestos School Litigation, the National School Class action, is likely to commence in the near future. Judge Kelly of the U.S. District Court for the Eastern District of Pennsylvania, is continuing to hear motions by both sides as to the format for the issues to be resolved in the first phase.

Several of the defendants have filed a motion to compel Judge Kelly recuse himself. The basis for said motion relates to the plaintiffs' sponsored Collegium Ramazzini conference and Judge Kelly's attendance at same. Members of the Plaintiffs' Executive Committee solicited Judge Kelly to permit the release of $50,000, from the collected settlement proceeds, to fund this June 1990 conference on asbestos disease. The defendants claim the Judge has "acquired personal knowledge of disputed evidentiary facts at issue in this proceeding through ex parte communications with plaintiffs' expert witnesses", as well as having accepted, albeit unknowingly, waiver of a registration fee and free hotel accommodation arranged by the Plaintiffs' Executive Committee. The conference featured, as speakers, many of the experts who will serve as plaintiffs' witnesses. Furthermore, the defendants contend that plaintiffs' application for funds constituted an ex parte advocacy of views on the merits.

We provide in our year-end asbestos bodily injury Market Letter a summary of the major issues with respect to assureds who have sought protection of the United States Bankruptcy Courts.

During the past year, three of the major assured manufacturers have filed bankruptcy petitions, National Gypsum has filed in Dallas, Texas, Celotex/Carey Canada in Tampa, Florida. Eagle Picher, which has only limited coverage remaining, has filed in Ohio. Other assureds who are major producers of asbestos building materials also may face bankruptcy or insolvency in the near future.

We are not considering the possible effect of these bankruptcy proceedings on the ultimate disposition of relevant coverages for purposes of year-end 1991 reserving. While in most jurisdictions the liability of the defendant in a products liability action is joint and several with other liable defendants, it is too soon to assess the impact of these pending bankruptcies on the disposition costs of the non-bankrupt manufacturers. We would observe that the two of the three target bankrupt defendants mentioned above would appear to have substantial coverages which may be adjudicated as applying to building clams costs.

1. Independent School District No. 662-Minnesota. On October 5, 1990, a jury returned a verdict in the amount of $820,000 for compensatory damages and $2.4 million in punitive damages solely against Keene Corporation. The case is currently on appeal. This result is significant, as it indicates the dangers of litigating asbestos building cases in Minnesota, where there are a large number of outstanding claims.

3. New Hampshire-Vermont Blue Cross/Blue Shield U.S. Gypsum and U.S. Mineral did not fare as well in a January 4, 1991 verdict, where the jury awarded total damages in the amount of $532,000. The plaintiff, not satisfied with the damages, sought a new trial, and the court found that the damages were insufficient and granted the plaintiff's motion. This case was significant in that it represents the first verdict in favour of a privately-owned building.

4. Adams Arapahoe School District. Colorado. Previous phases of this School District's claim had dealt with surface and thermal product manufacturers. Recently, a jury awarded minimal damages totalling approximately $45,000 against GAF and Flintkote in a case in which asbestos floor tile was the only product at issue. This was the first case to be tried involving floor tiles, and the very minimal damages awarded may discourage future litigation arising out of this product.

6. Kansas City Airport. In a judgment which represents the largest jury verdict to date, Keene Corporation was assessed $8 million in compensatory damages and $6.25 million in punitive damages in an April 1991 verdict. Keene is seeking re-argument, and an appeal is certain.

7. Jordan Perlmutter The owner of a shopping mall in Denver, Colorado, obtained a verdict against U.S. Gypsum in the amount of $950,000 on May 10, 1991.

8. Baltimore Board of Education. Keene won its first defence verdict in the past year in June 1991 in this litigation. It is not known whether an appeal will be filed.

9. Blue Cross/Blue Shield of Greenville. South Carolina, obtained a jury verdict in the amount of $3.8 million against W.R. Grace on June 1, 1991. This was the first verdict against Grace in approximately four years, and ended Grace's string of defence verdicts. However, Grace advises that the verdict was significantly below the lowest settlement demand, and Grace was not altogether dissatisfied with the result. Grace's post-trial motions for a new trial were recently denied by the trial judge.

10. St. Vrain Valley School District No. RE-1J and EL Paso County School District No. 11. GAF successfully defended a floor tile case in Colorado, obtaining a defence verdict in July of 1991.

