Jan 92

The Lloyd's Working Party, chaired by Sir Jeremy Morse, submit their report entitled "A New Structure of Governance for Lloyd's" to Lloyd's Council.

28 Jan 92

Annual Meeting of the Institute of London Underwriters: Statement by the Chairman, Mr. D M McMahon


By 1st January this year the ILU membership had fallen to 101, the result of thirteen companies deciding to stop accepting new business for this year. Some have withdrawn from marine business, at least for the time being, but also there have been consolidations within underwriting groups

31 Jan 92

Lloyd's says £3bn loss figure from Chatset is alarmist

Lloyd's of London has issued a counter-blast to Wednesday's "unnecessarily pessimistic and alarmist" figures from Chatset, the independent firm of Lloyd's analysis, which has forecast losses of more than £3 billion for Lloyd's between 1989 and 1991.

According to the Lloyd's projections 1990 will produce a pure year underwriting loss of about 3.5 per cent, or about £390 million. This compares with the Chatset forecast of a £700 million pure year loss.

forecast a pure year profit of between 3 and 4 per cent, or about £420 million. Chatset has estimated the 1991 result as a deficit of about the same amount.

David Coleridge, the chairman of Lloyd's, said that the latest estimates represented "a far more balanced view of the likely outcome of the 1990 and 1991 years than those produced thus far".

However, unlike Chatset's figures, they do not take into account a raft of other factors which affect the final outcome for the year such as investment income, expenses, reinsurance to close and deterioration on open years.

Lloyd's has claimed that these figures are impossible to predict so early in the 1990 and 1991 accounts, making Chatset's figures unreliable.

Chatset had forecast final losses of £1 billion and £750 million for 1990 and 1991. Estimates for 1991 do not take into account catastrophes that occurred in the final three months, including the

The Lloyd's estimates are based on individual managing agents representing about 40 per cent of Lloyd's capacity for the two open years in question. Many market practitioners have reacted angrily to the Chatset figures, especially those for the 1991 year, claiming that they present an inaccurate picture of the state of the market at a time when confidence in Lloyd's is already at an all-time low.

14 Feb 92

Daily Telegraph: Cross-party calls for inquiry into Lloyd's

THE GOVERNMENT sought to distance itself yesterday from fresh allegations of malpractice at Lloyd's of London as pressure mounted for an investigation into its insurance activities.

An unlikely alliance of Left-wing Labour MPs and Tory backbench names - a number of whom are facing substantial losses on their Lloyd's business - led to accusations of "structural rottenness" at Lloyd's and demands for the market to be brought into the regulatory framework covering other investment businesses.

One Labour MP described as "scandalous" a claim that market insiders had been taking the best business for themselves while leaving external members holding losses averaging more than £90,000.

A deputation of Tory MPs held talks yesterday with Mr. John Redwood, Corporate Affairs Minister, who later spoke to Mr. David Coleridge, chairman of Lloyd's, reminding him of his duty under the Lloyd's Act to look "swiftly and independently" at what Ministers said were serious allegations and reply to them.

However, Mr. Redwood made it clear that, as Parliament had decided Lloyd's should be self-regulating, there was no direct role for the Government. Complainants, he said, could pursue civil actions, go to the Lloyd's regulator, or take any evidence of fraud to the Serious Fraud Office.

Details of the alleged malpractices were sent to Mr. Brian Sedgemore (Lab, Hackney S) by an unidentified Conservative backbencher - one of 62 "names" among Tory MPs - and formed the basis of three Commons motions critical of the activities of professional underwriters.

The central claim was that agents acting for all members were reserving safe and highly profitable syndicates for themselves, whereas "disastrously bad dustbin" syndicates are composed almost entirely of external or retired members."

Earlier this week, Tory MPs had what was described as a heated meeting with Mr. Coleridge. They have also complained to the Government of the "structural rottenness" at Lloyd's which could only be addressed by outside regulation under the Financial Services Act.

The briefing note for the meeting, which was passed to Mr. Sedgemore, said that 153 underwriters each took fixed salaries of more than £100,000 from their syndicates in 1990 and 24 paid themselves more than £200,000, at a time when 6,000 largely non-working names faced hefty losses averaging £90,000.

The leak of information to Labour MPs who are known as specialists in pursuing allegations of financial malpractice was attributed to embittered Tory MPs. It is thought among Tory backbenchers that eight of their colleagues stand to lose at least £100,000 and one to lose £200,000.

Another Commons motion tabled last night, following a further leak of information, said one broker controlling the LMX spiral market - which accepts catastrophe risks - had paid himself an £8. 2 million salary and some £9 million in dividends.

One Tory "name" said the leakers had engaged in a "self-defeating exercise" as, by recruiting Labour MPs to their cause, they had brought more bad publicity upon Lloyd's, further undermining confidence in an already dwindling market.

Mr. Coleridge, meanwhile, denounced the "unsubstantiated, irresponsible and dangerous" allegations, which he claimed were an "unwarranted slur" on Lloyd's.

He said it was inevitable that an unprecedented number of catastrophes would have an impact on the market but denied that market "insiders" had benefited at the expense of external members.

"The fact is that, in two of the last three completed underwriting years of account, external members have enjoyed a higher return than working members."

Mr. Coleridge, who has pledged to implement the thrust of reforms contained in the wide-ranging Rowland report on the market, said a Government inquiry was neither necessary nor helpful.

Miss Marjorie Mowlam, Labour's City spokesman - who was unwilling to comment on the specific allegations - said: "The market needs to establish a structure which will provide its investors with the same degree of protection enjoyed by users of other types of investment business."

Lloyd's, she added, was too significant to the British economy to sort out its own problems and the matter needed to be resolved speedily before the market's reputation suffered more damage.

Mr. Paul Marland (C, Gloucs W) and a member of Lloyd's, who was among the MPs who met Mr. Redwood, said: "I was very concerned that the City of London has enjoyed such a fine reputation for so many years that it was important that any allegations of malpractice in Lloyd's were sorted out."

Mr. Dennis Skinner (Lab, Bolsover) described Lloyd's as a "posh betting shop".

14 Feb 92

Daily Telegraph: Names' caught in spiral of claims

AS THE world's biggest insurance market, Lloyd's aims to collect enough premiums to cover claims on everything it insures, from cars to space shuttles. But it also relies on individuals - known as' ‘names" - to pledge capital that can be called on.

In a good year, the names share the profit made by their underwriting syndicate. In a year when more claims than expected come in, they may have to make good any loss.

At the centre of the allegations in the Commons is the "spiral", under which syndicates reinsure with others to avoid the full brunt of any catastrophe claims.

Writing this spiral business involves high risk, but in good years can also deliver high rewards. By the end of the decade, however, a flood of claims from asbestosis victims in America and a spate of catastrophes, such as the Piper Alpha oil rig disaster, the Exxon Valdez tanker spill and Hurricane Hugo, had left "names" facing huge losses.

The losses have caused considerable damage to Lloyd's reputation, prompted the resignation of thousands of "names" and turned the spotlight on the salaries earned by Lloyd's underwriters.

Many "names" have joined action groups to consider suing syndicate managers and the agents who introduced them to the syndicate.

Members of Outhwaite syndicate number 317/661, which is facing losses of more than £250 million, agreed earlier this week to settle their High Court action against Richard Outhwaite for a £116 million payment.

Lloyd's last year announced its biggest ever loss and is expected to far exceed that when figures for 1989 are unveiled in June. A loss of £1. 35 billion has been forecast.

18 Feb 92

Lloyd's List: E&O cover halved after Outhwaite case

A new more difficult market for errors and omissions (E&O) cover for underwriting agents at Lloyd's is in prospect in the wake of last week's £116m ($204. 1m) settlement with Outhwaite names.

The cover available to agents for this year is set to be halved to £10m and the Merrett syndicates, one of the mainstays of the major E&O facility, is coming off the slip.

Terms of the E&O cover are also being tightened with the extended three-year claims discovery period permitted in previous years replaced by a strict one-year claims made wording.

A provision for automatic reinstatement of E&O cover exhausted by a claim is also being dropped for the 1992 policy year.

Broking of the E&O slip for the current year was well advanced by the time the Outhwaite settlement was announced but underwriters had become increasingly aware over recent weeks of the possibility that a costly deal would be necessary.

E&O cover for underwriting agents is already among the most costly forms of professional indemnity insurance, with annual premiums that can cost up to 10% of the cover limit.

Rates are not expected to harden greatly in the wake of the Outhwaite settlement as other changes are under way that will mean the record set by this deal is likely to stand for a very long time.

The deal agreed with the Outhwaite 1982 Names' Association in respect of the 981 litigants it represented is by far the largest E&O settlement in respect of Lloyd's underwriting agents.

The previous highest was a £3m contribution made by the E&O syndicates on behalf of the underwriting agents towards Lloyd's settlement with the PCW names.

Up to 124 Lloyd's syndicates will be participating in the latest settlement which is being made against the 1985 E&O cover of RHM Outhwaite Underwriting Agencies and the 1986 and 1987 policy years of the other members' agents.

The deal has been a blow to the E&O market as there had been a confidence that the claims of the litigating Outhwaite names could be resisted.

The performance of the expert witness and the overall way the trial was going, however, persuaded the lawyers advising the E&O underwriters that an out-of-court settlement was advisable.

A particular worry among some was that Mr. Justice Saville seemed to take a jaundiced view about the whole principle of insurance to close and its basic legality.

Syndicates close years by reinsuring outstanding liabilities into successor years which often have a substantially similar membership.

It appears to be a principle of English law that one cannot conclude a valid contract with oneself so the whole RITC system at Lloyd's may be legally flawed.

Whatever the worries were behind the E&O underwriters pessimism, there seems little doubt that the outlook for the market in the wake of the Outhwaite litigation has materially changed.

One possibility being considered by Lloyd's is ending the requirement that managing agents have E&O cover.

The logic of this is that few Lloyd's underwriting agencies are substantial well capitalised companies and once the insurance cover is removed aggrieved names will no longer sue.

This argument, however, is regarded with a good deal of incredulity by professional indemnity specialists.

If operating uninsured was a cure for litigation Lloyd's would have long since gone out of business as the market for liability cover would have disappeared.

When Lloyd's last year removed a requirement that members' agents have E&O cover, the consequence was that potential lawsuits were redirected towards the managing agents.

Lloyd's decision to drop the requirement that members' agents have E&O cover was for one year only but underwriters attitudes to getting involved in "vicarious liabilities" are such that the option of reimposing such a rule has now gone.

Managing agents and their underwriters were the real target of most aggrieved names but they were forced to pursue the members' agents as a consequence of the particular contractual relationships that used to exist at Lloyd's.

However, allowing managing agents to operate without professional indemnity cover would not send names' litigation in another direction - with the exemption of the Corporation of Lloyd's.

Angry names would probably still sue managing agents and their directors. Successful actions could force managing agents into bankruptcy, leaving Lloyd's to pick up syndicate run-offs and tidy-up the general mess that would be left.

The £116m settlement in the Outhwaite case is a guide to the sort of claims that could be made so even the largest and best established managing agencies having to pay on a large E&O claim would be extremely damaging.

Lloyd's is already in the firing line to a greater extent as the switch of responsibility under the new underwriting agreement from members' agents to managing agents has made it a much more attractive target for litigation.

One of the key arguments for switching responsibility from members' to managing agents was the potential aggregation that happened in the Outhwaite case when 81 firms of members' agents were sued by 981 names.

The E&O underwriters could have been exposed to the extent of £20m for each agent, which would have amounted to a claim of £1. 6bn - more than the cost of the Piper Alpha disaster.

Aggregation is much less of a problem when members of a syndicate sue a managing agent as the E&O cover fairly quickly hits the policy limit.

Providing E&O cover for managing agencies is also attractive as it is easier to assess risk and rate accordingly at this level.

The maximum potential recovery from a managing agency would be £20m for previous years and £10m for 1992, which means a payment would be spread pretty thinly in the case of a large syndicate.

The E&O cover might be limited but this would probably not stop names seeking further damages from the managing agency, brokers, auditors, Lloyd's and any other insured or deep pocket parties their lawyers could think of.

The defence of the Outhwaite litigation was largely run by the E&O underwriters as it was their pockets at risk. Lower limits and a wider range of parties at risk means such strict control of the defence may not be possible in the future.

The "king" of the Lloyd's E&O market, Kingsley Borrett, however, has no doubts that whatever the changes a fundamental need for cover will remain.

The market for E&O cover for Lloyd's underwriting agents is dominated by a facility run jointly by brokers Frizzell and Sedgwick.

The facility was set up by Mr. Borrett, managing director of Frizzell Professional Indemnity, and colleague Richard Brett offered cover to both members and managing agents in the past but is aimed at managing agents for 1992.

This facility, which has perhaps a 90% market share, is augmented by two much smaller facilities aimed at members' agents.

A joint Alfred Blackmore-Frizzell facility provides members' agents with the relatively low limit of cover of £1m for any one syndicate or agent and there is also a Fenchurch slip designed to respond to a limited range of E&O claims such as clerical mistakes.

The origin of the |Lloyd's E&O market was around 1960 when Roy Merrett and a number of colleagues who were in the practice of taking coffee together agreed to provide cover for underwriting agencies.

For a premium of £100 to £200 a year, £100,000 of cover was provided on a 10% co-insurance.

The product was not, however, exactly an overnight success for there was not a great perceived need for cover and underwriting agencies had the comfort of a legal opinion that it was impossible for an agent to be sued by his name.

Even hurricane Betsy in 1965, which led to huge losses at Lloyd's, did not lead to any immediate change in attitudes towards E&O for the fewer than 6,000 members of Lloyd's bore the losses stoically.

The wider development of the product dates from July 1970 when Messrs Borrett and Brett hit on a marketing idea, that was quite radical for its time.

They sent a direct mail shot to all Lloyd's underwriting agencies about E&O cover they could place and commending the wisdom of this sort of insurance.

The mail shot was a success and two dozen firm orders for E&O was developed, establishing the brokers' pre-eminence in the market.

The Fisher committee, which reported in 1980, recommended that E&O cover become compulsory and that agents should have to insure for half their stamp.

By 1984, £50m of E&O cover was available but this shrank to £20m from 1984 when the market hardened and it was becoming clear that the marketing of Lloyd's membership over the last decade had attracted a new less wealthy and more litigious type of name.

Messrs Borrett and Brett, meanwhile, moved to Frizzell which is how the E&O cover became a joint Frizzell-Sedgwick facility.

Until the late 1970s and the Sasse scandal it was virtually unknown for names to sue their agents and consequently there had been no claims.

An ex-gratia settlement was made in this case and this led to a split between the Lloyd's underwriters and the three insurers, led by Sun Alliance, which provided the cover.

The companies paid a compromised settlement but decided they did not wish to go on participating in the cover and withdrew from the E&O facility.

Further litigation followed: Oakley Vaughan, Spicer & White, PCW, led on to the recently settled Outhwaite and Warrilow cases although this still leaves Gooda Walker and a whole spate of recent problems still to be resolved.

21 Feb 92

Lloyd's commissions Sir David Walker to chair an inquiry into Lloyd's syndicate participations and the LMX spiral.

23 Feb 92

Sunday Times: Crisis at Lloyd's

THE TENSION was palpable. David Coleridge, chairman of Lloyd's, stood in the training room at the world's oldest insurance market last Monday morning facing 22 MPs and peers.

The slide-show was over, a couple of general questions had been answered but now the mood in the sparsely furnished room changed. Up rose the tall figure of Paul Marland, Conservative MP for Gloucester West, who is known to be one of the heaviest losers among the 22,400 Lloyd's "names".

Coleridge, a gentle, portly man wearing his customary double-breasted pinstripe, began to blink nervously.

"In which of your three capacities are you appearing?" asked the suave Marland. "As the chairman of Lloyd's, as the man responsible for regulation of the market, or as the chairman of Sturge Holdings [one of the biggest Lloyd's underwriters], from which you earn over £800,000 a year?"

Coleridge flinched and looked at the panel of senior Lloyd's insiders behind him: there was no help there. He replied in his soft but forceful lisp: "My Sturge salary is £75,000 a year." He received nothing for being chairman of Lloyd's.

"But what about your other income?" taunted Marland. Coleridge shrugged. "I do have a considerable private income." Everyone knew this was disingenuous. The balance of the £800,000 comes from Lloyd's also - in bonuses, dividends and underwriting.

Then it was the turn of Earl Alexander of Tunis son of the field marshal. He spoke of his own losses, and of what had occurred in the insurance market over the past decade. Finally, he asked: "Has Lloyd's any sense of duty to its members?" Coleridge, momentarily was speechless.

It was an extraordinary occasion: Tory politicians mercilessly roasting one of the City's grandees. "In my 29+ years as an MP I have never ever witnessed such gratuitous rudeness and bad behaviour," said Tom Dalyell, the one Labour MP who attended the meeting. Why was it so rough? Dalyell had no doubts: "Hell hath no fury like an investor who has lost a bundle."

Tory peers and MPs are among the hundreds of Lloyd's names (people pledging capital to underwrite the market's insurance policies) who could be ruined by losses that may top £1 billion. Some face bills running into hundreds of thousands of pounds. They acknowledge that Lloyd's is a casino, with reward balancing risk, and that in the past the cheques have been fat. But now they are outraged and claim that certain insiders have creamed off huge profits while mismanaging their money. Many names are now refusing to pay. Without the cash, Lloyd's will collapse.

The stakes are so high - Lloyd's contributes around £2 billion a year to Britain's invisible trade balance - that few believe the government would allow it to collapse. But behind Marland's question was the central problem of who runs Lloyd's.

Accusations of greed, malpractice and fraudulent behaviour at the market are rife. For too long, say some the rabbits have been in charge of the cabbage patch.

IT IS ALL very different from the Lloyd's with which Coleridge had grown up. Spawned 300 years ago in a City coffee house, Lloyd's had long operated like a private gentlemen's club. It dominated the marine insurance market and was allowed by successive governments to regulate itself. The rich put their money in, and got richer. Trust between members was paramount. The outside names made handsome profits and complaints were rare.

Then in the 1980s something changed. Competition from the large insurance companies at home and from Americans and others abroad began to eat into Lloyd's market share.

To fill the gap, the market embarked on some dangerous measures. Marine underwriters took on non-marine insurance about which they often knew little. All £360m of the losses of the notorious Outhwaite 1982 syndicate, some of whose names recently received an out-of-court settlement after suing for negligence, stemmed from non-marine business.

At the same time the rules of entry were eased to attract more names. The minimum worth they had to demonstrate was lowered, and incentives were offered to agents who brought "names" into the market, prompting a rush of middle-class investors newly enriched by the Thatcher boom years.

Celebrities and business stars such as Melvyn Bragg, Susan Hampshire, Henry Cooper and Edward de Bono were attracted by the seemingly non-stop profits. Pledging their assets to a promise of unlimited liability did not worry them. But they did not know insiders at Lloyd's were already courting trouble.

As the market - a complex mix of members' agents, managing agents, underwriters and brokers - anxiously witnessed the decline in business, some realised they could maintain profits by passing insurance from one to another.

The idea was simple enough: the risks were spread and all parties picked up commissions each time the business was transferred. The reinsurance game, especially the catastrophe business known as LMX (London Market Excess of Loss), swiftly became the one to play. It worked like this: underwriter A would reinsure his risk with underwriter B, who then obtained cover with underwriter C. Then C reinsured some of his exposure with A again, and so on, creating a spiral of liabilities. Here, according to observers such as Ian "Goldfinger" Posgate, the star underwriter now barred from Lloyd's, is where the problems started.

The process worked well when there were few disasters, as in the early 1980s. But during 1987-90 came a series of 15 disasters, each bringing a loss of more than $1 billion.

A frantic game of pass the-parcel began, with the syndicate that finally unwrapped the parcel taking a huge hit.

"Crisis? What crisis?" said Lloyd's as the losses piled up. Coleridge, a Lloyd's man since 1959, who became chairman only last year, still maintains there has simply been an unnaturally large flood of claims. "There are a lot of people who can't tell a loss from a scandal," he told journalists as the threat of litigation from names mounted. But the figures are undeniably worrying.

The market last year announced losses - the first in 20 years - of £500m for 1988 (Lloyd's waits three years to calculate the cost of claims). Estimates for the 1989 losses are as high as £1.35 billion. There is a legitimate argument for saying Lloyd's is nearly bust.

It claims assets of £18 billion, but some of that is in the form of pledges by names, many of whom are refusing to stump up. Its most liquid asset, a central fund of £450m, has been earmarked for losses on the syndicates run by Peter Cameron-Webb, the disgraced underwriter who escaped to America in 1982 and still sits there a free man enjoying millions of pounds of names' money.

MANY of the stricken names, described initially by Coleridge as "bitchers and whingers", accept they were greedy and gullible to become involved in the first place. But they also question why they, the outsiders, have suffered most while many of the insiders (underwriters are also names) knew which syndicates to avoid and so escape financial ruin.

Eight key complaints have emerged from the angry names, some of whom are now demanding a full parliamentary inquiry. They allege that:

  • Lloyd's insiders kept the good policies for their own syndicates;
  • Underwriters and brokers churned policies to inflate performance and raise commission payable;
  • Insiders regularly protected themselves from unlimited liability by hiving off assets into trusts, but neglected to tell outside names to do likewise;
  • Outside names were not advised to protect themselves with "stop-loss" insurance;
  • Some underwriters were allowed to write business despite being clearly incompetent;
  • Names who joined recently have had to pay for losses from years ago;
  • The same underwriters who incur big losses pay themselves six-figure salaries while forcing names to stump up huge amounts in cash calls;
  • Once in, it is hard for names to leave. They are tied in until the claims on a syndicate in a particular year have stopped.

The key allegation, that outside names were regularly dumped into "dustbin" syndicates, is supported by evidence of how hard it is to get into good ones. External names have tried for years to get into the most profitable syndicates. They cite Bankside's non-marine syndicate 45 where profits topped £7m in 1988, the same year that Lloyd's as a whole plummeted into loss. It is stuffed with "working names" - insiders. Outsiders stand little chance of getting in. The names allege, too, that insiders have known about the problems at Lloyd's for years. They cite the underwriters' nicknames in the "club" atmosphere: Bryan "Nodding Donkey" Spencer, now the subject of complaints alleging mismanagement from the names of 895 syndicate "Time Bomb Terry" Green, salary £353,000, named in a parliamentary motion last week, whose names eventually took a £26m pasting on the LMX market; "Money In The Bank" Frank Barber, who used to run 990 syndicate, one of the insiders' most exclusive, and profitable, outfits.

Then there is "Big Bill" Brown, the florid East End broker who built himself into Britain's best-paid man on the back of the LMX spiral. Publicity-shy Brown paid himself £17m in salary and dividends last year. He spends it on houses, show-jumpers and cars - Rolls-Royce Corniche (registration BB7), Mercedes (BILLY), plus Porsche Turbo and Ferrari.

For many names it is too much. Brown's family broking firm, Walsham Brothers, placed much of the excess-of-loss reinsurance that is costing syndicates so much. In an amendment to the motion tabled in the Commons this month calling for an inquiry into Lloyd's, Bob Cryer, a Labour MP, demanded that Brown's role in the LMX market be examined.

COLERIDGE now has to prove he can put his own house in order. Described by one MP as a "public-relations disaster", Coleridge has drafted in press and marketing support. Some names have offered him help - Melvyn Bragg came to see him about the PR problem last year - and have even tried to press the likes of Saatchi & Saatchi and Sir Tim Bell on him. He will have none of it.

But the main problem will not go away. The latest in a long line of reports on Lloyd's, The Route Ahead appeared in January, the result of a year-long study by a task-force headed by David Rowland of Sedgwick.

One of the most important suggestions, that an independent regulatory body be appointed to replace the Lloyd's council was immediately vetoed. Then, in a typical turnaround, the council decided to reconsider.

But the other proposed reforms do little to change the way the market is run. They do not solve the central problems of lack of capital and the power of certain brokers.

Nor do the proposed reforms address the problem of the change of culture that overtook Lloyd's in the Thatcherite 1980s. One name, Alfred Doll-Steinberg, an industrial chemist who is chairman of the Gooda Walker and Wellington syndicate action groups, describes what happened as a "sea-change" in morality. "The 300-year-old principle of uberrima fides - utmost good faith - started to be replaced by the principle of caveat emptor, as if you were buying a used car from Arthur Daley."

Some are already calling for Coleridge's head and the liquidation of Lloyd's while it is still solvent. Few believe that will happen unless the Lloyd's council continues to keep its head in the sand. Part of the difficulty is undoubtedly the state of the sector. All of Britain's big five composite insurance companies will unveil huge losses over the next few weeks, topping £1 billion in all.

But while ruined names troop in front of Dr. Mary Archer's hardship panel, set up to help the sufferers, Coleridge will remain under pressure. He will certainly have to show more concern about what goes on inside Lloyd's, rather than complaining about coverage outside it.

For now, says Coleridge, his greatest wish is that the tide of litigation from aggrieved names will end. "I think it is unattractive and certainly doesn't do any good to our business," he says.

On Friday he appointed Sir David Walker, chairman of the Securities and Investments Board, to look into the outside names' complaints. If that fails to address their concerns Lloyd's might not have any business left to worry about.

4 Mar 92

Syndicate Accounting (Amendment No. 7) Byelaw (No. 1 of 1992, 4 March 1992).

4 Mar 92

Membership (Overseas Deposits) Byelaw (No. 2 of 1992, 4 March 1992).

17 Mar 92

E&O cover halved after Outhwaite case

24 Mar 92

Storms, USA, Texas, Louisiana, Florida; estimated cost $610m.

31 May 92

There had been 172,943 asbestos-related bodily injury claims filed nation-wide in the United States.

1 Apr 92

Run-Off Years of Account (Amendment) Byelaw (No. 3 of 1992, 1 April 1992).

3 Apr 92

Financial Times: Apparent irregularities found involving former Lloyd's agency

Investigators have unearthed evidence of apparent irregularities at businesses formerly administered by Gooda Walker, a Lloyd's agency which managed some of the worst loss-making syndicates in 1989 and 1990.

The discovery is likely to have serious implications for the legal battles between Names who are the individuals whose capital backs insurance business, Lloyd's and their agents

Names are insisting that cash calls needed to pay more than £200m in losses made in 1989 and 1990 by the Gooda Walker syndicates should be frozen while investigations continue.

The evidence of apparent irregularities was discovered by GW Run Off, an agency set up to manage the affairs of Gooda Walker, and is contained in an affidavit presented by Lloyd's to the Commercial Court on Tuesday.

It centres on the use of so-called time and distance policies. These allow syndicates to reinsure known liabilities with outside reinsurers.

Before its liquidation last year Gooda Walker managed eight syndicates which mainly specialised in catastrophe reinsurance.

Yesterday Mr. Alan Lord, chief executive of Lloyd's, said that GW Run Off, a company formed to manage the syndicates, had exposed "a number of transactions which appear to have rather odd and perhaps damaging consequences for Names".

However despite the new information Lloyd's would continue to press Names "to pay cash calls and if necessary draw down the deposits," said Mr. Lord.

Failure to meet claims from its policy holders would damage the insurance market's tarnished reputation

This means that the legal action by 820 Names who are seeking court injunctions to prevent Lloyd's from drawing down their deposits will continue next Monday

"I do not think it will change our prospects of succeeding in our ability to draw down on Names' deposits. It will not change the substance of our case" added Mr. Lord

The case in which the Names are being represented by Michael Freeman & Co. was adjourned on Tuesday to allow both sides to consider the new evidence.

The Gooda Walker Action Group, some of whose members are party to the Freeman action, may now mount a separate legal action.

10 Apr 92

Bishopsgate bomb, London; estimated cost $1.315bn.

13 Apr 92

Flood in old tunnel system, USA, Chicago; estimated cost $300m.

28 Apr 92

Storms, USA, Oklahoma, Texas; estimated cost $760m.

29 Apr 92

Riots, USA, Los Angeles; estimated cost $775m.

29 Apr 92

Agency Agreements (Amendment No. 3) Byelaw (No. 4 of 1992, 29 April 1992)

The implications of the amended Byelaw in respect of the profit commission and the deficit clause:-

  1. The amended provision of Part B of Schedule 1 to the Managing Agent's Agreement extend the "vertical" deficit clause to provide that a loss from a syndicate must be carried forward for at least two years, (rather than one, as is presently the case), and be set off against any profit before the managing agent is entitled to charge any profit commission.
  2. The two year deficit clause will not apply in relation to any year of account earlier than the 1993 year of account.

1 May 92

Daily Telegraph: Names scheme at Lloyd's

LLOYD'S of London yesterday confirmed it is considering ways of helping thousands of members facing huge underwriting losses. But it said any plan would have to be approved by all members and there was no guarantee such relief could be arranged.

