1992 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 Capacity 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 Some have withdrawn from marine business, at least for the time being, but also there have been consolidations within underwriting groups 31 Jan 92 Lloyd's says £3bn loss figure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:- 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. 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. INTRODUCTION 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. 1989 RESULTS 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. CURRENT TRADING CONDITIONS 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. SOLVENCY 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. ASSISTANCE 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. RESPONSE TO LARGE LOSSES 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.

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:

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".

"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".

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.

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 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.

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

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.

Sunday Times: Lloyd's dissidents lay down their arms

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.

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.

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."

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

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

Letter from D E Coleridge to a Name

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.

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

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

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

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

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

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.

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.

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 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.

Pre-Facility Claims	8,693
Facility Closed Claims from Inception through Closure	19,117
CCR Closed Claims from Inception through May 31, 1992	59,948
CCR Pending Claims as of May 31, 1992	85,185
Projected New Filings for June through December	14,000
UNIVERSE AT 31 DECEMBER 1992:	186.943

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 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.

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 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.

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.

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.

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").

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.

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.

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.

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.

1. GENERAL OVERVIEW OF ASBESTOS BUILDING CLAIMS

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.

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.

2. Occupational Health and Safety Administration

3. HEI-AR

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:

4. Proposed New California Law

B. New Property Damage Lawsuits

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

D. National School Class Action

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.

II. TRIAL RESULTS

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.

III. DECLARATORY JUDGMENT DECISIONS

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 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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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

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.