Following months of trial, the Circuit Court of Cook County, Illinois, handed down its decision in U.S. Gypsum v. Admiral Insurance in January 1991. This litigation involved eight test cases and was tried without a jury. The London Market was a direct defendant in this litigation. The case is significant in that it involved a full trial of he issues and was not a summary disposition on motion.

-The Court rejected the assured's request for a triple trigger of coverage, and he adopted a "first discovery" trigger. This decision was based on expert testimony, as well as the fact that U.S. Gypsum had initially tendered the building claims to its primary carrier from 1979 to 1982, the discovery years. There was also evidence that U.S. Gypsum had treated other non-asbestos claims on a "first discovery" basis.

-The Court rejected the various policy exclusions, including the sistership and damage to own product exclusions. The Court also rejected the repair and replacement exclusions and the pollution exclusion.

-The Court rejected the "occurrence" defence (fortuity), finding that the damage caused by the asbestos to the buildings was neither expected nor intended from the point of view from the insured Wilkin Insulations.

-The Court, as did the judge in U.S. Gypsum, rejected all of the policy exclusions which defendants argued would preclude coverage.

The Wilkin Insulation decision is significant as it represents the first ruling by a state supreme court on the issues of whether asbestos in buildings constitutes property damage, the "occurrence" defence, and the potential applicability of policy exclusions.

-Relying on old New York case law, the Court ruled that primary carriers with pre-1966 standard form policies must continue to defend Grace after exhaustion of indemnity limits.

This decision is significant because the London Market has significant coverage for W.R. Grace. The London Market is at present involved in three declaratory actions arising out of Grace products in buildings.

These actions are at various procedural stages. Armstrong, part of the California Co-ordinated Proceeding, is currently on appeal. Fibreboard and Flintkote, also pending in California, are in the early stages of trial.

Immediately prior to the commencement of the first phase of trial in its declaratory action against its insurers, Fibreboard sought leave of court to amend its Complaint to add a count against its insurers based on advertising liability". Fibreboard was no doubt motivated by a series of cases in California, most arising out of the coverage actions involving the Saving & Loan industry, which have found coverage under the "advertising liability" section of the standard Insurance Services Office Comprehensive General Liability policy. The definition of "advertising liability" includes "unfair competition" in addition to other acts. The California courts have expanded the traditional understanding of unfair competition, which protected business competitors from each other, to include protection for consumers.

By way of summary, we have over the past few years utilised a number of different methods for the calculation of property damage reserves for asbestos building claims. In the early years, before the extent of the potential problem was known, we recommended fixed amounts of approximately $125,000 per policy year, to attach in excess of bodily injury reserves, for those assureds which we believed faced a potential exposure. These were, of necessity, not based on any factual or legal analysis, but were merely intended to alert the Market to the potential problem.

In the mid 1980's, as the extent of the problem was becoming known, we attempted to arrive at a more fact-based method for establishing reserves. We believed that the best method would be to arrive at some approximation of the total quantity of asbestos-containing material in buildings in the United States, and to apply to said amount the approximate per unit abatement costs of this material. The total amount arrived at by this method was then spread over those assureds which we considered to be potentially at risk.

In 1988, we had the benefit of the study conducted by the EPA pursuant to AHERA, which was a study of asbestos in commercial and school buildings. The EPA concluded that approximately 35,000 schools contained asbestos material, and that approximately 733,000 commercial buildings also contained asbestos material. The EPA calculated the total costs connected with regulatory compliance at approximately $3 billion for schools and approximately $51 billion for commercial buildings. The EPA study did not include municipal or government-owned buildings.

Based upon this EPA study, we recommended universal reserves of $2 billion for school buildings and $2 billion for commercial buildings. We then allocated this universal number on a percentage basis to the potentially-involved assureds.

B. 1991 Reserving Methodology.

-The types of products known to be present in the building. For the major assureds, W.R. Grace, U.S. Gypsum and National Gypsum, the main products are structural fireproofing and acoustical plaster. Other products, including pipe and boiler insulation and floor tile, may also be present in the building.

Structural fireproofing	$24.00 per square foot
Acoustical plaster	$18.00 per square foot
Structural fireproofing and acoustical plaster combined, or multiple products	$21.00 per square foot

For all other assureds for which reserves were established in 1990, we will continue to base reserving on the $2 billion universe for school buildings and the $2 billion universe for commercial buildings. Other than the three foregoing assureds, we will continue to apply the percentages utilised in our 1990 calculation, which are set forth in Attachment "A" hereto. We plan to extend the new methodology to these other assureds during the coming years, as sufficient reliable data becomes available.