Proposals that could see retrospective help for the market's "walking wounded"- those facing bankruptcy after losses in the disastrous 1989 year - were discussed "in broad outline" at a Lloyd's council meeting on Wednesday.

Alan Lord, the insurance market's deputy chairman and chief executive, said: "There is a great deal more work to be done until we are prepared to go to the Names (members) with a scheme if one proves to be feasible."

"But you have my assurance that this whole question is being pushed ahead as rapidly as possible although, as I have implied, I cannot at this stage guarantee that we shall necessarily arrive at a successful outcome."

Plans considered include putting a ceiling on the amount that can be lost by members and a levy on all members to rescue those worst affected - a move unlikely to he welcomed by the market's profit-making members.

Mr. Lord said it was not a question of ending the Lloyd's tradition of unlimited liability but "a question of setting a limit on the consequences of which that implies".

The scheme put forward by chairman David Coleridge reflects a change of heart from earlier opposition to "mutualisation" of losses. The aim is to end the spate of members' litigation.

1 May 92

Pittsburgh Corning has experienced a substantial increase in claims activity during the past year. The assured reported that it had closed 32,000 claims as of May 1, 1991 and that approximately 75,000 claims were then pending against it. Pittsburgh Corning now reports that as of May 1, 1992 it has closed 74,627 claims and that 74,670 claims are pending. This assured has paid $286 million in indemnity payments including $168 million since it left the Asbestos Claims Facility in 1988. Pittsburgh Corning has reportedly paid $228 million in defence expenses to dispose of 74,627 claims.

15 May 92

Owens Corning Fiberglas reports that it is named as a defendant in an average of 1,775 new claim filings per month for a total of 102,073 pending claims at year-end 1992. Owens Corning has reportedly paid $987 million in indemnity and $573 million in expenses to close 80,431 claims as of May 15, 1992. This time last year, Owens Corning had reported $816 million in indemnity and $384 million in expense payments.

17 May 92

Sunday Times: Coleridge: no government bail-out for Lloyd's

AMID mounting controversy over unprecedented losses at Lloyd's of London, David Coleridge, the insurance market's chairman, insists there will be no bail-out of distressed names (personal investors) by either the Bank of England or the Department of Trade and Industry.

"We have not asked the Bank or the government for help, nor will we," he told The Sunday Times last night. "Lloyd's is 100% solvent and we can sort out our own affairs." Rather than turn to the government, Lloyd's has appointed a "blue-chip merchant bank" to explore ways of rescuing over-stretched names. According to Coleridge, the bank (which he refused to identify) will advise on "the structure of a new scheme to help financially troubled members".

He denied allegations in parliament last week by Peter Hain, the Labour MP, that powerful interests at Lloyd's were in collusion with the government to protect vulnerable underwriters. He said: "if we asked either the Bank or the government for a bail-out, Lloyd's would be out of business in a second. Confidence in the market would vanish." Coleridge's hard line against seeking official help is sure to anger many names who feel they have been let down by Lloyd's. Many claim they have been the victims of negligence, and in some cases fraud. A common complaint, which is denied by Lloyd's, is that outside names have been invested more heavily in loss-making syndicates than have working names (those members who work at Lloyd's).

But Coleridge said there were no "dustbin syndicates" and predicted that the investigation into Lloyd's by Sir David Walker, who is also chairman of the Securities and Investments Board, would disprove widespread allegations of wrongdoing.

One proposal to be examined by Lloyd's newly appointed bank adviser will be limiting claims against names to the amount of their investment in the market.

Under current rules, Lloyd's names face unlimited liability. But the rising level of disastrous losses in the insurance market has forced the executive to reconsider the consequences of driving some members into penury.

Another scheme under consideration is the introduction of corporate members to Lloyd's, which has hitherto existed solely on investments from wealthy individuals.

The plan has received preliminary approval from the policy-making council of Lloyd's.

Individual members need to demonstrate they have £250,000 of unencumbered assets to become a Lloyd's name, but the minimum "entry fee" for corporate members would be considerably higher, perhaps £1m.

0 Jun 92

Flintkote's per claim indemnity average increased slightly from last year to $661 per closed claim at year-end 1992. Its per claim expense average has remained relatively steady at $1,701 per closed claim. Overall, Flintkote reports that it has paid $29 million in indemnity and $75 million in expenses to close 44,181 claims as of June, 1992.

3 Jun 92

Miscellaneous Administrative Provisions Byelaw (No. 5 of 1992, 3 June 1992).

4 Jun 92

Guardian: Troubled Lloyd's of London faces £2bn loss as group ponders new rescue plan - Setback is biggest in 300-year history - Many Names hit by this second year of losses could be wiped out

THE stricken Lloyd's of London insurance market is set to announce an annual loss of more than £2 billion this month - the biggest in its 300 year history - it was forecast yesterday, as a "Super Action Group" presented its own rescue plan to Lloyd's officials to bail out hard-hit underwriting members.

The latest figure from the independent Lloyd's analysts, Chatset, is far higher than its earlier prediction in January of a loss of £1-35 billion - and was accompanied by warnings that continuing large losses would wipe out Lloyd's capital base and more than halve its underwriting capacity by 1994.

It also exceeds a more recent forecast from the London Underwriting Agents Association, which predicted a loss of £1-1 billion at best and £1-65 billion at worst.

The overall loss relates to the 1989 underwriting year, as Lloyd's syndicates report their figures three years in arrears.

Lloyd's will announce the official "global" figures in around a fortnight's time, ahead of the annual meeting of individual underwriting members, known as Names. The Corporation of Lloyd's own accounts for 1991 will be published today. Yesterday, Lloyd's refused to comment on Chatset's figures, although market sources said they be believed them to be "broadly accurate".

Last year, Lloyd's announced a £510 million loss for 1988, while it notched up a profit of £509 million for 1987.

Chatset bases its forecast on the syndicates' own 1989 accounts which were lodged at Lloyd's last month.

"The culprits are the spiral syndicates that look like producing even worse than expected results," Chatset's Charles Sturge said.

Some of these, including Rose Thomson and Gooda Walker, still have to report their figures, so Chatset has included estimates where accounts have not yet been filed.

Dubbed the "dustbin" syndicates, the spiral syndicates are the specialist reinsurance syndicates also known as London market excess of loss (LMX).

Chatset's figure of £2-015 billion is made up of a "pure" loss of £1-8 billion on its underwriting in 1989, and a loss of £218 million for open years of account which cannot be "closed" due to continuing claims from latent liabilities such as pollution.

Major catastrophes such as the Exxon Valdez oil spillage, Phillips Petroleum oil refinery fire, together with Hurricane Hugo and the San Francisco earthquake all contributed to the 1989 losses.

But Chatset notes that Lloyd's syndicates were also "with monotonous regularity" still having to reserve for old pollution and asbestosis policies, which in some cases date back to the 1940s and 1950s.

Marine syndicates contributed the worst results, losing £1-125 billion in underwriting on the 1989 year alone and around £132 million on the open years of account. Around two-thirds of non-marine syndicates made losses, while motor and aviation markets were overall in the black.

An analysis by Chatset of the exposure of individual Names revealed that last year's loss was borne by one-third of Names, while two-thirds continued to make profits. Many of those hit by a second year of losses could be wiped out, Chatset said, leaving the remaining two-thirds to cover the shortfall.

Chatset blamed Lloyd's for creating personal hardship for failing to recognise the problem of an eventual capital shortfall.

"There has been a total failure of regulation at Lloyd's," said Chatset's John Rew, himself a Gooda Walker Name.

Yesterday, Christopher Stockwell, the new chairman of a co-ordinating action group for Lloyd's Names, said it had submitted a plan to the Lloyd's Council for "a major (loss) capping exercise". Chatset has calculated that the costs of capping the 1989 losses at 75 per cent, the cut-off point being considered by the Council, would amount to £556 million.

Lloyd's biggest managing agency, Sturge, said it would look closely at any bailout plan, as it unveiled a 30 percent pre-tax profits fall to £2-5 million for the half year to end-March.

8 Jun 92

Financial Times: Lloyd's levy spotlights woes

18 Jun 92

European EU 3rd Non-Life Directive which will disallow debts of more than 3 months old for solvency purposes. (Unclear whether this will be applicable to Lloyd's).

19 Jun 92

Storms, USA, Kansas, Oklahoma; estimated cost $670m.

23 Jun 92

Financial Times: Letter from Mr. Alan Smallbone

Sir, The answer to your leader first question - was there any wrongdoing?" - is yes: by the past committees of Lloyd's and acting in concert to suppress Lord Cromer's recommendations of 1969 - to favour their interests at Name's expenses."

Lord Cromer deplored the incorporation and sale of agencies and recommended a deficit clause to discourage under reserving, but above all he pointed out that Lloyd's was peculiarly ill-adapted to the underwriting of the very classes of business in which so many syndicates specialised - high excess catastrophe risks.

He pointed out that the tax regime applied to insurance companies facilitated the building of reserves and that Lloyd's needed similar treatment. He stated that tax changes were the responsibility of government and parliament too. Yet these essential needs were not made a principal plank of the Lloyd's Bill in 1982.

The reason is clear. Reserves can be made only from profits in good years, but anything which reduced the base on which agents could levy "profit" commissions would reduce the price of underwriting agency shares.

Those Names who were placed by reckless agents on ultra high risk syndicates have a legitimate complaint against the rota committees who interviewed them if the chairman did not point out to them that Lord Cromer bad long ago warned against such involvement, but that Lloyd's had deliberately failed to seek the legislative changes he suggested.

That is why agents and brokers should now contribute pound for pound with Names to the exceptional central fund levy.

24 Jun 92

Daily Telegraph: ‘Corrupt insider dealing' at Lloyd's claims Labour MP

FRESH allegations of "corrupt insider dealing" at Lloyd's of London insurance market were made in the Commons last night on the eve of what is expected to be stormy annual meeting attended by Names who have suffered heavy losses.

A Commons motion table by Mr Peter Hain, Labour MP for Neath, alleged that Lloyd's syndicates run by five past and present governing council members made gains of £550 million at the expense of thousands of external market members.

The motion said that some inside traders had "benefited massively" from the so-called LMX spiral re-insurance system, which underwrites catastrophes and re-insures the liabilities of other syndicates.

Mr Hain alleged that Mr David Coleridge, of the Sturge Managing Agency and the chairman of Lloyd's, was among those "estimated to have made re-insurance gains for their own syndicate's worth £550 million from the LMX spiral in the 1989 year of account".

Four other past and present council members are named in the motion - Mr Murray Lawrence and his agency, Mr Brian Kellet of Kellet, Mr Richard Hazell of Cater Allen, and Mr Stephen Merrett of Merrett.

Mr Hain's motion concluded: "This conflict of interest explains why Lloyd's Council took no action to curtail the re-insurance spiral and that this further example of corrupt insider dealing underlines the necessity for a proper Government inquiry into the management of the Lloyd's market."

The latest allegations were timed to coincide with today's annual meeting at Lloyd's where disgruntled outside investors are expected to make clear their objections over the way market professionals have allegedly favoured themselves at the expense of Names.

A spokesman for Lloyd's denied Mr Hain's allegation and accused the MP of abusing Parliamentary privilege with "unsubstantiated claims".

"I deplore both the action and the intent," said Lloyd's spokesman, Mr Nick Doak. ‘‘He would be better off spending his time in the Commons looking after the affairs of his constituents."

Pressure on the Government to order an independent inquiry into Lloyd's has come from MPs on all sides of the Commons, although an investigation established by the council under Sir David Walker is due to report next month.

About 40 MPs of all parties have accepted an invitation to visit Lloyd's tomorrow to discuss the 300-year-old market's problems and how they might be overcome.

At the annual meeting today, the market is set to disclose its worst-ever losses of about £2 billion for 1989, the most recent financial year under the market's accounting procedure.

Thousands of Names face big losses and some potential ruin.

· R Barry O'Brien writes: Mr Coleridge will have the support of working members at today's annual meeting.

A motion expressing full confidence in the chairman and council has been tabled and signed by 278 Lloyd's professionals in response to a motion of no confidence signed by 110 angry Names.

24 Jun 92

Annual General Meeting of Members of Lloyd. Statement by David Coleridge, Chairman - A Leaner and Fitter Lloyd's.


Ladies and Gentlemen, welcome to this Annual General Meeting. I should say straightaway that I have received two requisitions for an EGM. That meeting is likely to be held at 10.30 am on Friday 24 July, but we will be writing to you about it.

We meet today in the midst of one of the darker chapters in the long history of our Society. No-one in this room is more conscious of this than I, because, as your Chairman in this difficult period, it is to me that many of you express your feelings.

Each day I encounter all kinds of sentiments and they reflect the wide range of circumstances to be found among our members at this time. Yes, these sentiments include despair, anger and bewilderment. I want to say at the outset of this meeting that I understand all those feelings. And I accept that I, on behalf of the Council, have a duty to try to explain what has happened to those people whose experiences have provoked them. We must also do what we reasonably can to help, bearing in mind our position as custodians of the finances of the membership as a whole, and we must play our part in putting right those things that have plainly gone wrong in the past. In short, we must enquire, explain, try to help, and above all learn the lessons for the future. That is the spirit in which your Council approaches the serious problems that confront some of our members today.

It is also my task to put the extreme events in perspective. The dark clouds of current misfortune must not be allowed to obscure the rest of the picture for our membership, our market-place, and the future. Greatly troubled though I am by the anguish and the anger, each day I also encounter other sentiments: loyalty, commitment, optimism and determination. I also detect an increasing concern that the activities of a much-publicised minority can weaken everyone's sympathy for them, and harm the reputation of us all, on which our future depends.


Until recently, we did not produce our global report until the beginning of September. But it is clearly right that our results should, if possible, be reported earlier than that so that members should know their own personal result, and the outcome for the whole of Lloyd's, when this meeting is held. I remind you, however, that the formal business of the meeting is to receive the Annual Report and Accounts of the Corporation, which were sent to you some four weeks ago.

Determining results for the 1989 year of account has proved especially difficult this year for a small number of syndicates and their new managing agents. This has delayed the overall result. The stragglers are often those with some of the biggest problems, and they can for that reason have a big effect on the outcome. The last audited figures arrived at the weekend, and so I am now able to tell you that the total losses of all Lloyd's syndicates in 1989 were £2.063 billion. The full global report will be sent to all members early in July.

You can imagine that I take no pride in telling you this figure. It is an appalling result, reflecting the extreme losses of a handful of excess of loss syndicates. In fact over one-third of this loss is accounted for by the results of only five syndicates. Four of these were managed by two agents: Feltrim and Gooda Walker. Both have now ceased to trade, and the active underwriters involved are out of the market.

£398 million of the 1989 loss was accounted for by deterioration in the old years. Unwelcome though this is, we can draw some comfort from the fact that the trend in recent years for these provisions to grow has at last been reversed. This reflects in part the success that insurers have had in some recent pollution cases in the United States' courts. But huge uncertainty continues to surround the eventual outcome on pollution claims, and this has meant that many more syndicates have judged it necessary to leave the year open until the position becomes clearer.

The alternative is to risk closing the syndicate on terms which turn out to be either too onerous, which is unfair to the 1989 members, or inadequate, which would be unfair to the 1990 members.

If we look at the rest of the picture, two of our four markets did produce an underwriting profit in 1989: the motor market, and the aviation market.

After personal expenses, half of all the 390 syndicates trading in 1989 produced either a profit, or a loss of less than eight per cent. In fact 146 syndicates produced a profit. This meant that for two-thirds of our members, their loss, after personal expenses, was less than 15 per cent of their premium income - without making allowances for stop loss or tax recoveries which will improve the position for many.

If one could set aside the extreme results of the worst syndicates, and the deterioration on old years of account, the remaining pure year result for the rest of the market would stand very favourable comparison with the rest of the industry. Of course, losses are to be regretted in any commercial venture, but one does have to expect that they will arise from time to time. Looking at the 1989 year itself, the great majority of syndicates have produced results which are not discreditable when viewed against their track record, the trading conditions and the greatest concentration of catastrophes in this century. The major events are chronicled in the global report which will be sent to you, and in many of the syndicate reports that you will have already received.

All that said, I do not wish to minimise the damage that has been done to some of our members, and to the reputation of all of us, by the quite shocking result produced by a handful of syndicates. We have already mounted enquiries into exactly what happened. I shall describe later the measures to minimise the effects of extreme results - arising for whatever reason - on our members in future.

Some of the same characteristics that affected 1989 were also present in 1990. Premium rates were at a low ebb, while catastrophes continued to occur on an unprecedented scale. I know most members are already braced for a poor 1990 result. I hope that the overall 1991 result may be better than break-even, but any profit is likely to be very modest. There is unfortunately nothing we can do to improve the outcome of what has happened.


Looking ahead, insurance rates have begun to rise, as they always do, in response to past losses. There was a distinct upward movement in some areas in 1991, followed by a much stronger improvement in many parts of our market during the current year. This welcome change has been very pronounced in certain categories of reinsurance, where the prices charged have risen steeply.

At last, we face much more realistic trading conditions. I believe that these will continue to improve, and that members who stay will reap the reward of holding fast. Next year we may be up against capacity constraints, but that in itself, by its effect on rates, will increase the opportunity for profits.


For those who decide to take advantage of these conditions, there is one absolute priority. To go forward as a business we must demonstrate to the world that we continue to offer the very best security to all those who buy our policies. Clients are looking more closely at security than ever before. This is hardly surprising. Heavy losses are by no means confined to Lloyd's. In the United States, over 200 insurance companies have become insolvent during the last two years. In Britain, the ABI companies produced a statement yesterday of their most recent results: their combined underwriting loss was £6.8 billion. After investment income, this was still an overall loss of £3.3 billion. Against this background, it is no wonder that clients are looking closely at security and solvency.

It has always been the hallmark of what Lloyd's has to offer the world that our security is second to none. Very extensive publicity has been given to our current losses, and to the difficulty that some of our members will encounter in meeting them. Unwillingness to meet them has been expressed by a loud minority, in a way that I fear has damaged the reputation of us all. It has been necessary to resist several attempts to use the courts, both here and in the US, to prevent the legitimate operation of our chain of security. The steps we have taken have been successful in every case. These activities make it especially important that we can look our clients in the eye and give an unqualified guarantee that all valid claims will be met as they arise. If we do not place this at the top of our priorities, we cease to be an effective force in the insurance world. If we allowed that to happen, our members, the great majority of whom have suffered a significant but manageable loss in 1989, would be unable to look forward to profits in the future. It is the Council's duty to promote the long-term interests of the Society as a whole.

To do that, realising the potential size and pattern of this year's losses, the Council decided at the beginning of this month that it was essential to boost our Central Fund very significantly. This was not an easy decision. But we knew that we could not alter what had already happened; we had to provide for it. Many of our members have since expressed support for the action we have taken in raising a special levy. It demonstrated beyond question our continuing solvency, by ensuring that the Fund can make up for any members who are unable to meet their obligations to the policyholder in full. Some members have told me that they were upset to hear about this for the first time when they opened their newspapers on 5 June. I am very sorry about that. I am afraid that we have been living through a period of intense media speculation about the scale of our losses and the actions of our Council in recent months. I judged it right to tell the press, in our own words, about the decision the day after the Council meeting at which it was taken. Any delay risked more false and damaging rumours, which were mounting daily. But I very much regret that as a consequence we could not first get a letter into the hands of every member.

All commercial organisations of any significance nowadays find that intense media scrutiny has forced them to give much higher priority to press reporting. It is especially important for Lloyd's that the real reasons for our decisions are explained as fully, positively and quickly as they can be, before all kinds of self-appointed commentators rush in with their own rumours and misinterpretations. We shall always strive to get news to members as quickly as we can, but there will be times when the Society's business interests will prevent us from doing so.


The special levy was an essential step, but the Council - and no member of it more so than I - would have liked to have gone further. As I said in the annual report, we have been considering the possibility of introducing some kind of scheme to ameliorate the worst losses suffered by some members while advancing the Society's interests. We had several aims in mind. We wanted to enable as many members as possible to continue underwriting and to trade their way out of their current problems. We wanted to reduce the litigation that has been the source of so much damaging publicity. We also wanted to respond to the many Names, members' agents and the ALM who asked us to explore what could be done.

As you know from my recent letter, an intensive search has not been able to produce a formula by which these many aims could be achieved, while preserving fair treatment for all members. Let me tell you why.

It is certainly not for lack of effort in the search. Several factors were at work. First, the full extent of the 1989 losses has only recently become known. As a result of the extreme losses of a handful of syndicates, the total loss is larger than expected. Following on the special levy to increase the Central Fund it was felt that the membership could not be asked to contribute a further and additional amount. Nor do I believe that it would have been right to mortgage our future by seeking to borrow on a large scale, secured by the whole active membership for 1992 and future years, who would thereby have been put at risk. Until it was repaid, any such loan would have been a liability, either for Lloyd's centrally or for each member. It would have had to be counted as a liability in determining our overall solvency position. It would be a contradiction in terms for a member to provide insurance to others on the back of a debt. There are those who think we should have approached the Government for financial help. This was unnecessary and quite unrealistic.

That much decided, we knew that any formula or scheme could only be resourced from the Central Fund, which we needed for commercial reasons to preserve intact to the maximum possible extent. Working within this limitation, many different permutations were examined. It also became increasingly apparent that the majority of members, already coping with their own losses and the effects of the special levy, would be most unwilling for a large part of the Fund to which they had contributed to be used to put an arbitrary cap on the losses of those whose underwriting had been less conservative than their own. Inevitably, any formula approach would have meant that some of the beneficiaries would not need the money as badly as some of the contributors. This would have been unfair.

I remind you that Lloyd's has already devised a scheme to alleviate cases of genuine financial hardship. We do not force our members into bankruptcy. Our hardship assistance is applied selectively, and is subject to thorough means testing. In recent weeks it became increasingly clear that most members would favour the continued evolution of this approach. It is seen as fairer to all concerned.

I make no secret that I was very disappointed that we could not recommend a broad scheme which would have met with widespread support. But the Council could only have put forward a scheme for meeting losses retrospectively if it had been confident that it was in the best interests of the Society. Given the changed circumstances, and the limited ability of any scheme to achieve our original aims, we did not feel that our best efforts passed this test.

This view was shared by the Lloyd's Underwriting Agents' Association, who made it clear that, in view of the representations from many members, although they had originally been in favour of a scheme, they could not now support one. I am very sorry for those whose hopes may have been raised, but I can assure those in hardship that there will be continued fair and sympathetic treatment.

The Council will be considering how the hardship arrangements can be improved further. In this connection I know that many firms - agents, brokers and others closely associated with Lloyd's - want to contribute towards the problems of members' hardship. Ways of raising a substantial sum of £50 million on a voluntary basis are being urgently discussed with them.


The Council's response to the very large losses of a small number of syndicates has not been confined to the work I have described so far. Last year it was decided that exceptional losses should be the object of an independent enquiry, so that the members who were affected by them were given a full account of the circumstances and could decide what action they should take. We were urged to make these enquiries visibly independent, rather than to conduct them on an in-house basis. The price for doing so has been heavy: fees are likely to exceed £2 million; and it has meant that the speed of these enquiries has moved outside our immediate control. So far only one loss review and one interim report has been sent to the Names concerned, but I understand that the arrival of the next three is now imminent. Obviously, I can say nothing about their content at this stage. For any future loss reviews I am sure that we shall have to agree a timetable at the outset of each.

When the individual reports are received, I hope that the members concerned will take into account the fact that litigation in the courts is a costly, time-consuming and uncertain process. Whatever the outcome for individuals, litigation is bad for our image and for the health of the Society. It was for these reasons, and to encourage the fair resolution of disputes between Names and their agents without damaging publicity, that the Council recently commissioned a new set of Lloyd's arbitration rules. These are now being finalised by the Names' Interests Committee, to ensure that they are fully suited to the needs of Names. They will be adopted soon and will take effect at the start of the 1993 underwriting year.

Should any loss review report disclose circumstances in which Names are advised that they have strong legal claims, the Council will consider helping those who are willing to bring those claims under the arbitration rules rather than in the courts. The scheme as presently envisaged creates a speedy method for resolving disputes where the sum claimed is no more than £100,000, and a more conventional process for dealing with larger claims.

In addition to these loss reviews, earlier this year the Council decided that it was important to respond to two suspicions that gained ground amongst members, particularly some Members of Parliament, and in the columns of the press. These were the suggestion that the complex pattern of reinsurance known colloquially as the ‘spiral' had operated to benefit some of those who work inside the market, to the disadvantage of others. The second suggestion was, more generally, that the syndicate participations of external members had disadvantaged them vis-à-vis those who work within the market. The Council takes these allegations very seriously indeed. I therefore invited Sir David Walker, then a nominated member of our Council, to mount an enquiry into these matters. As the then Chairman of the Securities and Investments Board, he was a uniquely qualified and independent regulator, and I am extremely grateful to him for taking on this task. His report will be considered by Council on 1 July, and it would be wrong for me to comment now in advance of receiving his report on the subject that he has been invited to examine thoroughly.

I will say, however, that the Council will not flinch from taking whatever decisive action is needed in the light of Sir David's report. It has been one of Lloyd's historic strengths that the market's commercial activity should be as free from interference as possible. But if the interests of our Names require some limitation of that freedom, we are ready to learn that lesson and act swiftly. I can also assure you that Sir David's report will be published, and sent to every member as soon as the Council has seen it.

Already the Council has acted to improve the professional standards of those operating in the market, both by introducing peer reviews and by wider requirements for formal training and market experience.

Lloyd's depends upon a community of interest between those who work in the market and its external members. One of the major themes brought out in the Task Force report was the primacy of Names' interests. It is vital that all our members are treated in the same way. I have heard it said recently that the special levy falls on the shoulders of external members more heavily than it does on those working in the market. That is not so. Every member will pay the special levy in proportion to his or herfrom systematic embezzlement of the funds of the main syndicates.

The main syndicates


The reinsurances between one main syndicate and another were very similar, in that nobody has given us any sensible explanation as to how the reinsurances were calculated.


As with the transfers between the main and the baby syndicates, the transfers were by means of inter-syndicate reinsurances on slip policies which were ‘for declaration only'. The policies were quota share treaties, but were to take ‘up to 10% any one risk or account'. Such a wording is not consistent with a quota share, the essence of which is that the reinsurer accepts an agreed proportion of a particular class of risk: the reinsured should not be able to vary the proportion at will or choose which particular risks to cede. Nobody in fact has given us any sensible explanation as to how the reinsurances were calculated. Indeed some of them substantially exceeded the 10% limit of the policies. Probably the reinsurances were designated to produce whatever result was wanted. Indeed Mr. Cameron-Webb admitted that the inter-syndicate transfers in general were used for just this purpose. The reinsurances resulted in:


One main syndicate being favoured at the expense of another, depending on the profitability of the business transferred.


The distortion of the accounts of the syndicates involved, with the published accounts of the syndicates giving no proper guide to their underwriting performance.

Falsification of the syndicate accounts


The matters described in this and earlier chapters resulted in very serious falsifications of the accounts of the syndicates. These falsifications taken together were so substantial that the accounts were largely meaningless as a guide to the real performance of the syndicates. We set out below a brief summary of these falsifications:

  1. In chapter 6 we described the financial aspects of the Sterling Area and the Geneva quota share schemes. We concluded that the proper calculation of the losses to the syndicate as a result of these quota shares was the comparison of the actual position of the syndicates with what it would have been if there had been no quota shares at all. This gave a figure of US$53.2 million for the losses. In addition to the losses, the failure to observe the quota share terms resulted in large falsifications of the syndicate accounts as between one year and another and one syndicate and another.
  2. In our interim report on Unimar dated 7 April 1986, we described the losses suffered by the syndicates as a result of the Unimar quota share. These losses were much smaller than those from the Sterling Area and the Geneva quota shares, but still amounted to several hundred thousand US dollars.
  3. In chapter 11 of this report we described the various improper features of the Intermediate Programme. The losses to the syndicates as a result of these features are very hard to estimate, although they were substantial. As well as the losses, these features involved large falsifications of the syndicate accounts, including:
    1. The writing of an additional clause, if the syndicates wished to recover money which was not covered by the terms of the Intermediate Programme policies.
    2. Inviting the reinsurer to reassess the risk and agree to a refund of premium.
    3. Artificial depression of the syndicate results by delaying claims on the Intermediate Programme or not making them at all.
    4. Depression of the results by the payment of excessive premium or additional premiums.
  1. Furthermore Mr. Cameron-Webb said to us that Mr. Dixon and himself decided what profit they wanted for the syndicates, and then organised a return from the funds of the Intermediate Programme if the true results of the syndicates did not show enough profit, or they increased the reinsurance to close if there was too much profit.
  2. In chapter 12 we described the methods of accounting used by the syndicates in respect of the professional indemnity policies.
  3. Earlier in this chapter we described the inter-syndicate reinsurances and other matters, which affected the accounts of all the syndicates, but particularly those of the baby syndicates.
  4. In chapter 15 we describe the relationship between the syndicates and their managing agents, PCW and WMD, including the financing provided to the syndicates and the charges made to the syndicates

The combined effect of all these matters, particularly the quota shares and the fixing of the syndicate profits by Mr. Dixon and Mr. Cameron-Webb, was such to render the syndicate accounts largely meaningless as a guide to the real performance of the syndicates.)