For the past few years, based upon the possibility that courts would adopt comprehensive coverage triggers for asbestos building claims, we had been allocating reserves to policy years on a modified triple trigger basis. This involved the allocation of 10% of the overall liabilities to the years 1950 to 1960, 30% to the years 1960 to 1972, and 60% to the years 1972 to 1983. To the extent any "spill-over" was involved, it was allocated to available coverage years only for W.R. Grace, U.S. Gypsum, National Gypsum and GAF.

2. All Other Assureds.*

* Please refer to attachment A.

There have been no decisions for other assureds regarding the trigger of coverage and we are for 1991 purposes continuing to recommend that reserves for all assureds other than Grace, U.S. Gypsum and National Gypsum be spread on the modified triple trigger basis. For two of the larger assureds for which we have recommended reserves, Celotex, and Dana with respect to its involvement with Smith & Kanzler products, we would point out that the trigger of coverage issue will likely be decided by a Bankruptcy Court, which is more likely than other courts to seek to maximise coverage by adopting some type of a spread theory of coverage.

In prior years, we had recommended that a 200% defence cost loading be applied to primary policies for asbestos building claims. However, if more accurate information was available from the assured or reinsured, the actual known figures would be utilised.

On the excess layers, as primary policies were generally in place and providing a defence, we based our reserve assumptions on the fact that the $4 billion universe would include defence costs.

We have now revisited the issue of defence costs in view of the changes made in indemnity reserving for 1991. This is particularly true with respect to allocation of reserves for W.R. Grace, U.S. Gypsum, and National Gypsum on a discovery basis. As primary limits for these target defendants are exhausted or severely impaired, the excess insurers may face a potential liability for the reimbursement of defence costs. Accordingly, we are for the first time recommending that excess reserves be established, on a percentage basis, to recognise these potential liabilities. The defence cost ratio for the target defendants expressed as a percentage of indemnity, will be:

W.R. Grace	80%
U.S. Gypsum	80%
National Gypsum	0%

For all assureds other than the above target defendants, we will continue our 1990 reserving philosophy. These other producers generally have primary coverage in place, and have not yet obtained rulings on trigger of coverage. Accordingly, we will continue to base our reserves on the assumption that the $4 billion universe contains an allocation for defence costs, and the total reserve allocation will continue to be spread on the modified triple trigger basis discussed above.

It will be recalled that in 1990, we applied "spill-over" to available coverage years only for the three target defendants and for GAF. Spill-over, as we have previously reported, is the amount by which reserves assigned to a given policy year cannot be applied to said year, due to exhaustion of aggregate limits for bodily injury or other products liability claims.

With respect to GAF, we anticipate that most if not all available coverages will be fully reserved for asbestos bodily injury. To the extent they are not fully reserved, the remaining limits will be reserved for property damage, which may include some allowance for spill-over.

For accounts other than the target defendants and GAF, we are not making any allowance for possible effect of spill-over.

As should be evident from the length and complexity of this report, there have been a number of significant developments during the past 12 months, both in the underlying cases and in the declaratory coverage cases. We may be seeing the start of certain trends in the coverage litigation, and we have tried to amend our reserving methodology accordingly. In addition, as more detailed information is becoming available on certain of the underlying claims, we have adopted what we believe is a more scientific and objective approach to the establishment of reserves for the main target defendants, W.R. Grace, National Gypsum and U.S. Gypsum.

We continue to closely monitor developments in the underlying claims, and we submit the following summary. We will discuss recent cases interpreting the defences available to manufacturers, including product identification, economic loss, no risk/hazard, Statutes of Limitations, and Statutes of Repose.

Manufacturers have been generally successful in asserting the lack of product identification defence under the appropriate facts. Unfortunately, a defence motion for summary judgment is rarely successful, since the courts find a question of fact for jury determination as to the issue of product identification. Even where plaintiff is unable to produce evidence of a defendant's product in a particular building, the court usually will find the defendant's motion premature or the court will order plaintiff to provide evidence of product identification within a specific time frame.

In Mason Public Schools v. W.R. Grace & Co et al. Michigan Circuit Court (March 1990), the court dismissed plaintiff's claims against United States Gypsum and Pfizer based upon the plaintiff's inability to produce evidence of the defendants' products in any of the subject schools.