Continuation of the Walker Report:-

Chapter 5 of the report dealt with "Syndicate participations: the experience of 1983 - 1990. Paragraph 5.7

"Syndicates have been grouped by calculating the average return (over the period 1983 - 1988 inclusive) on a £10,000 share".

Paragraph 5.8

"Those syndicates that stopped writing business in 1986 or earlier are excluded, as are known "baby" syndicates".

Chapter 7 of the report dealt with "The role and performance of members' agents".

Paragraph 7.8

"Also relevant here is that, while the Neill Report recommended reasonable parity between the regulatory protections available to a name and those available to investors under the Financial Services Act, Lloyd's regulatory approach has been, and remains, much more reactive than that of the FSA regulators. The reasons for this difference included the Lloyd's belief, not sufficiently validated in the event, that higher standards of disclosure by agents to their names would suffice to ensure adequately high minimum standards and a continuing tradition that the Lloyd's regulators should stand back from market matters unless there is evidence of misconduct. In consequence, Lloyd's regulatory activity - apart from the development of new policy - has tended to relate to investigations and pursuit of disciplinary matters rather than, as a form of preventive medicine, pro-active monitoring of compliance with specific conduct of business requirements".

Paragraph 7.9

"In the Committee's view, this stance is no longer adequate in relation to regulatory oversight of the crucial role of members' agents. Indeed, given the limited financial resources available to a typical members' agent, regulation should to a much greater extent be a surrogate for the protection available to a name through recourse to remedies available through the courts".

27 Jun 92

Daily Telegraph: Coleridge counts cost of Names game

LLOYD'S of London, the insurance market where the great, the good and the modestly well-off have traditionally pledged their all in return for a slice of the equally traditional profits, was shaken to its foundations on Wednesday as the market announced the worst losses in its 304-year history.

After a tense three-year incubation period, a £2-1 billion loss for the 1989 underwriting year was revealed and the causes of infection diagnosed: unpredictable disasters like Hurricane Hugo and the Exxon Valdez oil spill.

Lloyd's chairman David Coleridge was kept on his feet for six hours by the 5,000 Names who packed the annual meeting. Drained by the effort of dishing out sympathy, be remarked: ‘I just. hope this will never happen again and certainly not until I'm dead. And that won't be long."

Losses loomed as well at Mirror Group Newspapers. The publisher of the Mirror lost more than £388m last year, thanks to nearly £500m written off against its late proprietor Robert Maxwell's plundering of its pension funds and bank accounts.

Chairman Sir Robert Clark identified 29 "unusual" payments totalling £230m from the company's bank accounts last year in favour of private Maxwell companies.

Auditors qualified the company's accounts with the prospect of further write-offs.

Meanwhile, £7+m worth of Mirror Group shares were found stashed in Liechtenstein and National Westminster Bank returned £25m worth of shares in an Israeli pharmaceutical company to the Maxwell pension funds. The administrators to the Mirror's sister company Maxwell Communication Corporation hope to raise $1 billion with the sale of some of the company's US businesses.

Japanese share prices continued to plumb new five-year lows, with the Nikkei index losing more than 700 points over the week to end at 15,812-73 yesterday.

Robert Horton was forced to resign as chairman and chief executive of oil giant British Petroleum after the company's non-executive directors presented him with an ultimatum.

Led by Lord Ashburton, who takes over as chairman, the eight part-time board members demanded changes to the way the company is run, following a slump in profits and morale.

The Wellcome Trust unveiled details of the sale of part of its 74pc stake in the drug company after which it is named.

The trust will sell 38-4pc of the shares-more than half its holding-in a bid to raise about £3 billion.

BAA, the company that operates Britain's airports, saw its profits drop 22pc to £192m last year, thanks to a poor performance at Gatwick and the heavy start-up costs of Stansted airport.

The Telegraph, publisher of The Daily Telegraph, announced the details of its flotation. The offer price was set at 325p, valuing the company at £435+ m. Canada's Hollinger Group, which controls the Telegraph, is selling 26m shares to reduce its stake from 87pc to 68pc.

27 Jun 92

Daily Telegraph: A signal in Morse that Lloyd's of London must change from the top

LLOYD'S of London must be the only business in the world to stop production for the day by holding a shareholders' meeting on the shop floor. Like so many things at Lloyd's, it is traditional, it is not businesslike and it happened again this week because no-one had thought about it.

Other unbusinesslike things happen because Lloyd's wrote them into its own Act of Parliament. For a business in trouble, this is suicidal, but then Lloyd's is not used to thinking of itself as a business-more a way of life, an institution or a club of fractious individuals. Losing £2 billion concentrates the mind, though. Reform in a troubled business must start from the top and, at last, I now expect to see it.

The signals were there in the report from David Rowland's working party on the future of Lloyd's. The business Mr Rowland concluded, must have something more like a board of directors -so Lloyd's governing council should be split in half to reflect its two different functions: running the markets and regulating them. Codswalllop, said David Coleridge, the chairman. On second thoughts and after loud protests, he warmed to the idea and asked Sir Jeremy Morse, chairman of Lloyds Bank, to look at it. We shall hear from Sir Jeremy soon.

Men and power...

He would not find it difficult to find something more businesslike than the cumbrous council; 28 strong, it must remind him of old-style bank boards, which needed microphones to help the deafer directors hear what was happening at the other end. The council is written into the Act, but its size is not. It has room to slim.

Nor does the Act, as I understand it, say that the council must do everything itself. It has to legislate for Lloyd's, making and unmaking its by-laws, but it does not have to choose the doorman or polish his black hat. It can delegate. It could, if it chose, delegate the running of the markets to one board, with the market professionals in the lead, and its regulation to another, mostly non-executive, much as Mr Rowland intended. It could then start to think about the roles of Lloyd's two most important people: the chairman, and the chief executive.

There will be vacancies. Alan Lord, Lloyd's chief executive since 1986, retires at the end of this week. No successor has been chosen - nor can be, evidently, until the job is defined. If Mr Rowland's idea is carried through (Mr Lord did not care for it) the right place for the new chief executive would be at the sharp end, running the business. This is not a job for a retired major-general. David Coleridge, Lloyd's chairman, was drafted in, 18 months ago, on the principle of: cometh the hour, cometh the man. His first action was to commission the Rowland inquiry. In no sense did he need the chairman's job and he can be excused for thinking that it has brought him more kicks than ha-'pence, for it is unpaid.

That is how Lloyd's does things. A chairman is lent by his firm, to serve for a few years, until the next man's turn - rather like being chairman of a club. The Bank of England used to be governed like that, but gave it up in 1914. The Stock Exchange has decided that its chairman needs to be full-time and pays him accordingly. Lloyd's needs to start thinking about its tradition. I am sure that the cerebral Sir Jeremy has started already.

cash and charity

Before Lloyd's can plan its future, though, it needs to make sure that it will have one. It has a civil war on its hands. Until the other day, the council was seen to be flying a flag of truce, offering a cease-fire to cover an ambulance service for the hardest-hit. Now the firing has resumed, but Lloyd's is trying to divert it.

Of the £2 billion loss, almost half is concentrated on a handful of syndicates - and where are their members to find that sort of money? Some will try to recoup their losses by suing their agents, who in turn would claim on their own insurance for errors and omissions. That would spread part of the loss over other Lloyd's syndicates-more than 100 of them - but part of it was insured outside Lloyd's, with big reinsurers on the Continent.

There will be substantial calls on the extra £500m which Lloyd's is calling up for its central fund-with the professionals, I am pleased to learn, paying their whack. Lloyd's will still need to be more open-handed with its hardship payments. The chief almoner, Mary Archer, has told the ruined members that she would allow them to subsist in remote villages. We cannot all live in Grantchester, like the lordly and lady-like Archers, but the members deserve better than humiliation.

28 Jun 92

Sunday Times: Lloyd's dissidents lay down their arms

A TENTATIVE peace agreement has been reached between Lloyd's of London and some of the dissident names who have been calling on David Coleridge, the chairman, to resign.

Claud Gurney, one of the more militant names, who last week demanded an extra-ordinary general meeting, now says he no longer wants the meeting to go ahead and will not support a vote of no confidence in the council and Coleridge. Gurney's change of mind follows a series of meetings with Dick Hazell, a Lloyd's deputy chairman.

But the reconciliation comes too late to stop the meeting, on July 27. In the past few days two other groups of names have tabled resolutions of no confidence in the council, and under Lloyd's rules the meeting must now be held.

Christopher Stockwell, chairman of the Lloyd's Names Associations Working Party, and the heads of other action groups met Bob Hewes, head of regulation, on Thursday. One name described the meeting as "constructive".

Hewes, who takes over next month as Lloyd's joint chief executive with Andrew Duguid, head of market services, and John Gaynor, head of finance, said: "Our understanding is that those who first brought forward the resolution would now like not to proceed with the no-confidence motion and the resolutions that go with it."

Lloyd's has already ruled out any retroactive help for stricken names. Several schemes were proposed, but two weeks ago Coleridge announced that there were none he and his colleagues on the committee felt able to recommend. Other names were reluctant to finance a bail-out, having also suffered losses in recent years, though on a smaller scale. However, there are plans for more consultation and openness between the council and the names, who make up the insurance market's capital base.

Gurney said that after his discussions with Hazell he believed there would be more "substantive dialogue" between Lloyd's and the names. Talks will start tomorrow.

Hewes believes Coleridge's handling of last week's annual meeting has reassured names. It was a "virtuoso performance", said one person at the meeting.

Peter Nutting, the external name on the Lloyd's council and a leading moderate, said: "The egm will get us nowhere. It shows an abysmal lack of understanding of Lloyd's."

1 Jul 92

Annual Subscribers (Consortium Underwriting) Byelaw (No. 6 of 1992, 1 July 1992).

5 Jul 92

Sunday Times: The professionals of Lloyd's are not fit to regulate a flea circus.

Jul 92

The Chairman of Lloyd's, David Coleridge, forwards to Members the document entitled "The High Level Stop Loss Scheme" which comes into effect on 1 January 1993.

16 Jul 92

Letter from D E Coleridge to a Name

Thank you for your letter of 22 June 1992. I apologise for the delay in responding but I hope you will appreciate that I have quite literally been -inundated with correspondence in recent weeks.

Whilst I am unable to comment on the circumstances :surrounding syndicate 404 remaining open, I fully understand your point when you stress the importance of syndicates establishing adequate reserves at the closure of a year of account. The determination of an equitable reinsurance to close is one of the most difficult tasks facing an underwriter, and although he will draw upon a whole range of accounting, actuarial and other technical assistance, he will also have to exercise his own' professional expertise and judgement. An underwriter must also demonstrate to his auditors that the final RITC figure is reasonable, such that the auditor can sign off his report in "true and fair" terms.

Turning now to your comments on expenses, I totally agree with you that it is of paramount importance for everyone in the market to reduce costs. and I have made the market well aware of my views. The Taskforce Report address this issue in quite some detail and identifies the underlying causes for the present unacceptable expense ratios. The most severe escalation in costs in the 1980's occurred in relation to direct syndicate expenses and agents fees -which are controlled directly by the market. The council has endorsed the target expense ratios set out in the Report (paragraph 12.20), and is looking at ways in which progress towards a 30% reduction in costs can be reported and monitored, both in relation to individual agents and across the market as a whole. I do assure you that those working in the market are addressing the issue urgently.

On the question of the central Fund levy, no Name, whether resigned or ongoing, is entitled to a recovery. The fund is for the benefit and protection of policyholders; it was in place to offer protection for Names' underwriting when they first joined the Society, and it is reasonable for them to provide that same safeguard to future Names.

With regard to your comments on reserving, the Taskforce examined this area part of their consideration of managing old and open years. A set of draft reserving guidelines have been developed, and consultation with the market and other interested parties is now under way in order to refine them before putting them into effect

Finally, with respect to taxation, we shall of course continue to pursue all avenues in relation to the tax position of Names and will advise the market and Names as soon as we have any positive news.

Thank you for taking the trouble to write.

18 Jul 92

Daily Telegraph: Lloyd's conflicts ‘not for the courts'

5 Aug 92

Council and Committee Byelaw (No. 7 of 1992, 5 August 1992).

5 Aug 92

Quorums and Appointments of Committees and Sub-Committees Byelaw (No. 8 of 1992, 5 August 1992).

5 Aug 92

Administrative Suspension (Amendment) Byelaw (No. 9 of 1992, 5 August 1992).

5 Aug 92

Solvency and Reporting (Amendment) Byelaw (No. 10 of 1992, 5 August 1992).

14 Aug 92

Lord Bissell & Brook and Mendes & Mount report to Underwriters at Interest C/- London Market Claims Services Ltd. Re: 1992 Year-End Reserves –Asbestos Bodily Injury Claims.

We submit to Underwriters our annual report to the Market summarising the significant developments which have occurred over the past twelve months in the asbestos-related bodily injury litigation. Developments in the asbestos-related building damage claims over the past year will be highlighted in a separate. Market letter.

This overview of the asbestos bodily injury litigation is a collaborative effort by Lord, Bissell & Brook and Mendes & Mount and the views and recommendations expressed herein represent the joint opinions of both firms.

As in years past, Underwriters' U.S. counsel and London representatives met to confer on the recent developments in the asbestos litigation and to establish a recommended reserving methodology for the 1992 year-end asbestos reserve reports. The attorneys in attendance were from Lord, Bissell & Brook, Mendes & Mount, Ropes & Gray and Hancock, Rothert & Bunshoft. The meeting was also attended by the Chairman of the Asbestos Working Party, members of the London Market Direct and Reinsurance Claims Committees, and London Market Claims Services.

The full Asbestos Working Party has been briefed on the reserving philosophy and the reserve recommendations reached at this meeting and reported herein. The Working Party has concurred with these recommendations.

The reserve recommendations reached at the 1992 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. We will also briefly note the status of the Asbestos Claims Facility as it finalises its winding down operations. Additionally, we will comment on the non-products claims deriving from asbestos bodily injury claims.

There are 16 asbestos producers who have declared bankruptcy as a result of the overwhelming volume of asbestos claims filed against them. Other asbestos producers are rumoured to be in financial crises as well. In response to this growing problem, new legislation has been proposed suggesting a "Chapter 14" addition to the U.S. Bankruptcy Code which would permit an otherwise profitable company involved in the asbestos litigation to declare a modified form of bankruptcy. A summary of the proposal is provided here.

The draft Chapter 14 revision to the Bankruptcy Code is the most recent in a series of attempts which have been made to devise new ways of managing the unprecedented volume of asbestos claims. Underwriters may recall that in our 1991 Market letter we reported on the July 29, 1991 Order signed by the Judicial Panel on Multi-district Litigation which transferred all asbestos bodily injury and wrongful death cases pending in the federal courts into one single forum. Under this Order, 26,639 actions were transferred to Judge Charles R. Weiner in Philadelphia. It is now one year later and Judge Weiner's accomplishments in that time are being viewed with increasing criticism, particularly from claimants' counsel. The current status of the Multidistrict Litigation and the results achieved in certain individual state court consolidations are discussed herein.


The Asbestos Claims Facility ceased operations in 1988 and is finalising its winding down procedures. All potential tax liabilities have been resolved. The ACF will arrange for claim records to be available to any signatory for a 20 year period and these records may be retrieved at the signatory's own cost. The Asbestos Claims Facility issued its final analysis of the asbestos litigation and reported that approximately 180,000 asbestos related bodily injury claims have been filed and that 85,000 claims are currently pending. The ACF reported that an additional 6,000 claims are open but inactive.

New claims filings against members of the Center for Claims Resolution ("CCR") appear to have been relatively level throughout the CCR's existence. Over the past twelve months ending May 31, 1992 new claims have been filed at an average rate of 2,003 claims per month. This figure is consistent with the average new claims filings of 2,010 experienced by the CCR from its inception on October 3, 1988 to May 31, 1992. Thus, regrettably there continues to be no decline in the rate of new claims filings.

As of May 31, 1992 there had been 172,943 asbestos-related bodily injury claims filed nation-wide. 19,117 claims were settled within the Asbestos Claims Facility prior to its demise in 1988 and 59,948 claims were settled by the CCR for a total closed claims count of 79,065.

The CCR's indemnity payment as of May 31, 1992 totalled $757,200,000 for a per claim average of $12,300. This compares to the per claim average of $11,900 reported in the 1991 Market report.

The CCR continues to achieve favourable results in keeping defence costs at a reduced level compared to that experienced by non-CCR members independently handling claims. As of May 31, 1992 the CCR had paid $224,720,000 in allocated expenses. The current ratio of indemnity and defence of 77% indemnity and 23% defence costs shows a proportionate reduction in defence costs as compared to the 75% indemnity and 25% defence costs ratio reported one year earlier. The CCR is hoping to continue this trend for the future and has a projected expense budget for its fiscal 1992 year of $55 million which is $2.5 million less than that spent-in fiscal 1991.

The CCR has recently enhanced certain of its methodologies. The CCR has historically been presented with a substantial percentage of claims wherein the specific asbestos related disease suffered by the claimant was unknown at the time the claim was filed. Of the unknown disease claims the CCR estimated that 95% were non-severe (asbestosis, pleural thickening) and that 5% were severe (mesothelioma, lung cancer and other cancers). During the past year the CCR re-examined the closed claims which, at the time of filings contained an unknown disease. The CCR undertook this task to determine whether the claimant's disease had been identified during the course of pre-trial discovery. The CCR has now determined that its previous evaluations of the unknown disease claims were relatively precise. The CCR has confirmed that 92% of the closed, unknown disease claims were non-severe and that 8% were serious diseases. The CCR undertook a similar analysis of rubber claims because the CCR had expected that only some of the claimants employed in that industry would be able to establish the presence of a serious asbestos disease. The analysis of closed, unknown diseases in rubber claims indicates that 98% of those claims involved non-severe diseases and only 2% involved serious diseases.


Based upon the information summarised above, the universe of claims projected as of December 31, 1992 has been agreed at 186,943. This total has been computed as follows:

Pre-Facility Claims


Facility Closed Claims from Inception through Closure


CCR Closed Claims from

Inception through May 31, 1992


CCR Pending Claims as of

May 31, 1992


Projected New Filings for

June through December




The claims universe at year-end 1992 includes 23,576 more claims than the universe at year-end 1991. As was true for last year-end, the universe of. claims does not include inactive claims, which currently total 10,443. These inactive claims are made up of 3,980 claims which have been dismissed without prejudice; 2,013 claimants who filed Green Cards and 4,450 claims filed under the Pleural Registry systems established by various state courts. Underwriters may recall 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 because of the absence of injury these claims do not have any recognised indemnity value. Historically very few of these claims have been reactivated and therefore these claims continue to be excluded from the pending claims count.

Lastly, we emphasise that the universe of claims only includes those claims filed or projected to be filed at December 31, 1992. 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, 1992.

The next step in setting reserves is to establish an average indemnity reserve per claim. To this end, the historical settlement average by state, disease and occupation was determined in order to calculate overall reserve averages for the pending population of claims. With respect to the various asbestos-related diseases, it is interesting to note that 15% of the claims closed by the CCR involve claimants suffering from serious diseases such as mesothelioma (5%), lung cancer (8%) or other cancers (2%). The remaining 85% of the claims involve non-malignant diseases such as asbestosis (54%) or pleural thickening (31%).

The overall pending mix of claims has not substantially changed within the past year. Nonetheless we have noted a shift in the geographic source of pending claims. 70% of the claims pending against CCR members as of May, 1992 are concentrated in eight states: Pennsylvania, Maryland, Texas, Mississippi, Ohio, California, Louisiana and New Jersey. Louisiana is the site of 3,224 Avondale Shipyard claims filed in October, 1991. The state of California, where the average indemnity payment for asbestos bodily injury claims has been relatively low, continues to decline as the situs for new filings. An increase in filings is seen in the state of Maryland, with historically high per claim indemnity averages. This shift in the geographical source of new claim filings has been noted when establishing reserves.

81% of these pending claims involve claimants who worked in occupations which have traditionally given rise to asbestos claims, such as shipyard workers, construction workers and insulators. The remaining 19% derive from non-traditional sources such as rubber and steel workers.

In consultation with the CCR's independent, special counsel, two new categories of claims have been identified as having claims values which vary substantially from the established state or occupational averages. The first is the Texas Lone Star Steel asbestos cases consisting of 2,761 claimants. These claims are believe to be of less severity than the average asbestos claim filed in Texas. The second unique claim category is the Louisiana Johns-Manville Plant-worker claims involving 427 claims. These claims are of particular concern to Turner & Newell, which has been targeted as the principal defendant.

Underwriters may recall that last year the recommended reserves were withdrawn for the 1,757 Ohio Maritime workers whose claims had been dismissed without loss payment. Within the past year, 1,433 of the Ohio Maritime claims were reactivated. Based upon this information, the London Market has established a $2,000 per claim reserve for these re-filed claims.

The 1992 year-end indemnity reserves are based upon the historical payments for the various occupational categories. The following table reflects the number of pending claims and the reserve average for the traditional, non-traditional and "special claims category":



No. of



Per Claim Payment Average


























$ 215









$ 4.516
































We anticipate that for the upcoming year payments will track the historical averages. Therefore the average indemnity reserve for 1992 is $14,000 per claim. The 1992 expense reserve has been set at $4,000 per claim.


The CCR runs on an October 1 to September 30 fiscal year. Discussions have not yet begun concerning the allocation of costs for the CCR's upcoming fiscal year. London remains the dominant insurer participant and therefore can be expected to actively participate in those discussions. A separate report concerning the CCR's next fiscal year shall be issued shortly.


Several major asbestos producers continue to handle their asbestos bodily injury claims independent of the Center for Claims Resolution. These asbestos producers have for the most part continued to experience a growth in the number of claim filings and their indemnity and defence expenses have increased in proportion to the new claim filings.

The major non-CCR defendants have fared poorly in verdict results during the past year particularly in comparison with results obtained by the CCR defendants. More than 148 verdicts were handed down during the past year involving non-CCR defendants. We examined a sampling of 53 of the significant verdicts involving known non-CCR defendants and determined that there were 51 adverse verdicts involving non-CCR defendants. The defendants in those verdicts included Keene Corporation which was found guilty in 38 verdicts; Owens Illinois which was found guilty in 15 verdicts and Owens Corning Fiberglas which received 9 of the 51 studied adverse verdicts. Several of the adverse verdicts included more than one defendant. Other non-CCR defendants which incurred adverse verdicts awards included Garlock, Fibreboard and Keasbey-Mattison. The total amount of compensatory damages awarded against the known non-CCR defendants was $70,382,353 for an average compensatory award of $1,327,~69 per case. Punitive damages totalling $19,580,000 were awarded in 15 of the 51 adverse verdicts. In contrast, the CCR defendants proceeded to verdict 53 times last year and obtained favourable results in 11 trials. Claimants in those trials received an average award of $985,000 but the CCR defendants' share of the total award averaged $170,000.

The major non-CCR Assureds have not experienced notable relief from the nation-wide asbestos litigation within the last year. Owens Corning Fiberglas reports that it is named as a defendant in an average of 1,775 new claim filings per month for a total of 102,073 pending claims at year-end 1992. Owens Corning has reportedly paid $987 million in indemnity and $573 million in expenses to close 80,431 claims as of May 15, 1992. This time last year, Owens Corning had reported $816 million in indemnity and $384 million in expense payments.

Pittsburgh Corning has experienced a substantial increase in claims activity during the past year. The assured reported that it had closed 32,000 claims as of May 1, 1991 and that approximately 75,000 claims were then pending against it. Pittsburgh Corning now reports that as of May 1, 1992 it has closed 74,627 claims and that 74,670 claims are pending. This assured has paid $286 million in indemnity payments including $168 million since it left the Asbestos Claims Facility in 1988. Pittsburgh Corning has reportedly paid $228 million in defence expenses to dispose of 74,627 claims.

Another assured which has experienced a surge in claim filings during the past year is Foster Wheeler. It reports that 39,942 claims have been filed against it as of May, 1992 compared with 18,563 previously known claim filings last year. The assured's average indemnity payment is $670 and its average defence payment is $2,650.

Flintkote's per claim indemnity average increased slightly from last year to $661 per closed claim at year-end 1992. Its per claim expense average has remained relatively steady at $1,701 per closed claim. Overall, Flintkote reports that it has paid $29 million in indemnity and $75 million in expenses to close 44,181 claims as of June, 1992.

Owens Illinois reports that it has averaged a per claim indemnity payment of $3,100 to conclude a total of 70,000 asbestos bodily injury claims and that it continues to defend against 78,000 pending claims.

Assured Babcock & Wilcox's claims activity remains notable. This assured continues to employ an aggressive settlement strategy in connection with its asbestos-related bodily injury claims. Babcock & Wilcox has agreed with the leading claimants' attorneys to pay a fixed settlement amount to any claimant who can establish exposure to a Babcock & Wilcox product and also establish the presence of an asbestos-related disease. As a result, this assured has been able to achieve modest settlements with minimal defence costs. However, this settlement strategy has also caused the assured and its insurers to incur substantial cash flow. Additionally, the assured appears to receive claims at a faster rate than similarly situated asbestos defendants.


The nation-wide asbestos litigation now entering a third decade has taken its toll on several asbestos producers. The total number of asbestos manufacturers which have filed for bankruptcy as a result of the crush of asbestos claims currently stands at 16, consisting of Advocate Mines, Inc., Amatex Corp., Celotex Corp. and Carey-Canada, Inc., Continental Producers, Eagle-Picher Industries, Inc., Forty-Eight Insulations, Johns Manville Corp., National Gypsum, Nicolet Industries, North American Asbestos Corp., Pacor, Inc., H.K. Porter Co., Raymark Industries, Inc., Standard Insulations, Inc. and Unarco Industries. Several of these companies remain in bankruptcy while still others have emerged to resume business operations; some asbestos manufacturers have been dissolved.

Those producers now undergoing bankruptcy proceedings have not experienced significant activity during the past year. The Chapter 11 proceedings by Celotex Corp. and Carey-Canada remain pending in the U.S. Bankruptcy Court for the Middle District of Florida in Tampa. In January, 1991 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.

National Gypsum's Chapter 11 bankruptcy proceedings have been pending since October 29, 1990 in the U.S. Bankruptcy Court for the Northern District of Texas. In April, 1992 the assured and a creditor's committee submitted separate yet similar amended plans for reorganisation to the U.S. Bankruptcy Court wherein each group proposed an asbestos-settlement vehicle likened to the asbestos trust funds established in the Johns Manville reorganisation. These proposed reorganisation plans will be subject to a lengthy approval process by the Bankruptcy Court and other creditors. In the interim, the Bankruptcy Court has permitted National Gypsum's asbestos-related bodily injury claims handling to be administered by the CCR.

Eagle-Picher Industries was granted until September 1, 1992 to file its own proposed plan of reorganisation with the U.S. Bankruptcy Court for the Southern District of Ohio in Cincinnati. The Court there ordered the creditors' committees to either accept or reject the plan by November 2, 1992.

The U.S. Bankruptcy Court in Pittsburgh set March 16, 1992 as the bar date for filing all claims, including asbestos bodily injury and property damage claims, against H. K. Porter. On June 12, 1992 a creditors' committee recommended that the company vest its assets in a liquidator's trust for distribution to retirees and unsecured creditors including asbestos claimants, and then dissolve the company.

Raymark Industries, formerly a wholly-owned subsidiary of Raytech Corp., was petitioned on February 10, 1989 for involuntary bankruptcy in Pennsylvania by a group of asbestos bodily injury claimants whose judgments against the company remained unsatisfied. On March 10, 1989 Raytech Corp. filed its Chapter 11 Petition in the U.S. District Court in Connecticut and cited that it has been named in approximately 1,000 asbestos bodily injury claims on the asserted basis of successor liability to Raymark Industries. On August 28, 1991 the U.S. District Court issued a preliminary ruling that Raytech is liable as a successor to Raymark. However, before issuing a final decision on the issue of successor liability, the U.S. District Court transferred the Raytech bankruptcy litigation including the successor liability dispute to the consolidated Multidistrict Litigation pending before Judge Weiner in the U.S. District Court for the Eastern District of Pennsylvania. Raytech is the only bankrupt defendant currently included within the Multidistrict Litigation.

Most of the 16 asbestos producers which filed for bankruptcy thus far have pointed to the flood of asbestos claims as the primary reason for their reorganisation or liquidation. The number of new asbestos claim filings has not subsided and it is likely that still other asbestos producers will be forced to seek the protection of the bankruptcy courts. In response to this unwelcome prospect, a private organisation has proposed Chapter 14 && an amendment to the U.S. Bankruptcy Code which would permit an otherwise profitable company involved in the asbestos litigation to declare a modified form of bankruptcy.

The group sponsoring this amendment is the American Bankruptcy Institute ("ABI"), a private attorneys' organisation comprised of several thousand lawyers and judges who specialise in bankruptcy. on May 14, 1992 the ABI unveiled its draft of Chapter 14 for inclusion in the U.S. Bankruptcy Code. The proposed amendment is in its earliest stages and any proposal must be passed by the U.S. Congress and signed by the President before it would be incorporated into the Bankruptcy Code, Nonetheless, chapter 14 has received support from at least one prominent U.S. District Court Judge and its conceptual premise has been debated before a U.S. Congressional subcommittee on three occasions within the past several months. We thus believe that Underwriters should be aware of the amendment's significant features.

Chapter 14 in its current form applies only to entities facing asbestos-related bodily injury and property damage claims. Sponsors of the amendment believe that if successful the Chapter may be expanded to encompass other long term exposure claims such as lead paint poisoning and silicone implant breast claims. Chapter 14 is intended to be invoked by entities ("asbestos debtors") who owe at least $1 million in asbestos-related claims. It is unclear from the language whether a claim is an actual incurred sum such as a settlement or verdict or whether the mere allegation of $1 million in damages is sufficient to satisfy the jurisdictional amount. It is evident, however, that Chapter 14 does not require the asbestos debtor to be bankrupt in the traditional sense and thus its liabilities do not have to exceed the value of its assets.

Utilisation of Chapter 14 would be a voluntary undertaking. Once an entity elects to invoke Chapter 14 it is granted an automatic stay similar to that now imposed under Chapter 11. All litigation against the asbestos debtor is stayed including coverage disputes to which the asbestos debtor is party. The bankruptcy court would then be empowered to appoint a trustee to oversee the continuing operations of the company. Creditors' committees may be created to represent the interests of present and future asbestos-related claimants.

A notable feature of the proposal is the creation of a company-tailored plan to dispose of all asbestos related claims pending against the entity. This plan calls for the establishment of a "presumptive schedule of awards" for claimants based upon such factors as previous jury verdicts and the nature, extent and duration of claimants' injuries. These awards would be funded by assets of the debtor's estate including available insurance proceeds. The ABI proposes that all asbestos-related coverage litigation be resolved within the producer's bankruptcy proceeding, suggesting a predisposition towards maximising insurance proceeds in favour of the policyholder. The ABI's sweeping approach to asbestos coverage litigation does not provide assurance that insurers shall obtain a fair adjudication of their coverage disputes within the policyholder's bankruptcy proceedings.

The ABI's proposal will be enacted into law, if at all, only upon passage through the Judiciary Committee's Subcommittee on Administrative Law and then through the full Judiciary Committee and finally through the U.S. Congress. At the current time the proposal has not been presented to the subcommittee, Thus, while Chapter 14 is far from being enacted into law, we believe that its potential impact on the future course of asbestos litigation warrants special monitoring by Underwriters.


On July 29, 1991 the Judicial Panel on Multi-district Litigation issued an Order transferring all asbestos bodily injury lawsuits pending in 87 federal district courts to the U.S. District Court for the Eastern District of Pennsylvania under Judge Charles Weiner. During the past year Judge Weiner has attempted with mixed results to streamline the pre-trial management of the 33,083 asbestos bodily injury claims now consolidated within the Multi-district Litigation ("MDL").

The number of asbestos claims consolidated within the MDL has increased to 33,083 from the 26,639 claims involved originally in the July 29, 1991 transfer order. This increase is due to the inclusion of new claim filings and claims inadvertently omitted from the original transfer order. Certain individual claims and classes of claims have been remanded to their original district courts. The largest single group remanded consists of 6,000 shipyard maritime claimants whose cases were severed from the MDL and placed on a separate maritime docket for special pre-trial management.

Judge Weiner's principal objective is to settle all the asbestos claims within the MDL beginning with mesothelioma claims and continuing with cancer claims and then the less serious disease claims. He established an ambitious settlement conference schedule but procedural disputes have plagued many of Judge Weiner's pre-trial orders and only 389 cases have been resolved through the settlement conferences. Many of those claims had been pending since 1988. Settlement conferences are already underway or scheduled in another 4,500 cases.

Judge Weiner has been confronted with two significant procedural issues during the past year. In September, 1991 claimants' lead counsel requested broad document production from all of the asbestos defendants including disclosure of the defendants' financial assets and insurance coverages. The CCR and 90 "peripheral" defendants filed objections to this production request. Judge Weiner has not yet ruled on this issue but' he previously permitted Owens Corning Fiberglas to seek broad discovery from several peripheral defendants in connection with product identification issues. In a second procedural dispute, Judge Weiner reversed one of his earlier decisions and on March 16, 1992 he agreed to sever the issue of punitive damages from each of the individual claims. He ruled that the punitive damages issue would be resolved separately as it applies to the MDL as a whole and not to individual claims.

The procedural controversies which surround the MDL may have prompted a petition by members of the claimants' Steering Committee seeking a remand of all the MDL cases to their original district courts for resolution. Nine of the thirteen Steering Committee members signed the petition which was filed with the Judicial Panel on Multi-district Litigation on June 12, 1992. Claimants' counsel assert that the MDL is inefficient and that Judge Weiner has removed the incentive for settlement by failing to set firm trial dates. They also argue that Judge Weiner exceeded his jurisdictional authority by severing punitive damages from individual claims. No hearing date is currently scheduled on the petition for a full remand.

There continues to be some progress in the individual state consolidations. The most notable is the Baltimore City Consolidated Asbestos Litigation pending in the Baltimore City Circuit Court. The Baltimore consolidation will be the subject of a separate report to the Market and therefore we are providing only a brief summary here. This litigation, consisting of 8,554 individual claimants, is the largest consolidated personal injury case ever to proceed to trial. Following an aborted start at trial in 1991, the Baltimore Consolidated Litigation began trial again on March 10, 1992 for six representative claimants, three of whom were selected by claimants' counsel and three of whom were chosen by the defendants. At the start of trial there were 14 defendants but settlements and dismissals left only six defendants ‘through the conclusion of the trial. The jury deliberated for twelve hours and on July 13, 1992 entered a finding of liability against each of the six defendants including ACandS, GAF, Keene, MCIC, Pittsburgh Corning and Porter Hayden. On July 14, 1992 a jury found Owens-Illinois liable for contribution in a counterclaim filed by the other defendants but excused W.R. Grace from any liability as a counter-defendant. On July 23, 1992 the jury awarded compensatory damages in the amount of $11.2 million in favour of three of the six representative claimants and against the six defendants. The jury has not yet apportioned liability among the defendants. Three of the six claimants were not awarded any damages because the jury found that those claimants had not suffered compensable asbestos related injuries. The jury will determine the amount of damages payable to the remaining claimants during subsequent trials, each consisting of small groups of ten to twenty claimants.

There have not been substantial developments in the Mississippi consolidation of 6,000 cases or the West Virginia consolidation of approximately 2,000 cases. On March 20, 1992 a Special Master reported that all but ten of the 120 Brooklyn Navy Yard workers' cases pending in the New York Federal Court had been settled. Further, many of the 880 consolidated New York Powerhouse cases have been resolved. On April 17, 1992 a jury awarded $30.7 million to seven former powerhouse claimants; Keene Corp. was the only defendant in five of the seven cases. Finally, approximately 150 claims have been consolidated in the Superior Court of Alameda' County, California and on April 17, 1992 a jury awarded $3.4 million to eight claimants and against the sole defendant, Western MacArthur Co. The remaining claimants will be broken down into smaller, separate groups for trial.


There have been certain major developments in the asbestos-related bodily injury coverage litigation within the past 12 months.

On September 12, 1991 the Maryland Court of Appeals, that state's highest court, adopted an "exposure" theory of coverage for asbestos bodily injury claims in a coverage dispute between Maryland Casualty and its assured Lloyd E. Mitchell, Inc. Maryland Casualty provided its assured with primary coverage effective from at least 1955 to 1977 and had argued for a manifestation theory of trigger. The state Court of Appeals reversed an Order of summary Judgment granted to Maryland Casualty and ruled that bodily injury occurs when asbestos is inhaled into the lung, thus triggering Maryland's duty to defend and indemnify its assured' for all asbestos claims alleging exposure during Maryland's period of coverage.

On February 25, 1992 an appellate panel of the New York Supreme Court, that state's intermediary level of judicial review, ruled unanimously that the pollution exclusion in Continental's CCL policies does not relieve Continental of its duty to defend Rapid-American Corp. and Its predecessor Glen Alden Corp. against asbestos bodily injury claims. Addressing this issue for the first time, the New York Supreme Court held that the complaints against Rapid American Corp. contained allegations of asbestos-related bodily injury sustained by a product user and did not allege environmental pollution of the atmosphere. The court found that the legislative history of the exclusion clause in New York indicates that it was intended to apply only to pollution or contamination by industry-related, activities but does not embrace the harm caused by a product placed into the stream of commerce.

Finally, on May 28, 1992 the Supreme Court of Louisiana handed down its decision in Cole vs. Celotex Corporation involving long term asbestos exposure by three employees of the Cities Services refinery in Louisiana. Claimants alleged among other things that the Cities Services' executive officers failed to provide claimants with a safe work place. Following a two week trial the jury found that nine of the eleven defendant Cities Services' executive officers were negligent for failing to provide a safe work place and the jury awarded damages of $300,000 to each claimant which was later reduced to $285,000 per claimant. The parties previously stipulated that INA provided Cities Services with primary coverage from 1944 to 1976 with per accident and/or per occurrence limits ranging from $10,000 in 1944 to $50,000 in 1976, i.e. no aggregates apply. INA appealed the verdict.

In its opinion the Louisiana Supreme Court adopted the exposure theory of coverage trigger. Next, the court rejected INA's argument that each of the nine executive officers should be counted as one, collectively comprising a single share, because the duty violated was the indivisible obligation of Cities Services to provide a safe work place. Instead the state Supreme Court reasoned that an executive officer's liability is not derivative or vicarious and thus held INA liable for nine virile (separate) shares representing nine executive officers. The Louisiana Supreme Court also permitted claimants to horizontally stack INA's primary coverages on the basis that an accident and/or occurrence took place in each policy year of each claimant's exposure. Thus, each claimant's $285,000 award shall be allocated across each claimant's years of exposure rather than assigned to a single year.


We have previously provided the London Insurers with a separate report on the issue of non-products claims arising out of asbestos bodily injury claims. We can confirm that some assureds have presented the London Market with notice of non-products asbestos claim involvements. Those claims will be addressed as necessary in individual reports for the specific assured matters.

We trust this summary of the developments in the asbestos bodily injury litigation over the past year and explanation of the basis for our 1992 year-end reserve recommendations has been of assistance. Your servicing attorneys will continue to advise the Market of all significant developments.

14 Aug 92

Lord, Bissell & Brook and Mendes & Mount

1992 Year End Reserves – Asbestos Building Claims

We once again submit for the Market's consideration our annual report regarding asbestos-related building claims. As in past years, we continue to provide separate reports in developing reserve methodologies for these claims.

We continue to report that the reserving philosophy for asbestos building claims is the result of discussions held at the year-end reserve meeting. which was attended by Mendes & Mount, Lord Bissell & Brook, Hancock, Rothert & Bunshoft, the Chairman of the Working Party, members of the London Market Direct and Reinsurance Claims. Committees, as well as London Market Claims Services.

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

Significant developments have taken place in the past 12 months, both in the underlying building claims and in the various declaratory judgment actions. Results in the underlying cases continue to be mixed. During the put year, there were a number of cases tried to conclusion, with the cases tried earlier in the year resulting in defence verdicts and the cases tried later in the year resulting in record setting verdicts against asbestos product manufacturers in favour of the building owners. There continue to be a significant number of cases which arc settled, including some major cases involving large amounts, which have been finalised during the put year.

The number of new cases filed during the past year continues to decline over the prior years, with London's most significant assured, W.R. Grace, reporting approximately ten new cases in the past twelve months.

Active declaratory litigation continues in a number of cases in which the London Market is involved, including W.R. Grace, U.S. Gypsum, National Gypsum, Fibreboard, Armstrong, Flintkote and Celotex/Dana. There have been a number of developments in these major cases which are discussed in this report. More detailed information is contained in the relevant assured reports circulated to subscribing Underwriters and Companies throughout the year.

In our 1991 Market letter, we advised the Market of a new methodology which was being utilised for reserving purposes for U.S. Gypsum, W.R. Grace and National Gypsum, the three main property damage defendants, referred to as the "3 G's". We have reviewed this methodology, and we have recommended that this methodology be continued for 1992 reserving purposes, subject to certain modifications.

This Market Report continues to be of necessity somewhat lengthy due to the complexity of the issues and the number of developments which have taken place. For the Market's convenience, we provide a brief index of the contents:



General Overview of Asbestos Building Claims


A. Legislation/Regulation


B. New Property Damage Lawsuits


C. Future Potential Claims


D. National School Class Action


E. Bankruptcy Considerations



Trial Results



Declaratory Judgment Decisions


A. National Gypsum


B. W.R. Grace


C. California Non-Asbestos Decisions


D. Summary


E. Pending Declaratory Actions



1992 Reserving Methodology


A. Background


B. Review of 1992 Methodology


C. Actual Results Compared with Projected Results


D. Discount For Potential Successful Defences


E. Defence Costs


F. Assureds Other Than the 3 G's


G. Allocation To Policy Years


H. Application of Spill-over







A. Review of Property Damage Litigation



Chronology of major decision



Discussion of significant decisions


A. Legislation/Regulation

According to the 1991 survey of state asbestos programs by the National Conference of State legislatures, state-owned buildings are required to be inspected for asbestos-containing material in 34 states, and six states require inspections of public and commercial buildings.

According to this survey, 43 states have adopted the Federal National Emission Standards for Hazardous Air Pollutants (NESHAP) and have received enforcement authority from the Environmental Protection Agency ("EPA").

1. EPA

a. Budget

Congress has increased the EPA's budget for asbestos abatement loans and grants to states by $5.5 million for Fiscal Year 1992. That is, the appropriations for the Asbestos in Schools Hazard Abatement Act program for Fiscal Year 1992 will be $57 million, up from $51.5 million in Fiscal Year 1991. This program makes loans and gives grants to states to help schools fund asbestos abatement projects. Congress gave the Health Effects Institute--Asbestos Research (HEI-AR) $1 million to continue its program, half what it received the prior year. All federal funds are matched by funds from the private sector.

b. Study of Asbestos in Schools

On July 30, 1991, the EPA in a study of the program entitled "Asbestos in Schools:

Evaluation of the Asbestos Hazard Emergency Response Act (AHERA)" reported that approximately 90% of the response actions recommended for schools call for managing asbestos-containing material (ACM) in place rather than removal. The study revealed a number of problems with in-place management, and the EPA said that it would issue specific guidelines for schools by early 1992. All schools must re-inspect for asbestos problems by July 9, 1992.

C. Ban on Asbestos Products

In 1989 the EPA issued a final rule under Section 6 of the Toxic Substances Control Act (TSCA) to prohibit the future manufacture, importation, processing and distribution of asbestos in almost all products. The EPA promulgated a staged ban on most commercial uses of asbestos.

The U.S. Fifth Circuit Court of Appeals on October 18, 1991 vacated the EPA's proposed ban on the manufacture and marketing of asbestos-containing products in the U.S. in Corrosion Proof Fittings. et al. v. The Environmental Protection Agency and William K Reilly. The appeals court said the Agency failed to consider alternatives to the ban, as required by Congress.

On November 27, 1991 the Fifth Circuit Court of Appeals denied the EPA's petition for rehearing, which asked the court to reconsider its decision vacating the Agency's ban on asbestos-containing products which were currently being manufactured, imported or processed. The court held that the EPA failed to sustain its burden of showing that the products banned by the rule present an unreasonable risk and that less burdensome regulation would not adequately mitigate that risk. However, the Fifth Circuit issued an order reinstating the EPA ban on asbestos-containing products which were manufactured, imported or processed before the date the disputed EPA rule was published. The EPA will issue a Federal Register notice asking manufacturers to submit information on asbestos products manufactured through 1989. Following the publication of the information received from manufacturers, the EPA will determine what action to take with regard to a possible ban on such products manufactured before 1990.

2. Occupational Health and Safety Administration

The Occupational Health and Safety Administration (OSHA) will take the responsibility for deciding how to regulate asbestos in public and commercial buildings, EPA and OSHA announced at a meeting Nov. 26, 1991. OSHA will be the lead agency on the issue "because the main concern is for workers." OSHA, which is part of the Department of Labor, handles regulations to reduce worker risks. OSHA is presently writing an asbestos regulation which would include regulations for building owners and managers. The regulation had been slated for May 1992, but additional work has extended that date.

The EPA will address potential risks to workers in state and local government buildings.


On September 25, 1991, the Health Effects Institute-Asbestos Research (HEI-AR) in Massachusetts released its Asbestos Literature Review, summarising existing knowledge concerning asbestos in the air in public and commercial buildings. The report cited the lack of reliable data and emphasised the difficulty in assessing asbestos exposure and concomitant health effects. The main findings were:

1. Non-friable asbestos appears to pose little risk to building occupants.

2. The determining factor in any remedial action should be the potential risk to exposed custodial and maintenance workers. Janitorial, custodial, maintenance and renovation workers may experience peak exposure episodes because of disturbance or damage to asbestos-containing construction material, which may release relatively high concentrations of fibres.

3. Asbestos-containing material within buildings in good repair is unlikely to expose workers and other general building occupants to airborne asbestos fibre concentrations above the levels found in air outside such buildings.

In January, 1992, the Board of Directors of HEI-AR approved two sets of studies for funding by the HEI-AR. The first research will focus on the "Effect of Maintenance and Custodial Activities on Exposure of Building Occupants to Asbestos." The second research will study the general U.S. population's exposure to asbestos in public and commercial buildings.

4. Proposed New California Law

A bill has been introduced in the California Senate that would allow any public entity to bring a civil action to recover the cost of removing asbestos within three years from the date the entity knew or reasonably should have known that the product posed a "significant health hazard" for occupants of a building. Existing California law provides that the time for commencement of an action for relief not otherwise specified is within four years after the cause of action has accrued. This could have the effect of extending the period of time for suits to be filed.

B. New Property Damage Lawsuits

The major asbestos producers continue to be named in new lawsuits in which the claimants seek recovery for alleged damages arising from the presence of asbestos in their buildings. However, the rate of filings for the past twelve months has declined over the rate for the prior twelve months. W.R. Grace, an assured with substantial coverage in the London Market, has reported 10 new lawsuits since June of 1991, a significant decrease over the 35 suits reported in the prior twelve months. There is no geographic pattern in these 10 new suits, as 7 different jurisdictions are involved.

We do detect the continuation of a trend which would suggest that most school districts have either already filed their own suits or are a part of the National School Class Action, as none of the 10 new suits involves schools. Five of the cases involved commercial buildings, four involve hospitals and one involves a municipal entity, the City of New Orleans, Louisiana. Most of the cases appear from the complaints to involve either a single building or a small number of buildings.

We continue to have some difficulty in obtaining detailed information regarding new filings from the other main target defendant, U.S. Gypsum, in view of the active ongoing declaratory litigation between U.S. Gypsum and its insurers. The remaining target defendant, National Gypsum, continues in a Chapter 11 Bankruptcy proceeding in Dallas, Texas and accordingly is protected from new filings.

C. Future Potential Claims

It continues to be most difficult to speculate as to the number of claims likely to be filed in the future. We are encouraged by the absence of new filings by school districts during the past twelve months, and we are further encouraged by the reduction in the number of claims filed from the prior year.

As the EPA first began to aggressively regulate primary and secondary schools with respect to the presence of asbestos-containing material in approximately 1980, the absence of any new filings is not unexpected. We consider that most school districts should certainly have been aware of the presence of any asbestos problems in their buildings by this time.

However, the law continues to be mixed as to whether Statutes of Limitation, which bar claims after a certain period of time, are applicable to school districts. Thus, in some jurisdictions claims by school district may not necessarily be barred.

As noted in the above discussion, assureds continue to receive notices of new claims from commercial building owners and municipal entities. We expect more municipal claims, particularly in view of the fact that Statute of Limitations do not run against these entities.

We can also anticipate future suits by commercial building owners. Statues of Limitations for these entities will in general run from the date of discovery of the asbestos problem. Such Statues generally do not exceed six years. Suits currently being filed therefore typically allege discovery dates which are in the mid-to-late 1980s. During this period of time, the policies of most of the major manufacturers include full asbestos exclusions. The claimants will no doubt argue that these Statutes are tolled i.e.., do not run, because of fraud and conspiracy on the part of the manufacturers in covering-up information regarding the dangers of asbestos in buildings. However, in the absence of such fraud or conspiracy, we would expect that the Statues of Limitation, as well as Statutes of Repose, will place many current claims into exclusion years in jurisdictions which adopt the discovery trigger of coverage.

D. National School Class Action

In our 1991 Market Report, we advised of the imminent trial in the National School Class Action, which is pending in the U.S. District Court in the Eastern District of Pennsylvania before Judge James M. Kelly. A. advised, Judge Kelly had scheduled Phase I of the trial to resolve the issue of whether there was a conspiracy among the major defendants to suppress knowledge of the hazards of asbestos. This Phase of the trial was scheduled to commence on February 3, 1992, against the following defendants:

U.S. Gypsum

U.S. Mineral Products

W.R. Grace

Pfizer Inc.

Owens-Corning Fiberglas

Dana Corporation

Keene Corporation

Asbestospray Inc.

GAF Corporation

Georgia Pacific Corporation

Pittsburgh-Corning Corporation

Asten Group, Inc.

It appeared to be Judge Kelly's plan to try the conspiracy issue so as to possibly avoid having to try issues relating to product identification and presence of asbestos in the thousands of individual buildings which comprise the Class. A finding of Conspiracy would make each party found to be liable jointly and severally liable for all of the damages of the Class, which would no doubt exert extreme pressure on the defendants to reach settlement.

Prior to the commencement of trial, in September of 1991, Judge Kelly had taken judicial notice of the fact that the school buildings were damaged by the very presence of friable asbestos materials. Judge Kelly based this holding on Federal Legislation, thereby depriving the defendants of one of their major defences, i.e., that the asbestos does not present a hazard to the occupants of the buildings.

Judge Kelly continues to be under significant pressure from the defendants to recuse himself due to his attendance at an asbestos seminar in New York City in June 1990 sponsored by the Collegium Ramazzini. The defendants contend that this seminar was sponsored by counsel representing the plaintiffs in the Class Action, and was in fact partially funded with settlements from defendants who had reached settlement in the litigation. The defendants allege that Judge Kelly's expenses at the Conference were in effect paid by the plaintiffs, and that speakers at the seminar were experts whom plaintiffs intended to call at trial.

Judge Kelly has declined to recuse himself from the case, although he did preclude the plaintiffs from using as experts the speakers who had appeared at the seminar. The defendants filed Petitions of Mandamus, requesting that the U.S. Court of Appeals for the Third Circuit to review these issues. The Third Circuit granted this petition, and has recently concluded oral argument. We anticipate that the Court will soon be reaching a decision on both the recusal issue and the issue of whether the first Phase of the trial should be limited to conspiracy issues only.

In our past Market Letters, we have discussed the possible implications of the bankruptcy filings of major asbestos producers. In our 1991 Letter, we advised of Chapter 11 filings by National Gypsum, Celotex/Carey Canada and Eagle Picher. There have been no new filings during the past twelve months, however, media reports suggest that U.S. Gypsum is experiencing difficulties, both due to adverse economic conditions in the construction industry and an inability to restructure its outstanding debt. The possibility of a pre-packaged chapter 11 has been discussed in the media, whereby U.S. Gypsum would seek the protection of the Bankruptcy Court, and present to the Court a previously-agreed plan among its major creditors.

In a separate Market letter regarding bodily injury issues, we also discuss recent legislative proposals for a new bankruptcy provision, to be known as a chapter 14, which would permit companies to seek bankruptcy protection, even if' they are not insolvent by traditional tests, if they face more than $1 million in liabilities arising from mass tort claims such as asbestos. Should such legislation be enacted, it could have a dramatic adverse impact on the overall asbestos problem for insurers.

Despite the overall difficulties presented by bankruptcy considerations, we continue to believe that these bankruptcy filings have not yet had a significant impact on the liabilities faced by the solvent manufacturers with respect to building claims. The asbestos-containing material which may be present in a building is usually identifiable as belonging to a specific manufacturer. Cases which proceed to trial generally proceed against one or a limited number of manufacturers, so that the issue of joint liability has to date not been a significant problem. We have accordingly not seen any indication that the solvent manufacturers are being called upon to respond for the shares of insolvent manufacturers in the building context. However, this situation obviously differs from bodily injury claims, where it is more difficult to identify the products of any specific defendant.


Since our last Market letter, we are aware of 5 cases which have proceeded through a full trial to verdict . As in past years, we report that the results were mixed, with defendants obtaining verdicts in the first 2 cases, and the plaintiffs obtaining substantial judgments in the remaining 3 cases to be tried. The results during the past year are as follows:

1. Worthington City Schools Franklin County, Ohio. Basic, Inc. which manufactured and distributed a spray-on-product known as "Kilnoise" received a defence verdict on November 21, 1991. We understand that the basis of the verdict was the jury finding that the presence of asbestos in school buildings does not constitute a hazard.

2. Brevard County – Florida. On January 30, 1992, W.R. Grace obtained a defence verdict, also on the basis of "no hazard" in a case, tried to conclusion in Orlando, Florida.

3. Chromalloy/Clayton Center - Missouri. Following its successful verdict in Brevard County, W. R. Grace was hit with the largest judgment at the time, in tile Chromalloy/Clayton Center ease, tried to conclusion on March 13, 1992 in St. Louis, Missouri. The jury awarded the plaintiff a total of $15.4 million in compensatory damages and a total of, $2.5 million in punitive damages. In reviewing the trial transcript, we note that the jury awarded the plaintiff all claimed damages, and did not provide any discount on the amounts sought by the plaintiff. The trial court has affirmed the compensatory verdict, but dismissed the punitive judgment on post-trial motions. An appeal has been filed by Grace.

4. Mayor and City Council of Baltimore - Maryland. On June 4, 1992, a Baltimore jury rendered the largest judgment to date, finding in favour of the plaintiff against U.S. Gypsum in the amount of $8.8 million in compensatory damages and $4 million in punitive damages, against Asbestospray in the amount of $8.3 million in compensatory damages and $2.0 million in punitive damages, and against Hampshire Industries, a local insulation contractor, in the amount of $718,000 in compensatory damages. This trial marked the first adverse verdict for Asbestospray Corporation. The jury awarded all but approximately $600 compensatory damages sought by the plaintiff in connection with asbestos abatement in twenty-five school and municipal buildings.

5. Bunker Hill Towers – California. A California jury awarded $6 million in compensatory damages against W.R. Grace in early June of 1992. The suit had been filed by an association of condominium owners.

6. Appellate Decision - Adams-Arapahoe School District. In a significant appellate-level decision, the U.S. Court of Appeals for the 10th Circuit reversed judgments against GAF and U.S. Gypsum in separate actions which had been tried to conclusion by the Adams-Arapahoe School District No. 28-J in Colorado. GAF was involved in this action due to its manufacture and sale of vinyl asbestos floor tile, and U.S. Gypsum was involved in a separate trial due to surface materials.

The 10th Circuit reversed the judgments against both manufacturers, finding that the mere presence of either asbestos floor tile or asbestos surfacing materials does not constitute a claim for physical damage to property. The Court ruled that the plaintiffs had not provided evidence of property damage, resulting in a dismissal of the judgments in both cases.


During the past 12 months, there have been a number of significant decisions in pending declaratory judgment actions in which the Market is involved. We provide the following summary of these decisions:

National Gypsum

There have been two significant decisions arising out of the Stonewall Insurance Company v. National Gypsum action in the U.S. District Court for the Southern District of New York.

In the first decision, handed down on December 31, 1991, Magistrate Bernikow issued a decision adverse to the insurers on several issues.

A number of the later-year insurers, those which issued policies effective after approximately 1980, had moved for dismissal based upon the "known loss" defence. The moving insurers provided the Court with evidence of the history of regulation of asbestos, including the 1979 EPA directive to schools, the 1980 Asbestos School Hazard and Detection Act, and the fact that suits began to be filed against various manufacturers in approximately 1980.