In Cincinnati Board of Education v. Armstrong World Industries, Ohio Court of Common Pleas, (September 1990) Judge Black placed the burden upon the plaintiff to prove by a preponderance of the evidence that defective asbestos products were the product of any one, two or more defendants who manufactured that product. If the plaintiff proffers evidence allowing a reasonable juror to conclude that the product in question was manufactured by any two or more defendants, Judge Black ruled that the burden of proof shifts to the defendants to show that their products are distinguishable from the products of other manufacturers. If a defendant is unable to distinguish its product from the products identified by plaintiff, summary judgment will not be granted.

In the City of Boston v. Keene Corporation, Massachusetts Superior Court, September 1990, the court refused to dismiss building claims against ten asbestos manufacturers, when the court denied a defence motion for partial summary judgment. The manufacturers claimed that plaintiffs were unable to produce any evidence that would tie them to the products in the subject buildings. They argued that identification of manufacturer's products made only by product specifications and construction contracts, was not sufficient. The judge, denying defendants' motion, found that no defendant had met its burden of affirmatively demonstrating it was not the manufacturer or installer of the products. The burden of proof would not be shifted to plaintiffs until defendants had demonstrated by pleadings, depositions, answers to interrogatories, admissions or other affidavits, that there was no issue of material fact concerning which manufacturer produced the items that caused injury. The denial of summary judgment was handed down in May of 1989. Thereafter, the matter was submitted to a jury. Among numerous holdings in a general defence verdict for U.S. Gypsum and U.S. Mineral Products, the jury found for the defendants on a lack of product identification in many of the buildings. In many other buildings, the jury found these defendants were not negligent in distributing Asbestos Containing Building Materials ("ACBMs").

In January and February of 1991, In re: Asbestos School Litigation, the National School Class action in the Eastern District of Pennsylvania, Judge Kelly found that the three lead school districts had established no evidence of product identification against four defendants. Judge Kelly granted summary judgment for Keene Corporation, Combustion Engineering, Cargill/C. Tenant & Sons, and Asbestospray. The conspiracy counts against these defendants remain, however, the product liability counts were dismissed for lack of product identification.

As a side note, with regard to product identification, it should be noted that plaintiffs have attempted to introduce "market share liability" as an "alternative theory" of liability, where product identification cannot be established. The "market share" theory of liability seeks to hold defendant-manufacturers liable on the basis that they placed ACBMs into the stream of commerce.

For example, in January 1991, the District Court for New Hampshire held that the market-share theory of liability was unavailable to relieve plaintiff of the requirement that it identify specific products within its buildings. University System of New Hampshire v. United States Gypsum Co. et al.

In summary, courts will generally hold plaintiffs to their burden of proof, and will require plaintiffs to identify the manufacturers of the product in their buildings.

Traditionally the economic loss doctrine has prohibited recovery for strictly economic losses in the case of a defective product. Where a purchaser's expectations are frustrated because the product purchased is not performing properly, the remedy available is in contract only, because damages are said to be "economic" in nature. Recovery in tort is thus prohibited. Conversely, where a defective product harms the purchaser or user, recovery may be had in either tort or contract.

The economic loss defence has been routinely asserted in asbestos building cases throughout the last eighteen months to two years. In essence, the defendants contend that the mere presence of asbestos in a building is not property damage but instead represents a potential economic loss. This anticipated economic loss is based upon the supposition that the building owner may incur future expenses associated with removal or maintenance of installed ACBMs. Defendants assert that these anticipated expenses are not recoverable in tort and, furthermore, that future monetary loss is not "property damage."

The Supreme Court in Wisconsin held in Banc One Building Management Corp. v. W.R. Grace & Co. (March 1990) that abatement costs are solely economic losses and cannot be recovered in tort, citing East River S.S. Corp v. Transamerica Delaval Inc., U.S. Supreme Court (1986) and, Sunny Slope Grading Inc. v. Miller Bradford & Risberg Wisconsin Supreme Court (1989).

The Hawaii Circuit Court followed this rationale, determining that only economic losses were alleged where plaintiffs sought recovery of prospective losses for removal and maintenance of ACBMs. The Court held that where: "there was no harm to person or property, no tortious conduct was alleged, and no recovery for negligence or tortious conduct [would be permitted]." Board of Directors of the Association of Apartment Owners of the Mott-Smith Laniloa Condominiums v. Robert Cutshaw & Associates & Okazaki & Sugai Plasters Inc. v. Hamilton Materials Inc., Hawaii Circuit Court, 1990.