Magistrate Bernikow, applying New York law, cited the City of Johnston, a 1989 decision from the 2nd Circuit involving pollution claims. In this case, the 2nd Circuit rejected the "known risk" defence. Magistrate Bernikow held that, while National Gypsum was aware of the potential risk presented by claims arising from asbestos in buildings, insurance is intended to cover such risks. Magistrate Bernikow held that such knowledge of a potential claim on the part of the policyholder is not sufficient to bar coverage, and that only an actual suit or an actual demand letter will bar coverage under policies effective after the date of such suit or demand.

While Magistrate Bernikow did not directly address the "expected or intended" defence, it is clear from the cases he cited and from his ruling on "known loss" that he would have ruled in favour of National Gypsum on this issue.

Magistrate Bernikow went on in his decision to state that the knowledge of the insurance industry with respect to the potential of asbestos building claims was also relevant. Magistrate Bernikow found that the insurance industry should also have been aware from approximately 1979 to 1980 of the potential for asbestos building claims, and that the insurers, if they had so chosen, could have elected to unambiguously exclude such claims.

Judge Martin subsequently assumed full responsibility for the National Gypsum case, leaving Magistrate Bernikow to resolve discovery-related issues. On May 26, 1992, Judge Martin issued an opinion on other summary judgment motions, including trigger of coverage and number of occurrences.

In deciding the law to be applied, the Judge applied the "Most Significant Interest" test, finding that New York law should be applicable to policies issued to National Gypsum while it was a New York resident and that Texas law should be applied to policies issued to National Gypsum after its relocation to Texas.

On the duty to defend issue, Martin ruled that the underlying complaints, given a liberal reading, do allege property damage. Accordingly, applying traditional tests, he found that the insurers are obligated to defend unless they can conclusively establish that there was no properly damage during their periods of coverage. With respect to the duty to indemnify, Martin found that the claims were for property damage as defined in the policies, and were not for mere economic loss. Accordingly, he ruled that there is a duty on the part of the insurers to indemnify National Gypsum against loss.

Judge Martin was also called upon to decide the "number of occurrences" issue, as National Gypsum has certain policies with per occurrence deductibles. In an apparent effort to maximise coverage, he found that the decision by National Gypsum to manufacture and sell asbestos-containing materials was one occurrence. Judge Martin found that all of the underlying claims arose from a single "unfortunate event", which gave rise to a single occurrence.

This decision is likely to be most controversial with respect to its trigger of coverage ruling. Martin applied an "injury-in-fact" test under New York law, and found that actual injury occurred at the time of installation. He thereby rejected a manifestation or discovery trigger sought by some of the insurers and he further rejected the triple or comprehensive trigger which had been requested by National Gypsum.

With respect to policies controlled by Texas law, Martin found that while lower courts in Texas had adopted manifestation or discovery triggers, the Texas Supreme Court would likely adopt an "injury-in-fact" test, which would lead to an installation trigger.

The Judge found that none of the potentially relevant policy exclusions were effective to bar coverage, including the "own products", "sistership", "loss of use" or pollution exclusions.

Judge Martin's decision is inconsistent with magistrate Bernikow's decision of March 19,1991 adopting a discovery trigger. The ruling by Magistrate Bernikow in the Grace case is currently before the U.S. Court of Appeal for the 2nd Circuit. In view of the inconsistent decisions with respect to substantially the same claims and substantially the same general policy language, it seems unlikely that both of these decisions will stand as rendered following appellate review.

B. W.R. Grace

While there have been a number of significant developments in the various W. R. Grace coverage actions, there has been only one substantive ruing on the key coverage issues. In the case of the State of Mississippi v. W. R. Grace in which Grace has named its insurers as third-party defendants, Judge Clinton Lockard has ruled that Mississippi law applies to the coverage issues with respect to buildings located In Mississippi. Judge Lockard further ruled on summary judgment motions by Grace that the presence of asbestos in buildings constitutes property damage, that such damage is continuous from installation to removal, and that Grace is entitled to select the policy year under which it is to be defended and indemnified. With respect to the Phase I settlement, Grace selected the 1972 policy year, and allocated the claim to its primary and excess insurer in said year. This decision is currently on appeal to the Mississippi Supreme Court.

C. Significant California Cases

The following California cases have been decided in the past year which may have some impact on the outstanding declaratory relief actions pending there, which are discussed later in this report.

1. Montrose Chemical v. Admiral Insurance

On February 27, 1992, the California Court of Appeal, Second Appellate District, Division One, issued an important decision regarding trigger of coverage and the "known loss" doctrine in Montrose Chemical Corporation v. Admiral Insurance Company. The Montrose case addressed the issue of whether CGL policies issued by Admiral Insurance Company to Montrose Chemical Corporation obligate the insurance company to defend Montrose in both bodily injury and property damage lawsuits arising from Montrose's disposal of hazardous wastes. The appellate court held that the bodily injuries and property damage were continuous and progressive and are thus covered by Admiral's policies, thereby rejecting the manifestation approach Admiral advocated. Additionally, the court ruled that the "known loss" rule would not defeat coverage in this case.

The Montrose decision constitutes the first California appellate authority addressing the trigger of coverage issue in the third party liability policy context in a dispute between an insured and an insurer. The decision also implicitly rejects the joint and several allocation concept contained in Keene. It is important to emphasise, however, that the Court did not rule on Admiral's duty to indemnity Montrose. Instead, the Court recognised that this decision would have to await resolution of Admiral's other defences, including "expected or intended," late notice and concealment.

As to the "known loss" issue, the Court ruled that a "PRP" letter merely provides notice of a "potentially responsible party" and is not sufficient to constitute a "known loss" for purposes of defeating coverage under California Insurance Code sections 22 and 250.

On May 21, a Petition for Review to the California Supreme Court which had been filed by Admiral Insurance was granted, which means that the case cannot be cited as authority pursuant to unique California rules. Briefing in this case will proceed this summer, and argument most likely will occur next year.

2. Pines of La Jolla

On April 16, 1992, the Fourth Appellate District, Division One, of the California Court of Appeal decided Pines of La Jolla Homeowners Assoc. v. Industrial Indemnity (5 Cal. App. 4th 714). This case is significant for several reasons. First, the case directly contradicts the Montrose case on the trigger issue as well as the Montrose court's application of the known loss rule to a third-party liability case. The case assigned a single date of loss, being the date of "first manifestation" of damage. It also applies the known loss rule to cut off coverage in a construction case. The Court ruled that the insurer providing coverage on the date of manifestation must provide coverage for the full loss, even though damage may continue into layer policy years. Interestingly, the case makes no mention of Montrose despite the fact that Montrose was decided more than one month before Pines of La Jolla.

No petition for review to the Supreme Court was filed before the deadlines in this case. At the present time one de-certification letter has been sent in by certain counsel representing insureds, including Flintkote represented by Brobeck, Phleger & Harrison. The Supreme Court has yet to rule on the de-certification request. The de-certification procedure permits the California Supreme Court to vacate a lower court decision, even though the parties may have spent millions of dollars litigating a specific issue.

3. Stonewall v. Palos Verdes

On May 19, 1992, in an insurance coverage for construction defects case, the Second Appellate District, Division Seven, held that there was a continuous trigger arising from a "continuous and repeated course of conduct" and that all of the insurers were responsible for coverage. Stonewall Insurance Company v. City of Palace Verdes Estates. 92 C.D.O.S. 4209. The Court also held that under the "known loss" rule, insurance is available until the liability of the insured is known or no longer contingent, explicitly following Montrose. The case was later modified to delete all references to Montrose since the Petition for Review to the Supreme Court in Montrose had been granted.

Since then, a Petition for Review to the Supreme Court was filed and is pending.

D. Summary

In summary, there is no discernible trend with respect to trigger and scope of coverage for asbestos building claims. While the National Gypsum case represents the first pure installation decision, other courts have adopted discovery triggers, injury-in-fact triggers, and in some cases, comprehensive or triple triggers of coverage. There are a number of cases approaching decision by appellate-level courts, including W. R. Grace, U.S. Gypsum and Armstrong. while pending in different jurisdictions, and depending upon the application of different substantive law, it is possible that decisions in these cases may begin to provide insurers and policyholders with some consistency.

The only trend to develop out of the cases is that courts have universally found that the presence of asbestos-containing materials in buildings constitutes covered property damage and that the various policy exclusions are inapplicable.

The Market continues to be named in declaratory judgment actions flied by various policyholders, some of which are quite active and some of which are basically inactive. The currently pending cases are as follows:

1. W. R. Grace

2. U.S. Gypsum

3. National Gypsum

4. Armstrong World Industries

5. Fibreboard

6. Flintkote

7. Celotex/Carey Canada (including Dana policies)

ASARCO/Lac D'Amiante du Quebec

9. Kaiser Gypsum/Kaiser Cement

10. GAF

We provide a brief discussion of the status of each of these actions:

1. W.R. Grace. The W. R. Grace coverage litigation continues to be most active, with 7 actions involving excess insurers currently pending. These actions are as follows:

A. New York Excess Action. This action was filed by Maryland Casualty against Grace and certain excess insurers in the U.S. District Court for the Southern District of New York. It is related to the New York Primary action, also filed by Maryland Casualty in the same court against Grace and other primary insurers. Grace has recently moved to dismiss the excess action for lack of jurisdiction, however, Magistrate Bernikow has denied this motion. Discovery in the Excess case is ongoing.

In the primary action Grace has also filed motions with the Second Circuit to dismiss for lack of jurisdiction. The issue of trigger of coverage is also on appeal to the 2nd Circuit, and an amicus curiae brief has been filed on behalf of the London Market supporting the discovery trigger based on injury-in-fact considerations as being in accord with New York law.

B. State of Mississippi. As noted above, London Market Insurers arc third party defendants in an action filed by the State of Mississippi against various asbestos product manufacturers. Grace has obtained a summary judgment triple trigger ruling on Phase I and has moved for a summary judgment with respect to Phase II and Phase III against Commercial Union and Home Insurance Company. The first summary judgment, against Maryland Casualty and Commercial Union, is on appeal to the Mississippi Supreme Court on trigger and scope issues.

C. Minnesota. Grace reached a settlement with, and assigned rights of recovery under its insurance policies to, five Minnesota school districts. The school districts then filed a garnishment action against Grace's insurers. The insurers attempted to remove the action from State court to Federal Court, and to have the case transferred to New York to be consolidated with the New York Excess action, however, the Federal Court remanded it to state court. Grace has filed summary judgment motions on all dispositive issues, and the insurers have filed motions to dismiss or stay on the basis of forum non conveniens. Decisions on these motions are expected in the near future.

D. Harris County, Texas. Grace filed a declaratory action against its excess insurers in connection with an underlying claim filed by Cullen Center, in which Cullen Center seeks approximately $75 million in damages from Grace. Grace sought a declaration that its excess insurers were obligated to pay defence costs and to indemnity it in connection with this claim. The insurers were successful in having the case dismissed in view of the prior pending action in New York, and in view of the fact that Grace had not yet been found liable to the plaintiff in the Cull en Center action. Grace moved for re-argument, and in view of the jurisdictional uncertainty in New York, the Harris County judge amended the dismissal from a "with prejudice" to a "without prejudice" dismissal. Grace is seeking to appeal from this decision.

E. Dayton II-Beaumont, Texas. Grace is a defendant in a continuing action in Beaumont, Texas filed by various municipal and school entities, known as the Dayton II action. Grace has filed a third party action against its insurers in this case. T he case is to be distinguished from Dayton I, where Grace filed a similar action against Excess Insurers, settled with the Dayton I plaintiffs, and obtained a substantial money judgment against Insurers. The Dayton I judgment was reversed by the Fifth Circuit on jurisdictional grounds.

In Dayton II, Grace has reached a significant settlement with the underlying plaintiffs, and is seeking to maintain jurisdiction in Beaumont, Texas. As part of the settlement, Grace has assigned policy recovery rights to the plaintiffs, and the plaintiffs have now filed third-party actions against the insurers. Grace, in seeking to avoid the jurisdictional problems with Dayton I, has dismissed its claim against certain defendants with whom it is not of diverse citizenship, thus arguably preserving an independent jurisdictional basis in Federal Court. Judge Fisher has, over strenuous objection by the insurers, issued a ruling that the settlement between Grace and the Dayton II plaintiffs was "reasonable". Judge Fisher currently has under advisement Grace's motion, also is strenuously opposed by the insurers, seeking to compel the insurers to pay defence costs in the Dayton II litigation. A similar motion on indemnity is anticipated.

F. New York State Court Action. As Grace had challenged the jurisdiction of the New York Federal Court, certain insurers felt it necessary to immediately file a New York State court action in an effort to preserve a New York forum. Such an action was filed by Employers Reinsurance, Commercial Union and Unigard. London Market Insurers intervened as plaintiffs in the action, and Maryland Casualty, an original defendant, filed third-party actions against various other insurers. when Magistrate Bernikow rejected Grace's jurisdictional challenges, this action was effectively stayed.

G. Los Angeles California Superior Court. The insurers had filed a New York State

court action in anticipation of the fact that Grace would seek to file a comprehensive action in a favourable jurisdiction. Grace in fact filed such an action, in the Los Angeles County Superior Court. The action has been voluntarily stayed by all parties for a period of 120 days, while jurisdictional challenges in New York are resolved. It is not likely that the California action, or the New York State Court action, will proceed if the Second Circuit finds that jurisdiction in New York is proper.

2. United States Gypsum v. Admiral Insurance. et al.

Following the "first discovery" trigger decision entered by the Circuit Court of Cook County, Illinois in January, 1991, U.S. Gypsum filed its initial appellate briefs to the Illinois Appellate Court. U.S. Gypsum seeks reversal of the "first discovery" trigger ruling and the trial court holding that each first discovery constitutes a separate occurrence for purposes of the applicability of limits and deductibles.

On Underwriters' behalf, we have filed appellate briefs responding to U.S. Gypsum's asserted continuous trigger of coverage theory. We also have urged reversal of the trial court finding of covered "property damage" under allegations raise din underlying cases. A key element of our appellate argument is that U.S. Gypsum failed at trial to sufficiently prove entitlement to indemnity for the "property damage" claims, and further that the trial court applied an incorrect legal standard to reach its "property damage" decision.

The arguments of the parties before the Illinois Appellate Court will be scheduled shortly.

3. National Gypsum. As discussed above, there have been two significant rulings in the Stonewall Insurance Company v. National Gypsum case, which is proceeding in the U.S. District Court for the Southern District of New York. A trial on bodily injury issues is presently set for September of 1992, and we understand that National Gypsum is discussing settlement with certain of the major insurers.

4. Co-ordinated Cases/Armstrong v. Aetna. Nineteen separate appeals were filed by the parties from Judge Brown's decision of the case on asbestos bodily injury and asbestos building issues. London is involved in the appeal of Judge Brown's appeal in the Armstrong case relating to asbestos building claims. The Co-ordinated appeal is a significant coverage case presenting the appellate court with a myriad of insurance issues involving asbestos, including (1) missing policy issues; (2) "trigger of coverage" for asbestos bodily injury and asbestos building issues; (3) whether "property damage" has occurred in Armstrong's policy period; (4) the number of occurrences in asbestos bodily injury litigation; (5) pre-merger liability; (6) the interpretation of expected and intended; and (7) the meaning of certain exclusions within the policies, such as the design-defect, sistership and own product exclusions.

Briefing in the Co-ordinated appeal was completed in December, 1991. Since the close of briefing Pacific Indemnity and Continental Casualty dismissed certain Group IV appeals dealing with intra-insurer disputes and damages. In addition, Continental Casualty dismissed a portion of another appeal involving "short term" or "stub" policy issues. The parties are awaiting a date for the Court to set oral argument. The parties expect that oral argument could be set for this Fall, but would not be surprised if oral argument is set sometime next year in light of the Supreme Court of California's decision to accept the Montrose petition as discussed below. The parties are working on preparing oral argument. A written decision is not expected until 1993.

5. Fibreboard v. Continental Casualty. This coverage action has been ongoing since 1985 in San Francisco Superior Court. Discovery closed in the action on October 1, 1991, although a handful of discovery matters are still ongoing. Trial of the main "property damage" subphase was originally set in the action for October 28, 1991, but has been continued four times and is now set for October 13, 1992. The October 1992 trial date will probably be continued as well, however, because the Court has indicated it is of the view that it is probably pointless to proceed with the litigation while the Co-ordinated Asbestos and Montrose appeals are pending.

Certain matters relating to the coverage underlying London have occurred in the past year. By way of background, London insurers' potential exposure in the case relates to five second and third layer excess policies issued in the 1952-62 period and one two-month first layer excess policy issued in 1978. The 1956-62 policies contain no aggregate limits and attach excess of $1 million per occurrence limits, with no underlying aggregate; the 1978 policy has a $5 million aggregate. Apart from the "property damage" issues, the attachment point issue is of critical importance to the 1956-62 London policies. On this issue, several important developments occurred in the last year, including: (1) Fibreboard discovered a previously unknown 1956-59 first layer excess policy issued by the Employers Reinsurance Corporation ("ERC") and successfully brought ERC into the action; (2) Fibreboard prevailed in a "missing policy" sub-trial against Employers Surplus Lines Insurance Company ("ESLIC") and established that ESLIC issued the first-layer excess policy for the 1959-62 period. Both the ERC and the ESLIC policies contain no aggregate limits. Accordingly, Fibreboard has now established all the coverage underlying London's 1956-62 excess policies.

Finally, on the settlement front, it is also note worthy that Pacific Indemnity, which issued a 1956-57 primary policy with one million per occurrence limits to Fibreboard, conditionally settled both asbestos bodily injury and asbestos building issues this year with Fibreboard for upwards of $360 million. The settlement and the precise amount owed is dependant upon the outcome of the Co-ordinated appeal involving Pacific Indemnity and Fibreboard. Settlement discussions are also ongoing with other carriers, including other primary carriers underlying London insurers. To date, Fibreboard has not made a formal settlement demand on London insurers.

6. Flintkote v. American Mutual. Trial of this action commenced in January, 1991. The trial of the case has been phased as follows: Phase I: policy interpretation (including "trigger"); Phase II: application of the meaning of the policies to the facts of the underlying cases and defences such as concealment and exclusions; Phase III: allocation between and among insurers and insureds; and Phase IV: bad faith.

Phase I commenced in January 1991 and included several subphases. Between January-April, 1991, the Court heard certain defence issues and issues relating to insurer insolvency including "drop down" issues and the involvement of the California Insurance Guarantee Association ("CIGA"). In December 1991, the Court decided these early subphases generally in favour of the insurers. Specifically, the Court found no obligation of the excess insurers to "drop down" over American Mutual which is insolvent.

Between April and December 1991, the Court heard the general interpretation issues relating to both asbestos bodily injury and asbestos building issues, including trigger of coverage. Flintkote in the general interpretation subphase introduced substantial evidence from the ISO and from various underwriters and claims people of the insurers which insured Flintkote/Genstar. In addition, substantial evidence relating to the underlying asbestos bodily injury and building litigation was introduced, including medical evidence of various physicians.

Judge Gyemant heard oral argument on the "trigger" issues involving asbestos building claims in December, 1991 and since then, has requested subsequent briefing on a variety of issues including loss of use, known loss and market share liability. We anticipate that Judge Gyemant will decide the general interpretation subphase in Phase I sometime this summer. Depending on how the Court rules on the Phase I issues, Phase II may start sometime later this year.

7. Celotex/Carey Canada (including Dana policies)

We previously advised that Celotex and Carey Canada filed a massive declaratory judgment action entitled an adversary proceeding in connection with their Chapter 11 Bankruptcy reorganisation pending in Tampa, Florida. Celotex/Carey Canada in this action seek declarations of coverage by the Bankruptcy Court with respect to asbestos bodily injury, asbestos building claims and alleged hazardous waste site environmental claims. The insurers have recognised from the outset of this action that the Bankruptcy Court, which is obligated to maximise the assets of the debtor, is an adverse forum in which to litigate these complex coverage issues. We have pending motions to withdraw the case from the Bankruptcy Court to the U.S. District Court, a court of general jurisdiction.

The Bankruptcy Court recently issued extremely broad, perhaps unprecedented, discovery rulings particularly against the more than forty insurer defendants in the action. These overly broad and burdensome discovery rulings have been questioned in motions for re-hearing and preserved, as necessary, for review by other courts. The massive discovery now underway is intended by the Bankruptcy Court to conclude with a trial currently set for the final two weeks of December, 1992.

8. ASARCO/Lac D'Amiante du Quebec. This action remains inactive in the U.S.

District Court for the Southern District of New York, where it is pending before Judge Sand. ASARCO had obtained a triple trigger decision on asbestos building coverage issues from the U.S. District Court for the District of New Jersey against various early year and umbrella layer insurers. ASARCO sought to expand this decision to bind its excess umbrella insurers by filing an action in state court in New Jersey. The insurers were successful in having this case dismissed, and, pursuant to an agreement with ASARCO, the case is presently pending in New York Federal Court. Certain bodily injury issues are presently before Judge Sand, and all parties have agreed to defer resolution of issues relating to asbestos building claims.

9. Kaiser Gypsum/Kaiser Cement. The Kaiser entities and their primary insurer Truck, which is paying building claim defence costs, have filed an action against the London Market Insurers in Superior Court, San Francisco County, California. While the action has been filed, it has not been served, and settlement discussions are continuing. The Kaiser entities are involved in coverage litigation with Fireman's Fund, a primary carrier. Fireman's Fund sought to have the London Market action co-ordinated with the two bodily injury actions, however, we were successful in convincing the Court to reject this consolidation.

10. GAF. The GAF building claim action remains stayed in Los Angeles County Supreme Court pursuant to a Standstill Agreement among the parties. GAF had previously agreed to dismiss against policies as they exhaust limits by bodily injury payments. As GAF is moving rapidly through its coverage block, it is not expected that this case will become active.


A. Background. In our 1991 Market letter, we outlined our efforts to develop a more scientific, fact-based methodology for the establishment of building claim reserves. Our previous attempts at adopting such a methodology had been hampered by an absence of factual data and by a relatively small statistical universe on which to attempt to project trends.

For 1991 reserving purposes, we engaged the services of Peterson Consulting with the authorisation of the Working Party. Peterson has developed a database which contains information on a number of the more significant building claims. Working with these retained consultants, we developed a new methodology which was utilised for W.R. Grace, U.S. Gypsum and National Gypsum for 1991 reserving purposes. The following is a brief summary and overview of this methodology:

1. Building Square Footage. This method was adopted for use for commercial buildings, and was based on the total remediation costs on a building-by-building basis. The first step in this methodology is to identity all open claims pending against a specific assured, and to input data regarding the individual buildings. To the extent that the necessary data was not available from the complaints or from status reports, we relied on information in the Peterson Consulting database and from other public sources. If the necessary information was still not available, assumptions are made based upon the best available information.

This method involves analysis of the following factors:

- The total building square footage

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 from which liability may arise are structural fireproofing and acoustical plaster. Other products, including pipe and boiler insulation and floor tile, may also be present in the building.

- The next variable is the location within the building of the product. For example, asbestos materials may be contained on structural support members of the building, as well as on ceiling and floor decks. Pipe and boiler insulation and vinyl floor tile would quite obviously be located in other sections of the building.

- An average national per-square foot abatement cost was calculated based on industry surveys for commercial buildings. Reserves are based on the following costs:

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

Next, a determination is made as to whether a specific product of the individual assured has been identified in the complaint or in discovery. If so, the assumption was made that the plaintiff had some factual basis for the allegation, and a correspondingly higher share of the liability is allocated to that assured. The same assumption is made if the assured is the sole defendant named in the underlying litigation.

- If other defendants are also named in the litigation, allocations are made to the assured based upon the type of product involved. For example, as W.R. Grace is the major defendant in structural fireproofing cases, if Grace and other defendants were named in an action and structural fireproofing had been identified, Grace was assigned 75% of the possible damages. Because Grace is not known to be involved in pipe and boiler insulation, if Grace and other defendants were named, and multiple products were identified, only 10% of the projected cost would be allocated to Grace. The calculations for the 3G's are monitored to make certain that there is no overlapping of reserves.

The foregoing analysis is conducted on a building-by-building basis for commercial buildings.

2. Number of Building/Model Building Method. This second method is utilised primarily for schools, municipal buildings, and colleges and universities. This method is based on the fact that little has been revealed to date about individual buildings owned by school districts, municipalities, or colleges. These cases are generally either class actions or large consolidations where little or no discovery on individual buildings has been conducted. Further, there may be thousands of buildings in an individual lawsuit.

This methodology is based on the assumption that there is likely to be minimal variation in the individual buildings within the class or consolidation. while individual commercial buildings may vary tremendously, we have found that schools, municipal buildings and college buildings typically do not vary significantly from other buildings in the same category. Accordingly, for these categories of buildings, the reserving analysis is based on the following factors:

- The number of buildings in the action.

- The frequency that various types of products appear in average buildings of the type under consideration. For example, based on statistics, it is statistically estimated that 23.2% of school buildings contain structural fireproofing and 54.9% contain some type of acoustical plaster.

- Average quantity of product in buildings. This factor assumes that there is such a thing as an "average" building, which contains a certain amount of structural fireproofing and acoustical plaster. For example, the available evidence indicates that an "average" school building contains 24,400 square feet of structural fireproofing and 15,400 square feet of acoustical plaster.

- Once the amount of product in the building has been calculated, each defendant is assigned a share of the estimated removal cost. Once again, using W.R. Grace as an example, we have calculated that Grace would be responsible for approximately 75% of the costs associated with structural fireproofing and 10% of the costs associated with acoustical plaster.

- Next, per-square foot abatement costs are calculated. These costs were estimated to be lower than for commercial buildings, as sections of school buildings can be isolated more readily than for commercial buildings, and remediation work on school buildings can be accomplished during periods of time when the schools are closed. Accordingly, average costs are estimated to be $20.00 per square foot for structural fireproofing and $15.00 per square foot for acoustical plaster.

- A similar methodology was then utilised for municipal buildings and for colleges and universities.

3. Case Specific Method. For certain buildings, there is credible information available as to the size of the buildings, the identity of the particular asbestos product in the building, and the removal cost. Where this level of information is available, the specific costs are based on the known data with only minimal assumptions being utilised.

4. Maximum Amount Method/Assumed Case Amounts. For certain cases, involving a large number of buildings, little data is available. Such cases would include the National School Class Action, and other large-multiple building cases. For other large cases, certain data was available, which, when projected to conclusion, yielded results which were in excess of $100 million.

For cases with only limited data, certain assumptions are made as to what the ultimate liability of each of the 3 G's would be in each case, and an assumed amount of liability was utilised. For the large-scale cases, which generated significant abatement costs, the potential liability for each of the 3 G's was "capped" at what we believed to be an appropriate value for the case.

C. Comparison of Actual Results with Projected Results. We receive confidential

data from W.R. Grace regarding dismissals and settlements, and we obtain publicly-available information regarding jury verdicts. In comparing the overall results of dismissed, settled, and tried cases with projected results, we find a variation approximately 1%. However, within this overall comparison, there were dramatic differences in the evaluations in the individual cases. We also received detailed information from Grace on the buildings involved in the Dayton II settlement. Applying the methodology to this case produced results which were consistent with the provable damages.

Despite some individual discrepancies, we believe that the overall methodology is credible, and that the results will improve as we obtain more detailed and accurate data from the underlying cases.

We have accordingly obtained the Working Party's approval to continue to utilise this methodology with respect to W.R. Grace, U.S. Gypsum and National Gypsum. The one significant change for 1992 purposes will be that the formerly "capped" cases will be run at full value. There are only four such cases in connection with W.R. Grace, and three for U.S. Gypsum and National Gypsum. In view of the significant confidential settlement by W.R. Grace of the Dayton II action, we no longer believe it is appropriate to establish artificial caps on the potential costs. Further discussion on the effect of the removal of capping will be provided in each of the individual reports for the 3 G's.

During the past year, we had also requested that Peterson Consulting apply this methodology for the Dana/Celotex account. This is a most complex situation, where Celotex is claiming indemnification from Dana pursuant to contract with respect to the Smith & Kanzler product "Spraycraft". It is impossible at this stage to predict the ultimate legal outcome, and it is in the interim most difficult to attempt to quantify the respective liabilities of Dana and Celotex in connection with "Spraycraft" claims. We have provided Peterson Consulting with copies of the complaints in which Dana has been named directly as a result of Spraycraft, or in which Celotex has demanded indemnification from Dana.

Peterson has run reserve projections on the basis of the above methodology for the claims which have been identified. While we find that this information is most helpful, we do not believe' that it is appropriate to use the projections as the exclusive basis for 1992 reserving. Our conclusion is based on the fact that there has been no settlement or disposal of any claims by Dana, and the cases which Celotex has resolved were not clearly identified as "Spraycraft" cases. Accordingly, we have no factual basis on which to make a determination as to whether the methodology would prove correct for the Dana/Celotex cases. While we are utilising the methodology projections as a basis for reserving, we are making independent judgment in establishing reserves for these two accounts.