However, the holdings of these two "economic loss" decisions were flatly rejected in the majority of jurisdictions in 1990. While there had initially been some encouraging results at the trial court level in New Jersey in the Livingston Board of Education v. United States Gypsum et al., New Jersey Superior Court, June 1990. The plaintiff - School District, as a building owner and commercial buyer, was denied recovery for economic losses resulting from the purchase of allegedly defective goods, ACBMs. The Court held that plaintiff's theory of recovery was a negligence theory. Since the ACBMs performed their intended function and plaintiff's losses were speculative and future losses, the Trial Court granted defendant's summary judgment. The Appellate Division reversed this decision, holding that the potential for future bodily injury claims gives rise to an action in tort.

The majority of cases reported continue to hold that the economic loss doctrine does not preclude recovery on a negligence theory. Judge Broderick, Southern District of New York, in Chase Manhattan Bank v. Turner & Newall et al recently summarised the position held by the majority of courts:

In Uricam Corp. v. W.R. Grace et al., Western District of Oklahoma, (June 1990) Judge Phillips adopted what he believed was the better view, noting a split of authority and citing Board of Education of the City of Chicago v. AC&S, Supreme Court State of Illinois. Judge Phillips wrote:

In Kershaw County Board of Education v. U.S. Gypsum Co Supreme Court South Carolina, September 1990, the court recognised the economic loss rule as precluding recovery in tort for a product defect if the damage suffered is only to the product itself. The Court rejected the economic loss defence, adopting the reasoning of the District Court in City of Greenville v. W.R. Grace & Co., a 1986 decision from the District of South Carolina. The Kershaw Court held: "The economic loss rule does not preclude an action . . for damages . . . to other property of the plaintiff" [other than the defective product itself].

University of South Carolina v. W.R. Grace & Co. et al South Carolina Court of Common Pleas; Tioga Public School District v. U.S Gypsum et al, District Court of North Dakota; THS North Star Association v. W. R. Grace & Co. et al, District Court of Minnesota; Independent School District No 622 v Keene Corporation et al, District Court of North Dakota; Kershaw County Board of Education v. U.S. Gypsum, South Carolina Supreme Court; Independent School District 197 v. W.R. Grace et al. Fourth Division, District Court of Minnesota; Uricam Corp,. v. W.R. Grace & Co. et al, Western District of Oklahoma; Board of Ed of The City of Chicago v AC&S, Illinois Supreme Court.

Over the past two years, only three courts have adopted the economic loss doctrine and permitted summary judgment in favour of defendants on negligence counts. The economic loss doctrine is not a reliable manufacturers' defence, having been successful in only 3 of 25 reported cases.

Nevertheless, the Environmental Protection Agency "guide book" stresses management of ACBMs as opposed to removal. The EPA has shifted its emphasis and is attempting to prevent unnecessary removal operations. The EPA is beginning to recognise, and attempting to convince others, that removal of ACBMs is not the treatment of choice in all cases. This shift in the EPA position regarding removal, coupled with recent publications criticising wholesale, knee-jerk removals have assisted defendants' no hazard arguments.

The number of jury verdicts in favour of defendants on the "no hazard" defence grounds continues to grow.

In Charleston National Bank v W.R. Grace & Co et al, Southern District of West Virginia, the jury rendered a general defence verdict for the manufacturers on April 27, 1990. Plaintiffs claimed $15 million in past abatement and maintenance costs and $15.4 million in future removal costs. The defendants asserted that air quality tests within the building over a period of years had established that maintenance of the asbestos was appropriate and there was in fact no reason for removal. A jury verdict for the defendants was returned on that basis.

In March of 1991, Mason Public School v. W.R. Grace & Co., Michigan Circuit Court, resulted in a judgment for defendant Basic. After 2+ hours of deliberations, the jury found that the defendant was not negligent based on the no hazard defence.

However, in Tioga Public Schools v. U.S. Gypsum, U.S. District Court of North Dakota, a jury verdict for the plaintiff was handed down in June of 1990. The no hazard defence was flatly rejected by the jury despite expert testimony regarding the air quality within the buildings and the expert testimony regarding low dose exposures and threshold limit values of exposure. This is the first recent jury verdict in favour of plaintiff to reject the "no hazard" defence.

Manufacturers have won 10 of 11 jury verdicts in the recent reported cases where the "no hazard" or "no risk" defence was asserted and sustained.