D. Discount for Potential Successful Defences. The figures resulting from the 1991 methodology were 100% figures, which reflected the full estimated costs of the abatement of asbestos-containing material in the buildings. while plaintiffs claim damages in addition to abatement costs, such as loss of use, lost rents, etc., we believe that the best overall estimate of potential damages is the abatement or removal costs.

In view of the fact that the manufacturers have and will likely continue to be successful in trying certain cases, and that settlements in many cases will be for less than the full potential value, we applied, for 1991 reserving purposes, an overall 30% discount to the projections as generated by the methodology.

We find that manufacturers did continue to successfully defend cases in the past year, I and, as a number of favourable settlements have been obtained, we have obtained the Working Party's authority to continue to apply this discount for 1992 purposes.

E. Defence Costs. For 1991 purposes, with respect to W.R. Grace, U.S. Gypsum and National Gypsum, we applied a defence loading recommendation on a percentage basis to the indemnity reserves. We applied 80% to W.R. Grace and U.S. Gypsum, which was below the historical defence cost ratio, which was on approximately a 100% basis. For National Gypsum, in view of the fact that chapter 11 Bankruptcy proceedings had stayed all litigation, we applied a zero loading for expense.

While historical ratios had been much higher, our recommendations were based on the fact that all of the assureds had incurred substantial start-up costs, in educating local defence counsel, in searching archives for relevant documentation, in establishing computer support databases, and in developing expertise of national counsel. We did not anticipate that these costs would continue at the previous high levels.

Furthermore, we considered that the percentage ratio of defence costs would be significantly less when the assureds settled or tried high-value cases. Actual experience confirms that this was correct, as certain large judgments and settlements resulted in defence costs which were, on a percentage basis, below the 10% level.

W.R. Grace and U.S. Gypsum are facing a number of potentially large value cases in the coming year, and as we consider that costs, on a percentage basis, are likely to be significantly less, we have recommended a 50% defence cost loading for W.R. Grace and U.S. Gypsum for 1992 reserving purposes.

With respect to National Gypsum, as this assured continues to enjoy the protection of the Bankruptcy Court, we are continuing to recommend a zero defence loading.

F. Assureds Other Than the 3 G's. It continues to be most difficult to evaluate the potential exposure faced by the defendants other than the 3 G's. while certain of these defendants did manufacture sprayed fireproofing or acoustical plaster products, most of them manufactured and distributed only pipe and boiler products, cement products, or floor tile or other construction materials. The results of cases tried to date against these defendants have not produced any significant judgments, and there have not been many noteworthy settlements by this group of defendants.

With specific reference to the floor tile defendants, such as GAF, Armstrong and Flintkote, we are encouraged by the recent decision from the U.S. Circuit Court of Appeals for the 10th Circuit in the Adams-Arapahoe case, which reversed a judgment based on jury verdicts against GAF. The trial itself had resulted in a judgment against GAF and Flintkote for a total amount of approximately $44,000. Based upon this minimal recovery, and the subsequent reversal by the Appeals Court, we do not consider it likely that plaintiffs' counsel will in the future vigorously pursue only floor tile manufacturers in most cases. If a case can be structured so that the plaintiff proceeds to trial against the surface material defendants as well as the pipe and boiler or floor tile defendants, it is possible that plaintiff will keep all defendants in for as long as possible.

Our prior reserve recommendations for the non-3 G defendants have been based on an overall sum of $4 billion, allocated at $2 billion for schools and $2 billion for commercial buildings. We had within this overall allocation assigned the various assureds to tiers, assigning a fixed amount of indemnity, which included an allocation for defence, to each tier.

We continue to recommend this tiered approach based on the $4 billion universe. While we have some cause for optimism that many of these defendants will be successful in escaping significant liabilities, we believe that it is too early to reduce or remove any recommended reserves. Our concern is in part based upon the fact that of the 3 G's, National Gypsum is in bankruptcy and U.S. Gypsum is experiencing financial difficulties, making W. R. Grace likely to be the only viable defendant. In the event that financial recoveries are no longer available from the 3 G's, it is likely that plaintiffs will focus their attention on the other defendants, which could increase the potential exposures of these parties. The allocation to each specific assured will be discussed in the individual year-end reports.

G. Allocation To Policy Years. In our 1991 reserving, we had recommended that reserves be allocated to the 3 G's on a first discovery basis, which was consistent with the decisions by the trial courts in both U.S. Gypsum and in W. R. Grace. As National Gypsum was pending in the same District Court as W. R. Grace, we anticipated a discovery trigger ruling in said case as well.

As discussed in Section III of this Letter, the Judge in National Gypsum has in fact adopted an installation trigger theory, which is inconsistent with the discovery ruling in W. R. Grace. Our view is that the installation trigger is not likely to be affirmed on appeal, as we believe that the discovery ruling by Magistrate Bernikow is better reasoned and finds much greater support in New York law. Also, it is not clear that Judge Martin was aware that an installation trigger would provide National Gypsum with no coverage in view. of policy exhaustion on bodily injury claims.

Accordingly, we continue to recommend that the reserving basis for the 3 G's be the first discovery of the presence of asbestos with the knowledge that testing, maintenance or remediation was required.

We had in 1991, provided the Market with reserve potentials on an alternative basis for 3 G's, based upon the methodology used in prior years and for other assureds, which is a modified comprehensive trigger basis. This basis involves an 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 1985, or the earliest date of a full asbestos exclusion.

We will continue to provide alternative figures on this modified comprehensive trigger basis for the 3 G's, and we will continue to recommend reserves on said basis for all accounts other than the 3 G's. Despite the fact that we are in part basing 1992 Dana/Celotex reserves on the new methodology, we do not believe it appropriate to apply a discovery trigger, as litigation is pending in Celotex/Carey Canada Bankruptcy Court, which is likely to seek to maximise available insurance coverage. The sole exception to this methodology is Armstrong, where, in view of the ruling by Judge Brown in the Co-ordinated case and based on unique coverage issues, we have set reserve potentials on a modified basis, allocation 60% of the reserves to the 1950 to 1960 period.

The difficulty in establishing reserves on a first discovery basis is that we have very little data on which to base the assignment of discovery years. This information is developed, if at all, very late in the discovery proceedings, and we accordingly do not have any sound statistical basis for calculating discovery years.

For 1991 purposes, we had, using our best judgment, developed a matrix of percentages for schools and colleges on the one hand and for commercial and municipal buildings on the other hand. These percentages, we considered, reflected the fact that schools began to learn of the need to inspect and test asbestos containing materials staring in approximately 1980, whereas commercial buildings did not begin to test and inspect until a slightly later point in time.

Based upon data develop during the past year, we continue to Consider that the ‘bell curve" which we have utilised for schools is approximately correct, and we are not recommending any changes, so that 1992 percentages will be as follows:













Post 85














With respect to commercial buildings, we have found based on some empirical evidence and based upon logical evaluation, that the discovery dates for such buildings are likely to be moving slightly forward in time. Accordingly, we have modified the percentage allocation of commercial and municipal building claims. Also, as we have noted that universities and colleges were not required to test at the same time as primary and secondary schools, we are including colleges and universities in the commercial and municipal category for allocation of percentages.

Commercial, et al












Post 85














We would point out that in a limited number of cases against W.R. Grace, we have obtained actual discovery dates. Where we have such confirmed dates, paid or reserved amounts will be spread using actual dates.

H. Application of "Spill-over". In our 1991 reserve recommendations, we did not apply "spill-over", which 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, to any assureds. As the 3G's were reserved on a discovery trigger, which is a single date of loss, any claims which could not be allocated to policy years were in effect allocated back to the assured. In past years we had applied "spill-over" to GAF as well in view of its status as a target defendant in bodily injury claims. However, as GAF is now almost fully reserved, spill-over should not have any impact.

Accordingly, spill-over will not be a factor in our allocation of 1992 property damage reserves. Spill-over will continue to be a factor for certain assureds for bodily injury claims.

V. Conclusion

We believe that this report provides an overview of the significant developments, in the underlying cases and in the declaratory cases, and provides an overview of the reserving methodology. Any unique aspects applicable to the individual assureds will be discussed separately in the reports prepared on each account by counsel.

We continue to see mixed results, both in the defence of the underlying cases and in the coverage rulings being handed down by various courts. It continues to be most difficult to attempt to discern any trends in these inconsistent results.

We have overall been reasonably satisfied with the actual case results following from the reserving methodology adopted for W.R. Grace, U.S. Gypsum and National Gypsum for 1991 purposes, and thus we are using the same overall methodology, with some fine tuning, for 1992 purposes.

Problems related to asbestos in buildings continue to be quite significant, as the major manufacturers face significant liabilities, potentially extending into the many hundreds of millions of dollars.

We will continue to keep the Market closely advised of developments, and we will provide our individual reports on each assured over the course of the next few weeks.

Attachment A


1. Chrono1ogica1 Summary of Significant Decisions Since May, 1991

1. A panel of the Fifth Circuit U.S. Court of Appeals ruled on May 15, 1991, that the former majority shareholder of an asbestos manufacturing facility that was converted into a shopping center is not liable for cleanup costs as an "owner or operator" under the Superfund Act (Riverside Market Development Corp. et al. v International Building Products. Inc. et al. 5th Cir.).

2. Insurance companies have a duty to defend an insulation company against asbestos property damage claims, the Illinois Supreme Court ruled in May, 1991 in U.S. Fidelity & Guaranty Co. v. Wilkin Insulation Co., Sup. Ct. IL. The trial court had held that the insurance companies did not owe Wilkin and the other contractors a defence. The First District Illinois Appellate Court reversed, holding that the asbestos materials in the buildings constituted property damage which was covered by CGL policies. The State Supreme Court affirmed.

3. U.S. Judge Robert G. Renner in T.H.S. Northstar Associates v. W.R. Grace & Company, et al D. Minn, 3rd Div., ruled on June 11, 1991, that asbestos contamination was not a risk within the reasonable expectation of the parties to a commercial transaction and therefore does not constitute economic loss. Thus, the plaintiff will be permitted to pursue a recovery of tort damages.

4. In Pascagoula Separate School District v. U.S. Gypsum, et al SD MS, Judge Walter J. Gex II of the U.S. District Court for the Southern District of Mississippi on June 17, 1991, ruled that "the economic loss doctrine is not applicable to asbestos property damage cases", which would also permit the plaintiff to seek recovery of tort damages.

5. In La Placita Partners v. Northwestern Mutual Life Insurance Co., 6th Cir. U.S.C.A., The Sixth Circuit U.S. Court of Appeals affirmed on June 19, 1991 a lower court ruling which held that the seller of real estate does not have a duty to disclose the existence of spray-on asbestos fireproofing to an "As Is" purchaser who conducts and relies upon his own inspection of the property.

6. Because ACandS Inc. and E.J. Bartells Co. installed asbestos-containing materials in school buildings more than 10 years before Portland's School District No. 1J brought suit against them, on June 20, 1991 U.S. District Judge Helen J. Frye granted the defendants' motions for summary judgment based on the statute of repose (School District No. IJ. Multnomah County, Oregon v. ACandS, Inc. et al , D. Ore).

7. On June 21, 1991, The Board of Education of Baltimore County moved for certification to appeal a defence verdict rendered on June 4, 1991, in favour of Keene Corporation. (Board of Education of Baltimore County v. Keene Corn. et al. Baltimore County Circuit Court.) The defence verdict had been based, we understand, on the "no hazard" defence.

8. The Wisconsin Supreme Court on June 24, 1991 overturned a state trial court's dismissal of an asbestos property damage complaint. The Supreme Court determined that the plaintiffs' damages were not for economic loss and were therefore compensable in tort (North-ridge Co. et al. v. W.R. Grace & Co. WI Sup Ct.).

9. On July 2, 1991, the North Carolina Court of Appeals upheld a $1.8 million verdict for the Rowan County Board of Education in The Rowan County Board of Education v. U.S. Gypsum Co., N.C. App. Ct. In a January, 1990, verdict, a jury had found for Rowan with respect to product identification in three schools and on negligence and fraud and misrepresentation claims. The award included $812,984.21 in compensatory damages and $1 million in punitive damages. The N.C. Supreme Court agreed on Oct. 2, 1991 to review the verdict against U.S. Gypsum.

10. The Colorado Court of Appeals in J & S Enterprises Inc. d/b/a Borg's Children's Cottage, et al. v. Continental Casualty Co. affirmed on July 5, 199l, the lower District Court's decision and ruled that a policyholder is not covered for damage from the release of asbestos fibres in its retail store because of a contamination exclusion in the policy. Further, the Court found that the "sudden and accidental" exception to the policy's pollution exclusion cannot be applied to the contamination exclusion to provide coverage. The trial court, in granting summary judgment to Continental Casualty Co., found that a "perils not insured" provision excluded coverage. Under the "perils insured" provision, the contract provided for coverage against loss from all hazards of accidental direct physical loss. The "perils not insured" provision excluded coverage for "contamination, dampness of atmosphere, change of temperature, corrosion or rust."

11. On July 25, 1991, the Missouri Circuit Court granted Keene's motion for judgment notwithstanding the verdict as to a $6.25 million award of punitive damages in Kansas City v. W.R. Grace & Co. et al. The court held that Kansas City's evidence failed to satisfy the strict requirements for a submissible case of punitive damages under Missouri law. The Judge said that there was no evidence that Keene had actual knowledge of a health hazard from asbestos in place.

12. In New Hampshire-Vermont Health Services Corp., d/b/a Blue Cross and Blue Shield of New Hampshire v. U.S. Mineral Products Co. D/NH, Senior U.S. District Judge Coughlin on July 29,

1991, ruled that asbestos will need to be removed at some time from a Concord, New Hampshire building and that the reasonable cost of removal of asbestos-containing material is a proper measure of damages for purposes of a new trial on the issue. We are unaware of the disposition of this case.

13. In Beavercreek Local Schools v. Basic, Inc. OH Sup. Ct., on Aug. 7, 1991, the Ohio Supreme Court declined to review a March 1991 determination by the state appellate court that the asbestos property damage claims raised against Basic, Inc. by the Beaver-creek Local Schools are time-barred under the applicable statute of limitations.

14. In UNR Industries, Inc. et al. v. Continental Casualty Co. et al. 7th Cir., a panel of the Seventh Circuit U.S. Court of Appeals ruled on Aug. 29, 1991, that a district court judge failed to take adequate account of the effect of the bankruptcy of UNR Industries, Inc. when he dismissed the company's action against Continental Casualty (CNA) for payment of asbestos-related claims. The panel reversed a ruling of the Northern District of Illinois dismissing UNR's claims against CNA on the ground that UNR had not yet suffered a loss that would trigger CNA's obligations under its excess policies. The Seventh Circuit found that the UNR reorganisation plan was a judgment that triggered CNA's policy.

15. On Sept. 27, 1991, in Thomas Miano, et al. v. Everitt J Hehn. et al. Nassau Co. Sup. Ct., N.Y., Judge George Murphy held that, because of an "absolute pollution exclusion," an insurer has no duty to defend or indemnify a policyholder that removed insulation from a residence, dispersed asbestos fibres and contaminated the premises.

16. On Oct. 10, 1991, in Blue Cross and Blue Shield of South Carolina v. W.R. Grace & Co. D SC Greenville Div., U.S. Judge Joe F. Anderson, Jr. approved the settlement between W. R. Grace & Co. and Blue Cross and Blue Shield of South Carolina after Grace withdrew its appeal with the Fourth Circuit Court of Appeals.

17. Personal injury liability policies issued to Fibreboard Corp. by Hartford Accident & Indemnity Co. do not provide coverage for underlying asbestos-in-building claims, a San Francisco Superior Court judge ruled Nov. 8, 1991, in Fibreboard Corp. v. Continental Casualty Co. et al. Calif. Super. Ct., San Francisco City. Judge Chesney determined that Hartford had exhausted its aggregate limits on products hazards under earlier policies and that subsequent policies had an asbestos products exclusion. The Judge refused to extend the Personal Injury section of the policy to asbestos building claims.

18. In Concordia College Corp. v. W.R. Grace & Co - et al., D MN, the U.S. District Judge Paul A. Magnuson of the District of Minnesota on Nov. 16, 1991, dismissed as time-barred the property damage claims of Concordia College, which opted out of the federal college class action in 1990.

19. On Nov. 21, 1991, an Ohio jury, finding an asbestos-containing acoustical ceiling plaster not defective, returned a verdict for Basic, Inc. in Worthington City Schools v. Basic Inc. Ohio Comm. Pls. Ct., Franklin Co. Basic raised a no hazard defence. The school district had claimed $485,000 in asbestos removal damage. On January 14, 1992, Worthington City Schools filed a notice of appeal with the Franklin County, Ohio, Court of Appeals.

20. In State of Mississippi v. Flintkote Co. et a1. Jackson Ct., MS Cir. Ct., on Dec. 20, 1991, Judge Clinton E. Lockard ordered two insurance carriers, Maryland Casualty and Commercial Union, to reimburse W.R. Grace & Co. for the costs of the manufacturer's settlement in the State's asbestos property damage action. Grace had made settlement on the State's claims regarding Allen Hall, in which the insured's products had been installed prior to the building's completion in 1972.

21. Asbestos-containing products in state-owned buildings constitute "property damage" which triggers insurance coverage, Jackson County Circuit Court Judge Clinton E. Lockard ruled on Dec.

23, 1991, in Mike Moore, etc. v. The Flintkote Co. et al. v. Maryland Casualty Co., et al. Jackson Co. Cir. Ct., Miss. The Judge ruled that money spent to remove or contain asbestos products constitutes "damages" and that the damage to the buildings continues from the time the asbestos was installed until it is removed or contained.

22. In The Maryland Casualty Co. v. W.R. Grace & Co. et al, S.D.N.Y., Judge Leonard Bernikow on December 23, 1991, entered final judgment on his ruling which adopted the discovery trigger of coverage for W.R. Grace & Co.'s public building and school claims.

23. In Stonewall Insurance Co. V. National Gypsum Co., et al S.D.N.Y., the U.S. Magistrate Judge Leonard Bernikow issued a report and recommendation on December 31, 1991, that insurers who had issued primary and excess policies to National Gypsum Co. in the early 1980's cannot decline coverage based on the "known risk" doctrine. Bernikow added that if the insurers had wanted to exclude coverage for asbestos claims, they should have done so specifically.

24. In a January 3, 1992, ruling, U.S. District Judge Joe J. Fisher favoured plaintiffs on the economic loss doctrine and statute of repose in a massive consolidated case involving Texas school districts, colleges, cities, counties and airports (Dayton Independent School District, et al. v. U.S. Mineral Products Co., et al., E. D. Texas, Beaumont Div.).

25. In Hebron Public School District No. 13 of Morton County v. U.S. Gypsum Co. 8th Cir., Hebron Public School District No. 13 had its $832,000 verdict against U.S. Gypsum Co. upheld by the Eighth Circuit Court of Appeals in a Jan. 8, 1992, opinion. This ruling occurred after Hebron received a favourable ruling from the North Dakota Supreme Court on certified questions on the North Dakota statute of limitations and the statute of repose. Hebron filed an action in 1986 seeking to recover the costs of removing USC's Audicote asbestos-containing ceiling plaster from a school building. on March 19, 1992, USC Co. paid the total judgment with interest and costs after the 8th Circuit U.S. Court of Appeals denied rehearing on March 9.

26. In Bass et al. v. Tax Commission of the City of New York et al., N.Y. Sup Ct., App. Div., First Dept., the Appellate Division on January 9, 1992, affirmed a January 1991 determination that NY City's property tax assessment on a 50-story Manhattan skyscraper must be reduced due to the presence of asbestos-containing materials. This case dealt with One New York Plaza. The aggregate assessment for the challenged 6-year period was reduced from $951 million to $581.634 million.

27. In Trust Co. Bank v. U.S. Gypsum Co., 5th Cir., the Fifth Circuit U.S. Court of Appeals on January 21, 1992, affirmed the September 1990 dismissal by a Mississippi federal court of an asbestos property damage complaint regarding a Georgia-sited bank building. The Court held that defendant U.S. Gypsum enjoyed the protection of Mississippi's six-year statute of repose for claims arising out of damage to realty. The 5th Circuit U.S. Court of Appeals on Feb. 24, 1992, denied Trust Co. Bank of Georgia's petition for rehearing.

28. In Mt. Lebanon School District et al. v. W.R. Grace & Co PA Sup. Ct., on January 23, 1992, the Court affirmed the January 1991 grant of a new trial given to a Pittsburgh area school district after its $21 million in asbestos property damage claims against W.R. Grace & Co. were denied by a jury in 1989. The Mt. Lebanon School District has been pursuing suit for the cost of abating Grace's Monokote-3 fireproofing.

The new trial was granted on the basis that the 1989 trial jury had been improperly charged on the statute of limitations. The Superior Court agreed with the plaintiff that it was entitled to invoke the nullum tempus doctrine, which precludes the statute of limitations regarding the State. The Court also addressed and rejected Grace's economic loss argument.

29. Holding that it was fire and not asbestos regulations that damaged an insured property, the Supreme Court of Montana determined on January 28, 1992, that an insurance policy covers the cost of asbestos removal necessitated by reconstruction of an insured's fire-damaged property (Farmers Union Mutual Insurance Co. v. Gary Oakland Mont. Sup. Ct.). In this case, the presence of asbestos in a fire-damaged building increased the cost of cleanup and repair.' This is but one of a series of cases, predominantly occurring in California, which deal with "efficient cause," "sufficient cause," and "proximate cause" of property damage. Essentially, the courts are holding that if one of the contributing causes of an accident is covered, the entire loss is covered. In this Montana case, although an asbestos exclusion was included in the primary policy, fire damage was included; therefore, the Court held that the entire loss was covered.

30. On Jan. 29, 1992, a jury returned a defence verdict in a property damage case involving a Brevard County, Florida, court-house in Brevard County v. W.R. Grace & Co. M.D. Pa, Orlando Div. The case involved a 1967 installation of Grace's Monokote 3 fireproofing in a 6-story courthouse building in Titusville, Fla. The county removed the asbestos between 1989 and 1990 and filed suit against Grace in June 1989. Grace raised state-of-the-art and no hazard defences. Brevard County later filed a motion for a new trial or judgment as a matter of law to recover damages.

31. The Ninth Circuit U.S. Court of Appeals ruled on January 31, 1992, that, while Benjamin Franklin Federal Savings and Loan Association may have suffered economic loss by having to clean up asbestos, there was no "direct physical loss" because its building remained basically unchanged. Based on this finding, the court determined that the S&L was not covered by Great Northern Insurance Co. for rip-out costs and lost rental income (Great Northern Insurance Co. v. Benjamin Franklin Federal Savings & Loan Assoc. 9th Cir.).

32. In California Sansome Co. et al v. U.S. Gypsum Co. et p1. ND CA, the U.S. District Judge Eugene F. Lynch on Feb 4, 1992 vacated an earlier order. The Judge granted W.R. Grace & Co. and U.S. Gypsum Co.'s bid for a new trial on their statute of limitations defence. The judge vacated the order almost one year after a federal jury in San Francisco concluded that the asbestos property damage claims of two high-rise owners were not time-barred. In April, 1992, Judge Eugene F. Lynch further held that plaintiffs, the owners of two buildings, have the burden of proving by a preponderance of evidence at trial that they fall within an exception tolling the three-year California statute of limitations.

33. In North Woodward Building Limited Partnership v. U.S. Mineral Products Co. E.D. Mich, S. Div., Judge George E. Woods on February 20, 1992 dismissed on statute of limitation grounds a suit brought by a limited partnership that was aware of the presence of asbestos in its building more than three years before it filed suit but had not discovered any contamination at that time.

34. Since tort claims which the prior owner of a building could have asserted against asbestos manufacturers would have been time-barred, such claims brought by the current owner are also barred by the statute of limitations, New York Supreme Court Justice Stanley Sklar held in a Feb. 24, 1992, opinion, dismissing a property damage action by the owners of 888 7th Avenue (888 7th Ave. Assoc. Ltd. Partnership v. Air Sprayed Insulations. Inc., et al. N.Y. Sup. Ct. N.Y. Co.).

35. A Missouri state court jury returned the largest verdict to date in asbestos property damage litigation, with an award of $17.9 million against W.R. Grace & Co., in a case brought by Clayton Center Associates (Clayton Center Associates et al. v. W.R. Grace & Co - et al. Mo. Cir. Ct., St. Louis Co.). The Feb 28, 1992 verdict included $15.4 million in actual damages and $2.5 million in punitive damages. Clayton Center sued Grace to recover the costs of removing the manufacturer's Monokote fireproofing which was applied in 1972-1973 to steel beams and columns above suspended ceilings in Clayton Center's Chromalloy Plaza Building in Clayton, Mo. On March 13, 1992, Grace filed a motion for judgment notwithstanding the verdict or a new trial.

36. Holding that plaintiffs cannot benefit from Minnesota's revival statute or the fraudulent concealment exception to the ten-year repose period, Chief U.S. District Judge Donald D. Alsop in February, 1992 granted defendants' motion for summary judgment, dismissing claims relating to three Minnesota buildings as time-barred in Metropolitan Federal Bank of Iowa. et al., v. W.R Grace & Co., et al. D. Minn., 3rd Div.

37. Based on forum non conveniens, a Texas District Court Judge (in W.R. Grace & Co.--Conn. v. Admiral Insurance Co., et al., Texas Dist. Ct., Harris Co.) dismissed in February, 1992 all defendant insurers from a Texas action because of two lawsuits on file in federal court in New York. Grace sought coverage for asbestos-related building claims brought against it by the owners of three high-rise buildings in Houston. The Fifth Circuit held that Texas had no interest in the coverage dispute, that New York had the most significant relationship to the contracts, and that New York law should be governing.

38. In Adams-Arapahoe School District No. 28-J v. GAF Corn et al 10th Cir. and Adams-Arapahoe School District No. 28-J v. U.S. Gypsum Co., et al., 10th Cir), the Tenth Circuit Court of Appeals on March 23, 1992 reversed judgments for the Adams-Arapahoe School District No. 28-J and sent the cases back to the trial court (U.S. District Court for the District of Colorado) for entry of directed verdicts in favour of the defendants.

a. The GAP Case:

In the GAF case, the Circuit Court of Appeals reversed the trial court's finding that the Adams-Arapahoe School District had suffered "physical injury" as a result of (1) Vinyl Asbestos Floor tile (VAT) in its buildings or (2) costs associated with the removal of VAT.

The School District had identified three distinct injuries caused by GAF's VAT:


Injury Due to the Mere Presence of VAT;


Injury due to the Nature of the risk inherent in VAT;


Injury in the nature of contamination caused by past releases of VAT.

The Circuit Court found that the first two injuries claimed, above, did not constitute a claim for physical damage to property, and that the School District failed to meet its burden of proof regarding the third injury claimed.

1. Specifically, in detail, the Court said neither strict liability nor negligence is actionable unless it results in physical damage to property. The Court held that the presence of asbestos in VAT, which involved increased renovation costs, is an economic loss.


2. There can be no tort liability based on the mere risk of

3. "Tort actions can be maintained only where plaintiffs explicitly allege and subsequent evidence demonstrates contamination of the building or other property as a result of fibres released from asbestos products. In other words, only asbestos contamination constitutes a physical injury compensable under tort law." The Court held that the School District failed to meet its burden of proving contamination.

b. The U.S. Gypsum case:

In Adams-Arapahoe School District No. 28-J v. U.S. Gypsum Co. et al., 10th Cir., the Court said that its reasoning was similar to its reasoning in the GAF case. The Court stated that "evidence of a mere possibility that a condition may have existed is not sufficient to support a verdict."

39. In Thorpe Insulation v. Superior Court of the State of California for the County of Riverside. Respondent, County of San Diego, Real Party in Interest, Calif. App. Ct., 4th App. Dist., the California Court of Appeal ruled on April 3 that the County of San Diego's causes of action did not accrue until and unless actual asbestos contamination occurred. The Court held that the mere presence of asbestos-containing material in county courthouses was not actionable under theories of either strict liability or negligence because such presence resulted only in economic losses consisting of lessened value of the defective product as distinguished from physical injury to other property.

40. In Norwest Bank Nebraska, N.A. v. W.R. Grace & Co.--Conn. 8th Cir, the Eight Circuit Court of Appeals on April 6, 1992 affirmed a trial court's dismissal of a building owner's property damage case against W.R. Grace & Co. as barred by Nebraska's 10-year statute of repose. The case was filed in December, 1989, and Grace argued that Norwest's action was barred by the statute of repose on Jan 22, 1980, ten years after Grace's product was sold to Norwest.

41. On April 24, 1992, a federal judge held that releases from Petroleum Specialties Inc.'s oil refinery storage facility were not covered by policies issued by Zurich Insurance Co. and Employers Insurance of Wausau because the releases were neither "sudden or accidental" nor took place during Zurich's and Wausau's policy periods. (Employers Insurance of Wausau v. Petroleum Specialties Inc., E.D. Mich.) The Michigan Department of Natural Resources had filed a formal complaint against PSI on Nov. , 1991 to enforce an administrative order. The complaint alleged, among other things, the presence of asbestos in open garbage bags at the storage facility. The judge ruled that the alleged contamination and pollution activities were long-standing and not accidental.

42. In April, 1992, in Marshall Independent School District v. United States Gypsum Co., E.D. Texas, Marshall Div., U.S. District Judge William Wayne Justice ruled that an issue of fact remained as to whether asbestos-containing acoustical ceiling plaster manufactured by U.S. Gypsum Co. was an "improvement" or a "component part of an improvement" under Texas law. The Judge cited Texas case law which distinguishes an "improvement" (subject to repose) from a "component part of an improvement" (not subject to repose).

43. In John E. Corbally, et al. v. W.R. Grace & Co., N.D. Texas, Dallas Div., U.S. District Court Judge Barefoot Sanders held in May 1992 that asbestos-containing fireproofing is an "improvement" and therefore subject to the Texas statute of repose. The Judge noted that "component part of improvements" are not protected by the statute of repose.

44. In The Port Authority of New York and New Jersey v. Allied Corp., et al., S.D., N.Y., Judge Charles L. Brieant held in May, 1992 that a claim asserted by the Plaintiffs under the Racketeer Influenced Corrupt Organisations Act (RICO) is not barred by the statute of limitations and sufficiently pleads fraud. The action involves approximately 1,000 structures, and plaintiffs claim that defendants intentionally misrepresented asbestos-containing materials as safe for use in buildings. The Judge rejected defendant's argument that a RICO claim accrues when an injury actually occurred. He held that "a separate claim accrues each time the plaintiff discovers or should have discovered an injury."

45. In Central Dauphin School District v. Basic Inc. Pa. Comm. Pls. Ct., Dauphin Co., Judge Clarence C. Morrison held in May 1992 that the doctrine of nullum tempus applies in this property damage case. Thus, the School District is immune from a statute of limitation defence, since the District was seeking to enforce a strictly public right.

2. Review of Property Damage Litigation to Date By Legal Issues

A. Product Identification

1. On July 2, 1991, the North Carolina Court of Appeals upheld a $1.8 million verdict for the Rowan County Board of Education in The Rowan County Board of Education v. U.S. Gypsum Co., N.C. App. Ct. In a January, 1990, verdict, the jury had found for Rowan with respect to product identification in three schools and on negligence and fraud and misrepresentation claims. The award included $812,984.21 in compensatory damages and $1 million in punitive damages.

2. In School District No. IJ Multnomah County, Oregon v. ACandS Inc. D OR, Judge Helen Frye on November 18, 1991, dismissed with prejudice Multnomah's claims against Fibreboard Corp with respect to twelve buildings and Owens-Corning Corp. with respect to four for lack of product identification.

B Economic Loss Doctrine (Pure Economic Loss is a Contract Issue and Not a Tort Issue).

1. U.S. Judge Robert G. Renner in T.H.S. Northstar Associates v. W.R. Grace & Company, et al D.Minn, 3rd Div., ruled on June 11, 1991, that asbestos contamination was not a risk within the reasonable expectation of the parties to a commercial transaction and therefore does not constitute economic loss.

2. In Pascagoula Separate School District v. U.S. Gypsum Company, et al., S.D. Miss., S. Div., U.S. District Judge Walter J. Gex III held in a June 17, 1991, opinion that the economic loss doctrine does not apply to asbestos property damage cases.

3. The Wisconsin Supreme Court 6n June 24, 1991, overturned a state trial court's dismissal of an asbestos property damage complaint. The Supreme Court determined that the plaintiffs' damages were not for economic loss and were therefore compensable in tort (Northridge Co. et al. v. W.R. Grace & Co. WI Sup Ct.).

4. The N.J. Superior Court Appellate Division on July 18, 1991, reversing a lower court's decision in Livingston Board of Education v. U.S. Gypsum. et al. held that the economic loss doctrine does not apply to actions brought by school districts for asbestos removal damages. Further, the Court ruled that schools share the state's immunity from the statute of limitations.

5. On Aug 6, 1991, in Philadelphia, In Re: Asbestos School Litigation, E.D. Pa., Judge Kelly, holding that the economic loss doctrine does not apply, denied Kaiser Cement Corp.'s motion for partial summary judgment as to the named Pennsylvania school class action plaintiffs' conspiracy, concert of action, and intentional tort claims.

6. On Aug. 23, 1991, Judge Hiller B. Zobel issued a memorandum and order in Commonwealth of Massachusetts v. Owens-Corning Fiberglas Corp., et al. and Boston Housing Authority v. Armstrong World Industries Inc., et al. in the Mass. Super. Ct., holding that the economic loss doctrine does not apply, and that Boston Housing Authority had alleged "an adequate basis for the imposition of liability based on market share."

7. In a January 3, 1992, ruling, U.S. District Judge Joe J. Fisher favoured plaintiffs on the economic loss doctrine and statute of repose in a massive consolidated case involving Texas school districts, colleges, cities, counties and airports (Dayton Independent School District, et al. v. U.S. Mineral Products Co., et al. E.D. Texas, Beaumont Div.)

8. On Jan 23, 1992, the Pennsylvania Superior Court affirmed a trial court's decision to grant plaintiff a new trial (Mt. Lebanon School District and Mr. Lebanon High School Authority v. W.R. Grace & Co.). The new trial was granted on the basis that the 1989 trial jury had been improperly charged on the statute of limitations. The Superior Court agreed with the plaintiff that it was entitled to invoke the nullum tempus doctrine, which precludes the statute of limitations regarding the State. The Court also addressed and rejected Grace's economic loss argument.

9. The Ninth Circuit U.S. Court of Appeals ruled on January 31, 1992, that, while Benjamin Franklin Federal Savings and Loan Association may have suffered economic loss by having to clean up asbestos, there was no "direct physical loss" because its building remained basically unchanged.. Based on this finding, the court determined that the S&L is not covered by Great Northern Insurance Co. for rip-out costs and lost rental income. (Great Northern Insurance Co. v. Benjamin Franklin Federal Savings & Loan Assoc. 9th Cir.)

10. In Adams-Arapahoe School District No. 28-J v. GAF Corp. et al 10th Cir. and Adams-Arapahoe School District No. 28-J v. U.S. Gypsum Co.. et al. 10th Cir), the Tenth Circuit Court of Appeals on March 23, 1992 reversed judgments for the Adams-Arapahoe School District No. 28-J and sent the cases back to the trial court (U.S. District Court for the District of Colorado) for entry of directed verdicts in favour of the defendants . In the GAF case, the Court held that the presence of asbestos in VAT, which involved increased renovation costs, is an economic loss.

11. In Thorne Insulation V. Superior Court of the State of California for the County of Riverside. respondent County of San Diego. Real Party in Interest, Calif. App. Ct., 4th App. Dist., the California Court of Appeal ruled on April 3, 1992 that the County of San Diego's causes of action did not accrue until and unless actual asbestos contamination occurred. The Court held that the mere presence of asbestos-containing material in county courthouses was not actionable under theories of either strict liability or negligence because such presence resulted only in economic losses consisting of lessened value of the defective product as distinguished from physical injury to other property.

C. No Risk/No Hazard

1. On Nov. 21, 1991, an Ohio jury, finding an asbestos-containing acoustical ceiling plaster not defective, returned a verdict for Basic, Inc. (Worthington City Schools v. Basic Inc. Ohio Comm. Pls. Ct., Franklin Co.) Basic raised a no hazard defence.

2. On Jan. 29, 1992, a federal court jury returned a defence verdict in a property damage case involving a Brevard County, FL, courthouse (Brevard County v. W.R. Grace & Co. M.D. Fla, Orlando Div.) The case involved a 1967 installation of Grace's Monokote 3 fireproofing in a 6-story courthouse building in Titusville, Fla. The county removed the asbestos between 1989 and 1990 and filed suit against Grace in June 1989. Grace raised state-of-the-art and no hazard defences.

D. Statutes of Limitation/Repose

1. Because ACandS Inc. and E.J. Bartells Co. installed asbestos-containing materials in school buildings more than 10 years before Portland's School District No. lJ brought suit against them, on June 20, 1991 U.S. District Judge Helen J. Frye granted the defendants' motions for summary judgment based on the statute of, repose (School District No. IJ. Multnomah County. Oregon v . ACandS, Inc. et al., D. Ore).

2. In Beavercreek Local Schools v. Basic. Inc. OH Sup. Ct., on Aug. 7, 1991, the Ohio Supreme Court declined to review a March 1991 determination by the state appellate court that the asbestos property damage claims raised against Basic, Inc. by the Beaver-creek Local Schools are time-barred under the applicable statute of limitations.

3. In Concordia College Corp. v. W.R. Grace & Co., et al., D MN, the U.S. District Judge Paul A. Magnuson of the District of Minnesota on Nov. 16, 1991, dismissed as time-barred the property damage claims of Concordia College, which opted out of the federal college class action in 1990.

4. In a Jan. 3, 1992, ruling, U.S. District Judge Joe J Fisher favoured plaintiffs on the economic loss doctrine and statute of repose in a massive consolidated case involving Texas

school districts, colleges, cities, counties and airports (Dayton Independent School District, et al. v. U.S. Mineral Products Co., et al. E.D. Texas, Beaumont Div.).

5. In Hebron Public School District No. 13 of Morton County v. U.5 Gypsum Co. 8th Cir., Hebron Public School District No. 13 had its $832,000 verdict against U.S. Gypsum Co. upheld by the Eighth Circuit Court of Appeals in a Jan. 8, 1992, opinion. This ruling occurred after Hebron received a favourable ruling from the North Dakota Supreme Court on certified questions on the North Dakota statute of limitations and the statute of repose. Hebron filed an action in 1986 seeking to recover the costs of removing USG's Audicote asbestos-containing ceiling plaster from a school building. On March 19, 1992, USG Co. paid the total judgment with interest and costs after the 8th Circuit U.S. Court of Appeals denied rehearing on March 9.

6. In Trust Co. Bank v. U.S. Gypsum Co., 5th Cir., the Fifth Circuit U.S. Court of Appeals on January 21, 1992, affirmed the September 1990 dismissal by a Mississippi federal court of an asbestos property damage complaint regarding a Georgia-sited bank building. The Court held that defendant U.S. Gypsum enjoyed the protection of Mississippi's six-year statute of repose for claims arising out of damage to realty. The 5th Circuit U.S. Court of Appeals on Feb. 24, 1992, denied Trust Co. Bank of Georgia's petition for rehearing.

7. On Jan 23, 1992, the Pennsylvania Superior Court affirmed a trial court's decision to grant plaintiff a new trial in Mt. Lebanon School District and Mt. Lebanon High School Authority v. W.R. Grace & Co.. The new trial was granted on the basis that the 1989 trial jury had been improperly charged on the statute of limitations. The Superior Court agreed with the plaintiff that it was entitled to invoke the nullum tempus doctrine, which precludes the statute of limitations regarding the State.

8. In California Sansome Co. et al v. U.S. Gypsum Co. et al ND CA, the U.S. District Judge Eugene F. Lynch on Feb 4, 1992 vacated an earlier order. The Judge granted W.R. Grace & Co. and U.S. Gypsum Co.'s bid for a new trial on their statute of limitations defence; The judge vacated the order almost one year after a federal jury in San Francisco concluded that the asbestos property damage claims of two high-rise owners were not time-barred. In April, 1992, Judge Eugene F. Lynch further held that plaintiffs, the owners of two buildings, have the burden of proving by a preponderance of evidence at trial that they fall within an exception tolling the three-year California statute of limitations.

9. In North Woodward Building Limited Partnership v. U.S. Mineral Products Co. E.D. Mich, S. Div., Judge George E. Woods on February 20, 1992 dismissed on statute of limitation grounds a suit brought by a limited partnership that was aware of the presence of asbestos in its building more than three years before it filed suit but had not discovered any contamination at that time.

10. Since tort claims which the prior owner of a building could have asserted against asbestos manufacturers would have been time-barred, such claims brought by the current owner are also barred by the statute of limitations, New York Supreme Court Justice Stanley Sklar held in a Feb. 24, 1992, opinion, dismissing a property damage action by the owners of 888 7th Avenue (888 7th Ave. Assoc. Ltd. Partnership v. Air Sprayed insulations Inc., et al. N.Y. Sup. Ct. N.Y. Co.).

11. Holding that plaintiffs cannot benefit from Minnesota's revival statute or the fraudulent concealment exception to the ten-year repose period, Chief U.S. District Judge Donald D. Alsop in February, 1992 granted defendants' motion for summary judgment, dismissing claims relating to three Minnesota buildings as time-barred in Metropolitan Federal Bank of Iowa. et al. v. W.R. Grace & Co. et al. D. Minn., 3rd Div.

12. In Norwest Bank Nebraska. N.A. v. W.R. Grace & Co.--Conn. 8th Cir, the Eight Circuit Court of Appeals on April 6, 1992 affirmed a trial court's dismissal of a building owner's property damage case against W.R. Grace & Co. as barred by Nebraska's 10-year statute of repose. The case was filed in December, 1989, and Grace argued that Norwest's action was barred by the statute of repose on Jan 22, 1980, ten years after Grace's product was sold to Norwest.

13. In April, 1992, in Marshall Independent School District v. United States Gypsum Co., E.D. Texas, Marshall Div., U.S. District Judge William Wayne Justice ruled that an issue of fact remained as to whether asbestos-containing acoustical ceiling plaster manufactured by U.S. Gypsum Co. was an "improvement" or a "component part of an improvement" under Texas law. The Judge cited Texas case law which distinguishes an "improvement" (subject to repose) from a "component part of an improvement" (not subject to repose)

14. In John E. Corbally, et al. v. W.R. Grace & Co., N.D. Texas, Dallas Div., U.S. District Court Judge Barefoot Sanders held in May 1992 that asbestos-containing fireproofing is an "improvement" and therefore subject to the Texas statute of repose. The Judge noted that "component part of improvements" are not protected by the statute of repose.

15. In The Port Authority of New York and New Jersey v. Allied Corp., et al., S.D., N.Y., Judge Charles L. Brieant held in May, 1992 that a claim asserted by the Plaintiffs under the Racketeer Influenced Corrupt Organisations Act (RICO) is not barred by the statute of limitations and sufficiently pleads fraud. The action involves approximately 1,000 structures, and plaintiffs claim that defendants intentionally misrepresented asbestos-containing materials as safe for use in buildings. The Judge

rejected defendant's argument that a RICO claim accrues when an injury actually occurred. He held that "a separate claim accrues each time the plaintiff discovers or should have discovered an injury."

16. In Central Dauphin School District v. Basic Inc. Pa. Comm. Pls. Ct., Dauphin Co., Judge Clarence C. Morrison held in May 1992 that the doctrine of nullum tempus applies in this property damage case. Thus, the School District is immune from a statute of limitation defence, since the District was seeking to enforce a strictly public right.

17 Aug 92

Mendes & Mount: Report to Underwriters at Interest C/- London Market Claims Services Ltd.

Re: Abate, et al. v. AC&S, Inc., et al., Consolidated Action-Circuit Court for Baltimore City

We provide the following report regarding the massive consolidated action recently tried to a conclusion in Baltimore, Maryland, which resulted in settlements and verdicts which will have a significant impact on both asbestos producers and their insurers, including the London Market. The resolution of the problem of crowded court dockets by consolidating large groups of asbestos claims is also quite certain to have a significant impact on future cases.


Since the advent of massive filings by asbestos claimants commencing in the mid-1970s, the traditional approach by courts has been to deal with individual cases, or small groups of similar cases. The common law tort system requires that each claimant prove all aspects of his negligence or strict liability claim against each defendant. Claimants must establish that they were exposed to an asbestos product manufactured by the defendant, that the exposure resulted in an asbestos-related disease, and that the defendant is liable, based either on negligence or strict products liability. Each defendant is entitled to assert its individual defences to these actions.

In the absence of a settlement, a full jury trial would be required in each of these cases. Each case would require proof of extensive medical evidence through the use of experts, and extensive liability evidence, as claimants sought to establish early knowledge by the defendants of the dangers of asbestos-related products. In addition, claimants generally sought punitive damages, which also required proof of each defendant's knowledge of the dangers of asbestos, as well as proof of the extent of defendants' assets.

With the significant growth in the number of individual filings, which have been consistent at approximately 2,000 per month over the past few years, it quickly became apparent that the United States judicial system would collapse if compelled to deal with these cases on an individual basis in accord with traditional tort concepts.

Efforts were made by plaintiffs, supported by some defendants, to have class actions certified. However, as there are significant differences in the claims by individual claimants, class actions have been found by the Courts to be inappropriate. Each claimant was exposed to asbestos under different conditions, and the damages sustained by each individual claimant, in terms of wage loss and medical expenses, differ from other claimants.

With class actions having been rejected, trial courts began to develop innovative strategies for dealing with the problem. One of the approaches which courts began to utilise was a consolidated approach, where a large group of claimants would be combined, and trial would proceed on certain issues which were common to all claimants and all defendants. Among such common issues were whether asbestos products were dangerous, the knowledge of each individual defendant with respect to the dangers of asbestos, the disease process itself, and whether defendants were liable for punitive damages.

This approach was first utilised in a large-scale case by the U.S. District Court for the Eastern District of Texas in the Cimino litigation. Judge Robert Parker selected a small number of defendants, whose cases were tried to separate juries, with the juries being requested to make common findings with respect to all defendants. Rulings on these common issues were then binding on the plaintiffs and defendants with respect to subsequent cases. Judge Parker also directed that the jury, if it found that punitive damages should be awarded, should arrive at a multiplier for each defendant, which would be applied to the award of compensatory damages for each plaintiff.

While Cimino is still subject to judicial challenge in the U.S. Court of Appeals for the Fifth Circuit, other courts have adopted this approach as an expeditious means of resolving problems of crowded court dockets. The staggering liabilities faced by defendants in these actions have also provided a powerful impetus towards settlement, which courts also urge in an effort to process a large volume of cases.


The State of Maryland is one of the more significant jurisdictions in the United States in terms of asbestos claims which have been filed. Maryland was the site of a number of major steel production plants, including the Bethlehem Steel plant at Sparrows Point, as well as the location of a number of shipyards. Due to the large number of filings, and the inability of the court system to process claims, Judge Marshall Levin, specially assigned to preside over asbestos cases in Baltimore City Circuit Court, ordered a consolidation of 8,555 individual claimants. Judge Levin, currently age 71, has already extended his retirement by approximately five years in an effort to resolve the asbestos problems.

In addition to the cases which actually form a part of the consolidation, there are approximately 700 other cases pending before Judge Levin, bringing the total claims to approximately 9,200.

Judge Levin ordered that the initial trial proceed with respect to six claimants, three to be selected by the defendants and three to be selected by the plaintiffs. Not unexpectedly, claimants under such circumstances will select severe cases, involving mesothelioma or lung cancer, and defendants will select non-impaired cases such as pleural placques. Plaintiffs in this case selected Lawrence Leaf, Ira Russell and Leggett McNeil. Leaf and Russell were building tradesmen who were deceased at the time of trial, and McNeil suffered from lung cancer.

The defendants selected Paul Cannamucio, Thomas Godwin and William Kalwa, all of whom alleged pleural disease.

With respect to defendants, the various complaints had. named as many as 100 different defendants. Judge Levin, however, found this to be an unworkable number, and he strongly suggested that the plaintiffs select 15 defendants to proceed to trial.

Judge Levin again strongly suggested that the dismissals against all except for the 15 defendants be on a "with prejudice" basis, which means that plaintiffs' future rights against said defendants are extinguished. This is a unique situation, as claimants who had originally named these other defendants may well have been able to prove exposure to said defendants' products. Claimants therefore at least potentially had claims against defendants other than the 15 selected for trial. The issue of Judge Levin's ordering of "with prejudice" dismissals of these plaintiffs may well be raised on appeal.

Clearly, the non-settling defendants, the defendants who proceeded to final jury verdict such as GAF and Pittsburgh Corning, have preserved their contribution claims against all other defendants. We anticipate that the issue of cross-claims will be a significant appeal issue.

Plaintiffs selected the following defendants for the initial trial:

AC&S, Inc.

Armstrong World Industries, Inc.

GAF Corp.

Keene Corp.

Fibreboard Corp.

Owens-Corning Fiberglas Corp.

Owens-Illinois, Inc.

Pittsburgh Corning Corp.

Quigley Company

MCIC, Inc.

Porter Hayden Company

W.R. Grace

United States Gypsum

National Gypsum

Metropolitan Life Insurance Company

Most of the plaintiffs are represented by local attorney Peter Angelos, who controls most of the asbestos bodily injury cases in Maryland. For the trial of the case, Angelos associated Ron Motley from South Carolina, a highly-successful asbestos plaintiffs' lawyer with a nation-wide practice.

Under the procedure established by Judge Levin, the initial jury would determine the liability of the defendants for the manufacture of asbestos-related products, whether the original six plaintiffs were injured as a result of exposure to asbestos products manufactured by the defendants, the damages to which the original six were entitled, and a punitive damage multiplier. The findings of either liability or non-liability, and the punitive damage multiplier, would be applicable to the remaining cases in the consolidation. Individual mini-trials would then be held on the issue of damages sustained by the remaining claimants.

At or shortly after the start of trial, a number of the defendants reached settlement, including the Center for Claims Resolution defendants, i.e., National Gypsum, U.S. Gypsum, Quigley, and Armstrong World Industries. Settlements were also agreed by Wellington signatories Fibreboard, Owens-Illinois and Owens Corning Fiberglas, and by non-signatory W.R. Grace.

GAF, which is a member of the Center for Claims Resolution, had declined to participate in the settlement as negotiated by the CCR. GAF did not believe that participation in the settlement would be in its best long-term interests, and it accordingly revoked the CCR's authority to negotiate settlement on its account. At the same time, the CCR, pursuant to the Producer Agreement, delegated to GAF the right to handle and defend the Baltimore consolidated claims. This is the first instance of which we are aware where a CCR member declined to participate in specific settlements.

There are differences in the parties' views as to whether a settling defendant preserves its right to obtain contribution by way of cross-claims against other defendants. Owens Corning Fiberglas, which entered into a settlement, has purported to preserve its contribution claims against all other defendants, including those defendants who are not among the 15 selected for trial. The CCR, on the other hand, which also entered into a settlement, has taken advice and is of the view that a settling defendant waives any contribution claims against other defendants.

At the time of trial, which commenced in March of 1992, the remaining defendants were:

GAF Corp.


Keene Corp.

MCIC, Inc.

Pittsburgh Corning Corp.

Porter Hayden Company

While five of the six are nationally-known asbestos defendants, MCIC, Inc. is a local contractor, which had presumably been named by the plaintiffs in order to prevent the defendants from removing the case to Federal Court on a diversity basis.


Phase I of the trial dealt with the issues of whether the defendants were liable to the plaintiffs, on the basis of either negligence or strict liability due to a failure to warn of the inherent dangers of asbestos products.

The thrust of the plaintiffs' attack, led by Attorney Motley, was that all of the defendants knew, at least as of the 1930s, that asbestos potentially caused serious diseases in individuals exposed to fibres. A great deal of the trial testimony involved proof of this knowledge by the defendants, as well as the presentation of a great deal of medical testimony as to asbestos disease processes.

Defendants in response asserted the "state-of-the-art" defence, arguing that their past conduct should not be judged by 1992 standards, and that they had at all times complied with then-existing health regulations. Defendants argued that the knowledge of the scientific community back in the 1930s and 1940s had quite obviously not progressed to its current state, and that the defendants should not be judged by present standards. Defendants argued that early studies regarding the dangers of asbestos fibres focused on individuals who were heavily exposed to raw fibres, including miners and plant-workers who manufactured products containing asbestos. Defendants argued that this medical evidence should not have caused them to conclude that asbestos could be harmful to other types of workers who were not exposed to the same heavy dose levels.

The trial, which was being heard by a jury of ten women and two men, lasted approximately four months, during which time more than 100 people testified, including 29 workers who alleged that they sustained asbestos-related diseases. More than 1 million pages of documents were produced during discovery, and the trial record runs in excess of 22,000 pages.


On July 10, 1992, following 12 hours of deliberations, the jury found that all remaining defendants were liable on the basis of negligence and strict liability. The jury found that the manufacturers should have been aware of the dangers of asbestos fibres commencing in 1938.

The instructions to the jury, and the jury verdict form, are lengthy, and we are at this time attempting to obtain copies for a full review.


Following the Phase I decision, the same jury began deliberations as to the extent of damages to be awarded to the original six plaintiffs. On July 23, 1992, the jury found in favour of three plaintiffs, not surprisingly the three selected by the plaintiffs' counsel, Leaf, Russell and McNeil, awarding total damages of $11.2 million after 13 hours of deliberation. The jury found in favour of the defendants with respect to the three plaintiffs whom the defendants selected, Kalwa, Cannamucio and Godwin.

The awards to the three claimants are allocated as follows:



Defendants Liable

Estate of Lawrence Leaf

$4.2 million

AC&S, Porter, PCC

Estate of Ira Russell

$3.7 million

MCIC, Porter, PCC

Leggett and Geneva McNeil

$3.3 million

GAF, Keene, MCIC, Porter, PCC

Under Maryland law, each defendant found liable is jointly and severally responsible for a pro-rata share of the judgment, reduced by any set-offs from settling defendants.


The same jury in the next Phase was required to determine whether punitive damages should be assessed against the defendants. Prior to the jury's deliberations, Judge Levin excluded AC&S and MCIC from consideration for punitive damages, allowing the jury to consider awards as against the remaining four defendants.

On July 30, 1992, after seven hours of deliberations, the jury determined that GAF, Keene, Pittsburgh Corning and Porter Hayden would be liable for punitive damages based on their knowledge of the dangers of asbestos dating back to the 1930s.

The next issue to be determined by the jury was a multiplier, or a figure which would be used in calculating punitive damages. The multiplier would be applied to the compensatory damage award, both for the original three plaintiffs and for all remaining claimants in the consolidation who are found to be entitled to compensatory damages.

After approximately one day of deliberations, the jury decided upon the following multipliers:





Pittsburgh Corning


Porter Hayden


Recent Maryland case law on punitive damages requires that the plaintiffs prove that defendants "consciously or deliberately disregarded harm to the consumer", a standard which had been considered would be difficult to meet. While we do not as yet know exactly how the jury was instructed on this issue, we believe that there will be strong attacks on the punitive damage award in the appeals which are expected to be filed.


The Maryland Court of Appeals, the highest Court in the State, has ruled that public policy does not preclude insurance coverage for awards of punitive damages. In the 1978 case of First National Bank of St. Mary's v. Fidelity & Deposit Company, the Court found that the plaintiff bank was entitled to be indemnified for punitive damages assessed against it in an underlying malicious prosecution suit.

The nature of the underlying conduct which gave rise to the award of punitive damages was apparently not a factor in the First National Bank of St. Mary's case, as the underlying claim was based on an intentional tort, i.e., malicious prosecution.

Of the defendants against whom punitive damages were awarded, Keene does not appear to have any significant remaining insurance coverage, and Porter Hayden does not appear to have any direct coverage in the London Market. Both GAF and Pittsburgh Corning do have significant coverage in the Market, although issues may exist with respect to the availability of this coverage.

Both GAF and Pittsburgh Corning are signatories to the Wellington Agreement, which in Appendix B, Conditions Defences and Exclusions Reserved by Subscribing Insurers in Paragraph 10 provides that the following defences are preserved to the insurers:

10. That the insurance policy in question does not cover punitive damage awards due to an express exclusion or because the law of the State governing the insurability of punitive damages in the particular case holds that punitive damage awards are not covered by insurance because of public policy or contract interpretation; provided, that if such holding is by other than the highest court of the state in question, the Subscribing Producer and the Subscribing Insurer each shall pay 50 percent of the punitive damage award. Any disagreement as to whether punitive damage awards are covered by insurance shall be resolved by negotiation, followed by non-binding alternative dispute resolution, followed, if necessary, by litigation. Any such resolution shall apply, in all respects, to the affected parties notwithstanding any other provision of the Agreement.

It is not clear from the above provision in the Wellington Agreement whether the parties are obligated to look to the law of the jurisdiction where the underlying tort case arose, or whether another jurisdiction's substantive law might be controlling with respect to the punitive damage issue on ordinary choice-of-law principles.