In Clayton Center Associates v W.R. Grace & Co, Missouri Circuit for St. Louis, Judge B. C. Drumm, Jr. denied summary judgment, finding an issue of fact with regard to the date the building owners knew of the presence of asbestos-containing building materials. The defendant W.R. Grace claimed that the plaintiff knew of the existence of ACBMs as early as 1980, when a building appraisal listed asbestos damage. Plaintiff claimed it was not aware of an asbestos related problem until 1983. The Court found an issue of fact for jury determination and denied summary judgment. Discovery is continuing in this matter.

In Hebron Public School District 13 of Morton County v. U.S. Gypsum, (March 1991), the Eighth Circuit Federal Appellate Court upheld a jury verdict in favour of defendant on statute of limitations grounds. The plaintiff claimed that North Dakota's "discovery" rule should apply. Thus, the period within which plaintiff could commence the action did not begin to run until plaintiff knew of defendant's culpability. Defendant U.S. Gypsum claimed that installation of the products more than 10 years prior to commencement of the suit barred plaintiff's recovery (Statute of Repose). In the alternative, U.S. Gypsum argued that the School District was on notice of the potential hazards and thus the action was time-barred (Statute of Limitations). The jury found that the plaintiff knew of the hazards of asbestos building materials more than three years prior to the filing of the suit. Therefore, a jury verdict for the defendant was entered.

In a March 1991 decision, the Ohio Court of Appeals held that it was uncontroverted that claimant, Beavercreek Local Schools, knew of the presence and potential hazards of ACBMs more than five years prior to commencement of the action. Defendant Basic was, therefore, entitled to summary judgment on statute of limitations grounds. Beavercreek Local Schools v. Basic. Inc. et al. In so ruling, the Court of Appeals reversed a judgment against Basic in the amount of $250,000.

In Presbyterian Center. Inc. v. U.S. Gypsum, (December 1990) the 11th Circuit Court of Appeals upheld a Georgia four year statute of limitations. The Georgia Legislature had specifically enacted a statute which held that the four year statute of limitations began to run on the date of installation of the asbestos containing building materials.

In Richmond County Hospital Authority v. Celotex. the U.S. District Court for the Southern District of Georgia held that the 1980 Asbestos School Hazard Protection and Control Act provided ample notice. Plaintiffs then knew or then should have known of the potential for an asbestos-related hazard. Measuring from 1980 plaintiffs' actions are time barred.

In a Michigan Appellate Court decision, Board of Education of the School District of the City of Detroit v. Celotex, the trial court's decision to dismiss on statute of limitations grounds was upheld by the Michigan Appellate Court. The trial court found that a 1979 EPA report constituted notice to the plaintiffs. As such, their action was time barred.

In Warren Consolidated Schools v. W.R. Grace & Co. et al, Michigan Circuit Court, (August 1990) Justice Schwartz rejected plaintiffs contention that the damages had not accrued or were continuing, and each installation of asbestos containing materials began a new discovery period. Plaintiffs also contended that the filing of the class action in the Eastern District of Pennsylvania tolled the statute of limitations as to individual school district claims. Judge Schwartz granted the defendants motion for summary judgment on the basis that all depositions and documents introduced established that plaintiffs discovered the dangers of ACBM's prior to 1985 and, in fact, the danger of ambient asbestos fibres was made known to plaintiff in the 1970's. The plaintiffs actually filed a report with the EPA in September of 1985 regarding friable asbestos in 9 different buildings. The delay in filing the action against Grace and others was more than three years. Therefore, the three-year statute of limitations barred plaintiff's claim.

In another Michigan Circuit Court decision, Elizabeth Anders v. W.R. Grace & Co, (November 1990) plaintiff claimed fraudulent concealment had tolled the four year statute of limitations. Claimant alleged defendants knew of the hazardous nature of their products and intentionally and fraudulently concealed this information from plaintiff. Therefore, it was argued, plaintiff's time to commence the action should begin to run only from the time defendants fraud was discovered. The Court held that a March 1979 EPA report to all school districts placed plaintiffs on notice of the danger. At that point, they knew or reasonably should have known of the dangers of ACBMs. Therefore, since plaintiffs were placed on notice by the EPA report, the alleged fraudulent concealment could not excuse the delay in filing after 1979. The action was, therefore, time-barred.

In January 1991, in Mason Public School v. W.R. Grace & Co. et al, the Michigan Circuit Court held that asbestos had been located and identified within the buildings as early as 1977. Therefore, plaintiff's action against Keene was time barred.

In Los Angeles Community College District v. Owens Corning Fiberglass, the California Superior Court for Los Angeles County held that 1982 air tests indicated a dangerous level of asbestos fibres in the air. The Court therefore applied California's three year statute of limitations and granted defendant summary judgment since plaintiff failed to file its claim within three years of the 1982 test result. The Court held that plaintiff's knowledge of health dangers attendant to asbestos was substantially equivalent to knowledge of property damage. Therefore, knowledge of health dangers would commence the running of the statute of limitations.

In Mount Lebanon School District v. W.R. Grace et al, Pennsylvania Court of Common Pleas, (January 1991) the state Court held that the doctrine of Nullum Tempus (Time does not run against the sovereign state) applies to school district's enforcement of a public right. Since the school district is seeking to enforce a right of the public to attend school in a safe and healthy environment, no statute of limitations defence would be available to the defendants. This is not a majority view. Judge Kelly in the National School Class Action has taken the opposite view, dismissing claims against Kaiser on the grounds of the Statute of Limitations.

In May of 1990, the New Jersey Superior Court decision, Board of Education of the City of Clifton v. W.R. Grace, supported the Nullum Tempus doctrine.

On the other hand, a recent decision in California Sansome Company & Polk Marketing Company v. U.S. Gypsum (February 1991) held that the manufacturers failed to show that the building owners were damaged more than three years prior to filing of their action. The California Court in Sansome required defendants to prove that: 1. asbestos fibre releases had resulted in a contamination level sufficient to cause property damage, and 2. plaintiff had knowledge of that contamination. Where the level of asbestos fibre release was not sufficiently appreciable to a reasonable man, no notice would be charged to plaintiff. This shifting of the burden of proof to require defendants to prove contamination is a minority view.

The more widely accepted standard was set out in Uricam Corp. v. W.R. Grace et al, Western District of Oklahoma, where the court held that the statute of limitations begins to run when plaintiff knows or reasonably should know of the potential for an asbestos-related claim. The Court held that this was a question of fact and therefore summary judgment would not be permitted. In an extension of this viewpoint, the United States District Court for New Hampshire held in University Systems of New Hampshire v. U. S. Gypsum, (February 1991) that the plaintiff must know not only that an injury has occurred, but also that the defendant caused the injury. This additional factor has not been widely accepted by the various courts.

Fourteen of the 24 reported cases have been decided in favour of the defendants on statute of limitations grounds. It now appears that when plaintiffs, in particular school districts, have been charged with knowledge of the potential for an asbestos-related claim, then their delay in filing claims is less likely to be excused by the Courts. Also, juries have found that certain plaintiffs' knowledge with regard to asbestos fibre release has been long standing. Consequently, juries are beginning to hold plaintiffs accountable for the delay in filing.

Judge Kelly, overseeing the National Class Action In re: Asbestos School Litigation, refused to dismiss actions by Virginia school districts for buildings built prior to January of 1978. Judge Kelly determined that, although the Virginia school districts opted to join the national class action in January of 1988, schools built prior to January of 1978 would not be barred from the litigation. In Judge Kelly's opinion, there was a question of fact as to whether these school districts knew or should have known of asbestos contamination prior to January of 1978.

In a Washington D.C. case, U.S. Gypsum v Wesley Theological Seminary, a related issue went to the United States Supreme Court. The U.S. Supreme Court held that a revival statute enabling plaintiffs to sue for asbestos contamination was not unconstitutional despite the revival statute's reversal of the effect of the statute of repose, which was already in place at the time of enactment of the revival statute.

In Cincinnati Board of Education v. Armstrong World Industries et al, (January 1991) the Hamilton County Court of Common Pleas in Ohio held that the defendant's relationship to the plaintiff is significant in determining applicability of the statute of repose. The Court granted summary judgment to numerous defendants who acted only as subcontractors or installers. The Ohio statute of repose set forth a time bar for this class of defendants, however, the Court ruled that the statute of repose was not available for defendant-manufacturers.

In Trustees of the University of Pennsylvania v. U.S. Gypsum, Philadelphia Court of Common Pleas Judge Gafni held that the statute of repose only protects those defendants who participate in the design, planning and construction of real property. The statute specifically excludes manufacturers and suppliers of building materials.

The greatest activity with regard to statute of repose was found in the Maryland State Courts. In State of Maryland v. Keene Corporation et al, and the related case Mayor and City Council of Baltimore City v. Keene Corp. et al, Judge Levin of the Baltimore County Circuit Court ruled that the statute of repose protected asbestos manufacturers and applied to latent diseases. The Maryland statute of repose protects contractors, manufacturers, and suppliers if the alleged asbestos related damages occurred more than 20 years prior to filing of the suit, according to Judge Levin. Following Judge Levin's decision, the Maryland Legislature removed the protection of statute of repose from manufacturers and suppliers of asbestos containing materials, if they knew or should have known of the danger of asbestos when the products were installed. The Maryland Governor vetoed this legislation.