Among the future issues to be resolved at the trial level is the issue of credits available to the remaining defendants as a result of settlement by other defendants.

With the conclusion of the initial phases of the consolidated action, we fully expect that the defendants found liable will pursue all appellate remedies. We anticipate that all aspects of the proceeding, including the consolidated aspects will be challenged on appeal.

As plaintiffs were unsuccessful in three of the original cases, we consider it likely that there will be cross-appeals on these cases.

We can also expect appellate challenges on the punitive damage aspects, including challenges to the application of the punitive damage multiplier applicable to all cases in the consolidation.

It is not clear whether Judge Levin would agree to stay the mini-trials on damages for the remainder of the consolidation pending the outcome of the appeal. We believe that Judge Levin will not agree to such a stay, and that damage assessments in the remaining cases will commence in the very near future.

The total damage exposure presented by the remaining cases will quite obviously depend on the nature of the injuries sustained by the remaining claimants. Counsel for the claimants will no doubt contend that the original group of six were a fair representative sampling of the entire group, whereas defendants believe that there are only a very limited number of serious disease cases, involving lung cancer or mesothelioma, and that the overwhelming bulk of the remaining claimants are no more impaired than the three claimants who received no damages in the trial.


We can report that our office will be involved in an audit of claim files maintained by the Center for Claims Resolution in connection with the Baltimore settlement. We have selected approximately 250 random files for review, and we will audit these files and meet with CCR officials regarding the settlement. We have advised the CCR that we wish to discuss the following issues:

1. Proof that each claimant was exposed to products of CCR signatory producers;

2. Proof that each claimant has, as a result of this exposure, sustained a compensable asbestos-related disease;

3. Proof of actual exposure dates as well as diagnosis dates in order to make sure that settlement amounts are properly applied to Coverage Blocks;

4. Allocation of the total settlement amount to individual claimants;

5. Proper billing of settlement amounts on a "named only" basis.

We will at the time of this audit seek to obtain additional details regarding the terms of the settlement negotiated by the CCR. In accord with its standard operating procedures, the CCR has obtained releases for all of its producer-members, and we understand that the Agreement provides some form of protection to the members from the settling plaintiffs. We will provide additional details as same are developed.

We anticipate that the first billings for the CCR settlement will reach the Market in September 1992, and we accordingly intend to complete this audit by late August, and to thereafter make a report of our findings and provide our recommendations to the Market.

In accord with the current billing methodology of the CCR, all producers named in the plaintiff's complaint will be billed for a share of the settlement for that plaintiff. Other than the producers selected for trial, CCR producers with significant namings include Turner & Newall, Certainteed, Union Carbide, Pfizer, Dana and A. P. Green.

Plaintiffs' counsel have compiled extensive product identification documentation for all of the major job sites in Maryland. We believe that plaintiffs would have been able to establish product identification against any named producer.

We will of course continue to keep the Market advised of developments.

20 Aug 92

CentreWrite letter. Re: Asbestos White Papers

Thank you for your letter of 18th August. When I read the article in question I anticipated we might get some questions but decided that it wasn't worthwhile writing to the Financial Times to correct their story as that always seems to me to be self defeating.

Let me start from the beginning to give you the full background without any of the slants in the article. To be fair to the journalist involved when trying to put a complete story into a thousand words or so always creates problems.

By the middle of 1981 it was becoming quite clear to leading underwriters in the London market and their claims people that the question as to how asbestos products liability losses should be handled under excess of loss reinsurance contracts was becoming confused and needed a discussion as to how reinsurance contracts out of the United States to this market should respond. A number of leading underwriters therefore produced a position paper in September 1981 setting out those underwriters views and encouraging a dialogue amongst all the parties involved both in London and the US, or anywhere else where this issue was relevant. The main cause of the confusion at that time was that a number of US insurance companies when considering making claims on their reinsurers seemed to be taking different views as to how the contracts should respond. The September 1981 paper was then sent via brokers to reinsureds in the USA and was widely discussed and considered. Subsequent to that document being produced a further paper was then written in December 1981 to crystallise the London underwriters views following the dialogue produced in the first paper. The conclusions spelled out in the second document have basically received unanimous support both in this market and around the world even though in some cases the support was slow in coming. These two papers have now become known as the "Asbestos White Papers of 1981."

The suggestion in the article that we came to this conclusion for any reasons other than what was believed had always been the intention of underwriters is inaccurate. To be fair to Mr. Hazell I believe what he was describing as the "biggest catastrophe ever to hit the insurance industry' was not the white papers, which he in fact signed, but rather the whole subject of asbestos and what asbestos products liability losses have done to the insurance industry.

I should like to repeat therefore that the white papers which have had incredibly wide circulation and discussion over the years did nothing more than confirm the position held by London underwriters as to how their reinsurance contracts should respond. One is glad to say that a number of people including one or two ceding insurance companies having read the White papers were converted to our views which is as I said earlier are pretty well universally accepted.

I hope this rather long explanation does more justice to the subject that the Financial Times article and that you can put any names' concerns to rest.

Should you have any questions do not hesitate to contact me. For your information purposes, I am enclosing copies of these White papers so that you can get a better flavour even though you will probably find them somewhat technical and turgid in parts.

23 Aug 92

Hurricanes Andrew, USA, Florida and Louisiana; estimated cost $15. 55bn.

28 Aug 92

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

With further reference to the captioned account, we submit herewith for the Market's consideration our 1992 Year-End Reserve Report.


We have provided Underwriters and Companies with our general Market Letter for 1992, which discusses the overall status of bodily injury asbestos-related claims. Said Letter provides detailed background information regarding the facts and assumptions which underlie our reserving philosophy. We will not repeat herein the full details of said Letter, and we would refer the Market to said Letter, which should be read in conjunction with this report.

We have also provided London Market Claims Services with a copy of the 1992 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.

A. Background

As Underwriters will recall, limits afforded to Owens Corning Fiberglas ("OCF") 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 also 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."

London Market Policy 614/NC7070, provided $24.5 million of indemnity coverage, with costs-in-addition to limits. This policy was fully reserved at last year-end with expenses estimated at $32,666,667 for the London Market's participation, based upon OCF's historical expense averages. However, we recently received OCF's "Updated Forecast" of expenses attributable to the 1979 policy period. We reported the details of this forecast in our 27 July 1992 report to Underwriters, the details of which will not be repeated herein. In short, the assured now advises that expenses are outpacing indemnity payments by a 2 to 1 margin. Total aggregate limits for the 1979 London Market policy were $50 million. The London Market policy 614/NC7070 accounted for $24.5 million, or 49% of the total limits. Consequently, an additional $16,333,333 of defence expenses would be required to satisfy the defence expenses as forecast by OCF. We continue to await substantiation by OCF of the revised defence expenses. The indemnity limits of the policy were consumed in April of 1992.

Policy NC8099 effective 1 September 1979 to 1980 provides $20.5 million part of $50 million of coverage, with expenses impairing aggregate limits. Our 1991 Year-End Report recommended that policy NC8099 be fully reserved. We, of course, continue that recommendation although we have modified the expenses versus indemnity allocation of the policy limits based on OCF's revised expense to indemnity ratio. This policy will be fully consumed during 1992.

Maryland Consolidated Litigation

OCF recently concluded a settlement agreement with the Angelos firm in the Maryland consolidated actions. This agreement covers 7,086 cases in the consolidated trial and 1,530 unconsolidated cases. The remaining cases in the consolidated trial were represented by other plaintiff attorneys with whom OCF is also finalising settlement agreements.

The total settlement covering 8,676 cases amounts to $140 million and is to be made in instalment payments through 1997. The settlement agreement has several key terms which relate to the payment of present and future claims. These are as follows:



OCF has retained the right to pursue its contribution claims against numerous third party defendants which do not include the 15 direct defendants involved in the consolidated trial. OCF will receive a credit for 50% of proceeds from these third party defendants, subject to certain limits.,



OCF will receive a credit for 50% of any recoveries by the Angelos firm from the third party defendants on the plaintiff's direct claims in the unconsolidated cases, subject to certain limits.



The Angelos firm will not pursue consolidations of more than 25 cases against OCF in Maryland.



The Angelos firm will not file against OCF in Maryland any suit in which plaintiff's injury does not meet minimum impairment criteria.

The agreements with the remaining plaintiffs in Maryland will contain similar provisions. As Underwriters are aware, the jury awarded $11.5 million in compensatory damages and a punitive damage multiplier to three of the six plaintiffs, who represented a sampling of the consolidated plaintiffs. These awards were rendered against GAF Corp., Keene Corp., Pittsburgh Corning Corp. and Porter Hayden Corp. The amount of compensatory damages for the remaining 8,500 plaintiffs will be determined in mini-trials, wherein plaintiffs will only need to prove that they have sustained an asbestos-related injury.

B. Claims Universe

The assured has provided the following loss history, which is current through 31 May 1992:





Total Claims Filed




Total Outstanding




Total Claims Closed




With Payment




Without Payment





Paid Indemnity




Average Indemnity


Closed Cases




Settled Cases




Outstanding Indem.




(Avg Closed Indem


x Open Claims)


Paid Expense





Outstanding Expense





Average Monthly Filing






Open Claims (102,703) includes a projection of 12,425 new filings through 31 December 1992 (1,775 claims/month x seven months (June to December)).



1992 Outstanding Indemnity and Expense were obtained by straight line multiplication. The historical average for all payments for settled cases is $14,111. We are, however, for 1992 reserving purposes using an average indemnity of $15,000 per claim and an average expense cost of $20,000 per claim. Remaining London Market coverage is fully reserved and will be exhausted during the remaining months in 1992.


C. Coverage

Policy 614/NC7070 Effective 8 March to 1 September 1979

London Market Policy 614/NC7070 provided $24.5 million of umbrella coverage, with costs-in-addition to limits. The indemnity limits of this policy were exhausted following OCF's April 1992 billing. However, OCF continues to attribute defence costs to this policy, where expenses were incurred prior to the exhaustion of aggregate limits. As Underwriters will recall, OCF defence costs are allocated to policies based upon actual costs incurred and paid. Defence costs are first summarised by the month in which the service was performed. The costs are then allocated to those policies to which claims were allocated during that month, and costs are allocated in the same ratio that claims were allocated. Billings for defence costs and expenses attributable to a particular month are often received by OCF several months after services are rendered. This results in the billing of defence expenses to policies for some time after exhaustion.

Policy NC8099 Effective 1 July 1979 to 1980

London Market Policy NC8099 provided $20.5 million umbrella coverage, including costs, above $100 million underlying coverage. With the exception of first excess coverage limits of $25 million provided by Northbrook, the coverage underlying this London policy has been exhausted. Currently, Northbrook and OCF are engaged in a declaratory judgment action in Lucas County, Ohio, Court of Common Pleas.

It is Northbrook's position that each asbestos claim for bodily injury is a separate occurrence. OCF has asked the court to recognise that, in every case where a court has held that individual claimants constitute separate occurrences, the policy holder has sought that determination. OCF further argues that the definition of occurrence in the Northbrook policy runs entirely counter to the case law it cites in support of their "multiple occurrence" position.

We have discussed in detail in our 1991 Year-End Reserve Report our understanding regarding the Northbrook policy and have, therefore, not repeated it in this year-end. Regardless of which definition of "occurrence" is utilised, the London Market policies would still ultimately be called upon to indemnify OCF for its losses subject to the "each occurrence" or "aggregate annual" limits set forth in the underlying policies.

D. Reserves

Based upon the currently available information and the paid and outstandings indicated above, distribution of these losses over the coverage block indicated in "Schedule A" results in losses coming through to the Underwriters' excess layers as indicated in the attached "Schedule A". As Underwriters are aware, OCF's April 1992 billing exhausted the indemnity obligations of London Market policy 614/NC7070. Based upon the assured's revised expense forecast, we recommend a revised expense reserve of $49 million for this Year-End for London Market policy 614/NC7070. We continue to recommend that NC8099 be fully reserved in accordance with the "Schedule A" and note that this policy will be fully consumed during 1992


We have submitted a separate Market Letter regarding property damage issues. Said letter provides a detailed summary of the current status of property damage underlying litigation, declaratory coverage litigation, as well as our reserving philosophy. Once again, we would suggest that the Market refer to said Letter in conjunction with this report.

As was fully discussed in our prior reports, OCF faces a significant potential liability exposure in the property damage area. We are, as discussed in our Market Letter, continuing to allocate liabilities for this assured based upon a total of $4 billion claim universe, which consists of $2 billion for schools and $2 billion for commercial buildings. We continue to allocate to OCF a .5% share, or $10 million for schools, and 1% share, or $20 million for commercial buildings, for a total allocation of $30 million.

Our general reserving practice for property damage claims for the non-3G's is to allocate claims on a modified triple-trigger basis, which reflects the fact that the later years of coverage are more seriously exposed than the earlier years of coverage. Our normal allocation is as follows:


1950 - 1960

10% of $30 million = $ 3 million


1960 - 1972

30% of $30 million = $ 9 million


1972 - 1983

60% of $30 million = $18 million

In keeping with our general practice, we have applied bodily injury losses first to remaining limits. Based upon the projected exhaustion of all London Market coverage in response to bodily injury losses, no reserves attach based on these property damage claims.


We continue to recommend that Underwriters and Companies maintain a reserve of $25,000, in addition to amounts paid to date, for the policies as listed in the attached "Schedule A."


As in our prior reports, we again caution that the above recommendations with regard to bodily injury and property damage do not reflect any consideration for IBNR claims, as the recommendations are based solely on claims actually filed.

In view of the fact that both bodily injury and property damage claims are continuing to be filed against this assured, all Syndicates and Companies should make provisions for IBNR as they in their best judgment deem necessary.

We will continue to keep Underwriters advised of developments.

Schedule A






Per. /No. /Limits

B.I Indemnity

B.I. Expenses

B.I Indemnity

B.I. Expenses


8 Mar 79 to 1 Sept 79 614/NC7070


24.5m p/o 50m 4th layer x 100m






1 Sept 79/80



20.5m p/o 50m 4th layer x 100m






14 Aug 92


1 Sep 92

London Market Claims Services: Letter to Underwriters at Interest. 1992 YEAR END RESERVES



Please find enclosed three important reports for your review:

(1) 1992 Year End General Reserve Report B.I. Claims

(2) 1992 Year End General Reserve Report Building Claims

(3) Baltimore / Maryland Consolidation Action Report

The general reserve reports are a result of the combined lawyer representative efforts of Mendes and Mount and Lord, Bissell and Brook.

I would make a note, as in prior years to keep paper to a minimum , that much of the information contained within the general reports will not be repeated in the individual account reports, and therefore these reports should receive the widest distribution within your syndicate / company.

Approximately 1,000 individual reports are expected for reserving purposes and you can be assured that all efforts will be made to achieve the earliest circulation before year-end, particularly on accounts where reserve movement is anticipated.

10 Sep 92

Syndicate Premium Income (Amendment No. 4) Byelaw (No. 11 of 1992, 10 September 1992).

11 Sep 92

Hurricane Iniki, USA, Hawaii; estimated cost $1.6bn.

16 Sep 92

Sterling left Europe's exchange-rate mechanism (ERM)

0 Oct 92

Lloyd-Roberts & Gilkes Ltd: Wellington Marine Syndicate 1028 - Underwriter H R Dumas

Raymond Dumas started this syndicate for the 1987 account writing a general Marine account (including some Non-Marine and Aviation business). His report explains a good deal of what goes into such a syndicate - well worth the read.

With reducing reinsurance results are likely to be volatile in the 1990's, but Dumas writes his business not only with his reinsurances in mind. He has increased his own line o the syndicate to £250,000 and has no Stop Loss.

He has, I like to believe, the right mix of knowledge of his trade, ability, arrogance and fear of failure.

For 1993 after a year of parallel underwriting 448 will be merged into 1028. The reason for this is to leave behind the 448 exposure to old year liabilities. You may think this dishonourable, but it is certainly commercial and Joining 1028 does give you the best bits of 448.

LRG Names on syndicate





R.M.H. Gilkes for 1993)

0 Oct 92

Lloyd-Roberts & Gilkes Ltd: Wellington Marine Syndicate 406 - Underwriter I C Agnew

Our existing Names who transferred to 406 from Agnew's 672 may remember my distinct lack of enthusiasm for their new management. 406 is facing some awful open years (the loss this year was 30%) while 672 produced profits.

Part of the reason for the 1989 loss was the increase in old year reserves. This is a good sign for joiners, because the bigger the reserves the less likely you are to be kicked in the teeth by old year problems.

406 is now a big syndicate and there must be a little concern about how Agnew will manage this. Wellington, his Managing Agent, has woken itself from a complacent sleep and there are good signs here.

Agnew is leading the change on improving his marine market. There is every sign that he is succeeding.

I still wish we could join 672 but 406, in current conditions, is worth a go.

There is also too much financial reinsurance in the syndicate: this buys current performance at the expense of the future - just as over reserving reduces current performance and improves the future.

LRG Names on Syndicate -





(R.M.H. Gilkes, G.E. Lloyd-Roberts & D. E. Corben)

7 Oct 92

High Level Stop Loss Fund Byelaw (No. 12 of 1992, 7 October 1992).

7 Oct 92

Agency Agreements (Amendment No. 4) Byelaw (No. 13 of 1992, 7 October 1992).

7 Oct 92

Members' Agents (Australia) Byelaw (No. 14 of 1992, 7 October 1992).

7 Oct 92

The Lloyd's Arbitration Scheme (Members and Underwriting Agents Arbitration Scheme) Byelaw (No. 15 of 1992, 7 October 1992).

27 Oct 92

Market Claims Services Ltd dissolved.

4 Nov 9

Lloyd's Brokers (Amendment No. 6) Byelaw (No. 16 of 1992, 4 November 1992).

Nov 92

Cambridge Water -v- Eastern Counties Leather. Cambridge Water awarded over £1m damages for pollution caused by the tannery to a public waterway. The court made legal history by holding that Eastern Counties was not negligent, as the pollution was unforeseen, but it was liable in "nuisance" an older legal jurassic concept, based on the 1885 case Ballard -v- Tomlinson, where it is not necessary to show fault.

6 Nov 82

Daily Mail: Lloyd's battle halted after suicide tragedy

A SIX-MONTH suspension was announced yesterday in the battle over liability for Lloyd's massive losses.

The move came within hours of the funeral of magistrate Margaret Jones, who committed suicide last week in despair over a £200,000 bill.

The temporary reprieve was announced by Lloyd's chief executive Peter Middleton, who told a group of MPs that he had suspended all legal action seeking to make ‘names' pay their share of losses said to total £2 billion. The extent of liabilities will be assessed and available funds examined. The decision affects at least 17,000 syndicate members facing ruin after a series of international disasters.

Writs which were due to be issued yesterday - and would have seen more Lloyd's members who are no longer active having to sell their homes - have now been frozen.

The funeral of Mrs Jones, who was found last week in a fume-filled car outside her home at Lunnon, on the Gower Peninsula, South Wales, was held yesterday. Her husband Francis and 100 friends and relatives crowded into the small church of St Illtyd.

Mrs Jones, a magistrate and former eye specialist, came from a distinguished legal family. Her cousin, Lord Justice Sir Anthony Evans, gave the address and said that news of her death had broken like a sudden storm in blue skies over the Gower Peninsula she so loved. She had been brought up by Sir Anthony's parents after hers died, and the two were very close.


Mrs Jones became a ‘name' in 1978 and belonged to nine syndicates, seven of which had lost more than £200 million over the past three years.

She had been faced with losses before but managed to meet them. This time they were unremitting.

She belonged to syndicate 604, one of the most notorious loss-makers, which was closed down last year. It underwrote American claims against asbestosis and pollution and had lost an estimated £66 million over the last three recorded years.

Liabilities were still being met for 1984, a particularly bad year. Earlier this summer, the 604 syndicate names were warned that the situation was ‘deteriorating'.

Cuthbert Heath, the agency whose job it was to keep Mrs Jones informed of the state of the market, would not give details of her projected losses.

There was praise yesterday for Lloyd's boss Peter Middleton, who took over as chief executive in September after the retirement of Alan Lord.

Tory MP Paul Marland, who has been leading the Campaign for a better deal for names, said: "The moratorium is a big breakthrough. Mr. Middleton has achieved more in seven weeks than his predecessor did in seven years."

20 Nov 92

Kentile Floors, a vinyl floor tile manufacturer, filed a petition for Reorganisation under USCA Chapter 11.

21 Nov 92

Storms, USA, South East States; estimated cost $425m.

10 Dec 92

Storms, USA, NY, NJ, Penn, Mass; estimated cost $650m.

13 Dec 92

Sunday Telegraph: Reinsurers threat to Lloyd's

CONCERN is mounting that Lloyd's of London's search for a global market solution to Names' grievances could founder if reinsurers will not foot the bill. They will be asked to meet hundreds of millions of pounds' worth of claims from the Errors & Omissions underwriters of the agents who would be asked to contribute.

But sources close to the RHM Outhwaite agency report a shortfall of up to £50 million or more in reinsurance payments to Names' agents' Errors & Omissions underwriters who paid a large part of the £116 million out-of-court settlement to Outhwaite Names facing massive asbestosis claims. Reinsurers, including Munich Re and Swiss Re as well as Lloyd's syndicates were asked to meet the E&O underwriters' costs, but many have still not.

Some argue an out-of-court settlement is not covered by the reinsurance policy. Names on the Merrett, Feltrim, Gooda Walker and other action groups aiming to sue their agents, underwriters and auditors may find they have a tougher fight on their hands than they realised. The Merrett 418 Names are the latest to have formed themselves into an association. They are seeking to remove the six year legal time bar and sue.

31 Dec 92

The Alexander Howden M J Harris Non-Marine Syndicate 947 - Run-off:-

Year End

Paid Loss

Outstanding Loss

Incurred Loss

Paid in Year


$ 8,816,023


































The run-off reinsurance was placed in April 1982 for a premium US$2,250,000. Reinsurers benefited from a US$20,000,000 Time & Distance policy, premium $7,285,000, with a limitation that commutation may be mutually agreed but not before 1 January 2000. The placing information states:- "in order to establish the Reserve figure at 31 December 1980 of $13,325,435, the following procedure was adopted:-

  1. An analysis was made of all outstanding losses in the Long-tail and Short-tail classification separately by each year of account;
  2. In respect of each classification the Syndicate took whichever was the higher of the outstanding advised loss or the Lloyd's Audit requirements. If the outstandings were lower than the Audit percentage requirement, a loading of 30% was added to the Audit figure. If the outstandings were higher than the Audit requirement, then a loading of 50% was applied to those outstanding claims. This applied to both short and long tail business separately.
  3. In respect of all the five Asbestosis type claims, the syndicate had an outstanding of $1.4m at 31 December 1980. For Audit purposes, this was loaded by 50% giving a figure of $2.1m. At 31 December 1981, the syndicate had an unloaded outstanding figure of $2.144m for these losses. The PML loss which is the maximum figure which they consider they may be liable to pay is $15.069m which is made up as follows:-

Unloaded Outstanding

Approx. %

Approx. %



Content @ 31-12-81

R/I Content

Direct Content


$ 7.12 m

$1.72 m




$ 4.314m




Love Canal

$ 1.587m




Agent Orange

$ 1.591m




Dalkon Shield

$ 0.467m








There was a "shortfall" of $1.1m, due to Asbestosis type claims, in the reserve requirement of Syndicate 947 at 31 December 1981. Alexander Howden Non-Marine Syndicate, J S Miles and others, commenced underwriting at the beginning of 1976. Syndicate 391 grew to 43 Names in 1977, 198 in the following year, and in 1979 and 1980 there were over 400 Names. Net premium income grew in line, reaching £5.1m for the 1980 year of account. The profitability however fell to £26,000 for the 1977 year of account (announced in early 1980), only £6,000 for 1978 (announced in early 1981) and a loss of nearly £1.3m was recorded for the 1979 year (announced in early 1982). The 1980 year of account, the last year of this short-lived syndicate, gave rise to a further loss of nearly £1.1m. Miles was dismissed as underwriter in mid 1980 and active underwriting ceased. M J Harris, another Howden underwriter, was appointed to run off the business and subsequently the business of Syndicate 391 was reinsured into Harris' own syndicate 947 from 1 January 1981. Not until Harris' report in April 1981, when Miles had ceased to underwrite, was there a fuller explanation of the difficulties: in that April 1981 report, dealing with the close of the 1978 underwriting year, it was forecast that both 1979 and 1980 would close with an underwriting loss. For some years it had been known in the market that large losses would arise on computer leasing insurance but only in November 1979 were the estimates of losses first quantified. Miles had a line on a number of such policies and it was realised then that the Names on the 1977 stamp would lose money when the results were declared in April of 1980. Tudor Williams as a chartered Accountant and Managing Director of the managing agents knew well Lloyd's detailed requirements in the area of valid reinsurances. These included a specific warning against reinsurances which might be seen to move losses from one year of account to another. In addition, a directive issued by the Committee of Lloyd's advised agents that computer leasing losses should remain in the 1977 account unless the Committee approved otherwise, and the scheme was devised to circumvent this directive.

31 Dec 92

The Sedgwick Group Annual report 1992 discloses:-

  1. David Rowland Chairman.
  2. Business Review: Sedgwick is an International Insurance Broking, Risk Management and Consulting Group in the Financial Services Industry. Dedicated Services .... Sedgwick's office which is local to United Technologies, is a self-contained unit, but is able to provide total accounts support by calling on the resources and skills of other Group offices when the need arises. Sedgwick uses teamwork such as this with many of its clients, including the Law Society of England and Wales. Sedgwick is retained by the Law Society to give advice on investment management, tax planning, mortgages and pensions to clients of member firms. Sedgwick is one of the largest independent advisers on domestic mortgages in the UK and advises on investment management of £100m. .... The dedicated skills which Sedgwick uses in this work are echoed in other areas of its business from energy to engineering and from agriculture to aviation.

3. Sedgwick James: is one of the leading brokers in the south-east of the U.S. In December 1992, it strengthened this position by acquiring Duncan Peek, one of the largest independent insurance brokers and employee benefits consulting companies in Atlanta, Georgia.

4. Reinsurance: E W Payne: Profits were adversely affected by the contraction of reinsurance capacity, virtually elimination of the marine market excess of loss, retrocessional business and reductions in sterling and U.S. dollar interest rates. The impact of these unfavourable factors was partly offset by gaining a larger share of the UK company market and increasing business in the Asia/Pacific region. Significant cost reductions have been achieved in our continuing process of relocating most of our London operation services to Witham, Essex. During 1982, the broking structure in London was reorganised in anticipation of continues market contraction, to enable E W Payne to take advantage of its overall market strength. Closer co-operation within the Group's reinsurance operations in North America and other overseas subsidiaries will enable us to continue to deliver excellent service and best capacity available to our clients in difficult market conditions.

5. Europe: Sedgwick Consulting Group (Europe) Ltd: The Group's continued commitment to Sedgwick Consulting Group in Europe showed rewards. Revenue increased by 10%; the Direct Marketing Division did particularly well, as did our operations in France. Demand for Sedgwick Consulting Group's services in health and safety, and in managed health care insurance arrangements remain strong. Sedgwick Consulting Group expanded its capacities to provide services relating to health and safety at work.

6. Shareholders: Trans-America holds 24.7% of the issued share capital of the company as of 23 February 1993.

7. Sedgwick Lloyd's Underwriting Agents Ltd

  1. Company Underwriting: the Group's underwriting operations are

Americas Insurance Company based in New Orleans, which writes cargo, energy and aviation business; Americas Insurance Company recorded a reduced underwriting profit. Mendip Insurance & Reinsurance Company Ltd, the Group's specialist reinsurance subsidiary in Bermuda;

River Thames Insurance Company, the London market Insurance Company, in which the Group has a 49% interest.

9. Resignations of Directors as Members of Lloyd's:



Year Resigned

Lord Fanshawe

Sedgwick Group Plc

Prior to 1992


The Ten Worst Catastrophes in 1992


Estimated Cost

24 Mar 92

Storms, USA, Texas, Louisiana, Florida;


$ 610m

10 Apr 92

Bishopsgate bomb, London;


$ 1,215m

13 Apr 92

Flood in old tunnel system, USA, Chicago;


$ 300m

28 Apr 92

Storms, USA, Oklahoma, Texas;


$ 760m

29 Apr 92

Riots, USA, Los Angeles;


$ 775m

19 Jun 92

Storms, USA, Kansas, Oklahoma;


$ 570m

23 Aug 92

Hurricanes Andrew, USA, Florida and Louisiana;



11 Sep 92

Hurricane Iniki, USA, Hawaii;


$ 1,600m

21 Nov 92

Storms, USA, South East States;


$ 425m

10 Dec 92

Storms, USA, NY, NJ, Penn, Mass;


$ 650m

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