In Tullahoma City Board of Education v. U.S. Gypsum et al, (February 1991) Kansas State Court Judge Jarvis denied summary judgment, holding that a defendant was required to demonstrate plaintiff knew or should have known that the buildings contained asbestos dust prior to the commencement of the statute of repose.

Judge Phillips, Western District of Oklahoma, held in Uricam Corp. v. W.R. Grace & Co. et al, that building professionals, architects, engineers, product manufacturers and suppliers, and contractors were not protected by the statute of repose for numerous reasons. Judge Phillips held that these defendants were in a better position to determine the dangerous nature of the ACBMs. As such, it would appear that statutes of repose will not bar claims in Oklahoma.

In Hebron Public School District 13 v. U.S. Gypsum et al, the statute of repose issue was certified to the North Dakota Supreme Court. A decision is awaited as to whether the protection of the statute of repose will extend to manufacturers, suppliers and installers of ACBMs in asbestos property damage actions.

The statute of repose defence has been fairly successful for manufacturers and other defendants. In the past twelve months, manufacturers have won seven of fourteen reported cases. Maryland and Virginia are particularly adamant regarding protecting building suppliers and have staunchly supported the statute of repose defence for property damage claims. As discussed above, several jurisdictions have excluded manufacturers from the statue of repose defence by specifically tailoring the legislation enacted. A number of jurisdictions also draw a distinction between building suppliers and manufacturers of products.

Syndicate Premium Income (Amendment No. 3) Byelaw (No. 12 of 1991, 4 September 1991).

London Market Claims Services Ltd letter to Underwriters at Interest

RE: 1991 YEAR END RESERVES

ASBESTOS RELATED BODILY INJURY AND BUILDING CLAIMS

Please find enclosed copy of two 1991 year end overview reports in regard to asbestos related claims, a result of the combined lawyer representative efforts of Mendes and Mount and Lord, Bissell and Brook.

Over 800 account reports can be expected for reserving purposes which will be streamlined as much as possible. As a consequence underwriters should note that much of the information contained within the overview reports will not be repeated in the individual account reports.

I have also been asked by the Reinsurance Sub-Committee to advise Lloyds underwriters of the following in relation to 1991 year end reserves (1968 year and post).

In Robin Jackson's market letter dated 8th August 1990, it was proposed that LUNCO should provide a facility to enter Asbestos reinsurance reserves from 1991 year end onwards.

Following a series of discussions and significant preparatory work by both LUNCO and LMCS the Asbestos Reinsurance Sub-Committee are able to report that this service will be provided to interested Lloyd's syndicates from 1st October 1991 onwards.

It is anticipated that LUNCO will shortly provide a market circular to its members outlining the new procedures, LMCS will continue to circulate the year end reserve reports to all participants in the normal manner.

Hearings take place in the Outhwaite trial.

Mendes & Mount letter Re: Assured : Owens Corning Fiberglas Corp. Claimants : Various Asbestos Broker : (1) Lumley Ref.: NMC/SFJ/PN (2) (C.E. Heath Ref.: Unknown

We have also provided London Market Claims Services with a copy of the 1991 London Market Reserve Worksheet for this account, which has been prepared by Peterson Consulting. This Worksheet contains a more detailed statistical explanation of the reserving methodology, as well as a detailed coverage chart for this account. Access to this Worksheet may be obtained by contacting London Market Claims Services.

As Underwriters will recall, limits afforded to Owens Corning for the 22 October 1957 to 1 October 1964 London Market policy periods have been consumed by the payment of asbestos bodily injury losses/expenses. The London Market does, however, participated in Fourth Layer Excess policies issued to Owens Corning for the period 8 March to 1 September 1979 and 1 September 1979 to 1980, which provided limits of $24.5 million and $20.5 million as indicated in the attached "Schedule A."

We recently met with OCF representatives, and we have determined that OCF was making indemnity payments at the rate of $9 million per month and expense payments at the rate of $12 million per month. It is OCF's contention that they are experiencing an increase in the cost of their defence because more cases are becoming active and trial consolidations are causing more costly discovery to be conducted prior to settlements. Based upon present levels of consumption, the London Market policy for the 1979 year will most likely be reached in the near future and may in fact be fully consumed by year end.