6 Jan 83
Daily Telegraph: Further huge losses loom for Lloyd's members
LLOYD'S of London members, some already hard-hit, are about to suffer more huge losses following adramatic deterioration in the finances of another syndicate involved in the notorious "LMX spiral".
About 1,000 members of R J Bromley syndicate 475 could be facing losses of more than 500pc of the syndicate's 1989 capacity.
If losses reach that level equivalent to£128m in value terms, they would beat even the worst losses incurred by Gooda Walker syndicate 298, where members are now threatening legal action.
News of the losses is likely to spark anger at a meeting tomorrow of agents who introduced members to the syndicate. They include some of the market's biggest agents,Murray Lawrence, Sedgwick and PW Kininmonth.
The latest market estimate of the loss isfar greater than members were led to believe in March last year when accounts warned of a loss of about 60pc of capacity.
It follows growing losses onHurricane Hugo and the 1987 European storms above the syndicate's reinsurance protection, and was discovered following a review by its managing agent Spratt & White, part of the Knightstone Group - the firm that emerged from the disintegration of the Poland agencies in 1991.
Members were told of the deterioration in a letter fromKnightstone chairman Trevor Bradley just before Christmas .
He said theminimum loss had soared to 200pc, "but it could be considerably worse than this."
Expectationsfor the 1990 year are for a 50pc loss but Mr. Bradley who has called for a loss review by Lloyd's, said this could also rise.
Syndicate 475 was run by Roy Bromley until he was ousted as underwriter and head of the Bromley agency in May 1991 in circumstances he is still disputing in the courts. Thesyndicate ceased trading at the end of that year and is now in "run-off."
Itsproblems stemmed from the high-business of reinsuring the top slice of the catastrophe risks of other syndicates.
Mr. Bradley said yesterday that members were likely to face calls to put in more cash. A cash call will then trigger a loss review.
"We are all for a review," he said. "The reason for these losses has to be established because they are soabsolutely appalling. We think we have the expertise to sort it out after the Poland excess of loss.
10 Jan 93
The People: Royals and pals hit by cash crash
SHOCKED royals and their top-rank friends have suffered huge losses in insurance syndicates at Lloyd's of London.
The Duchess of Kent Prince and Princess Michael of Kent, Prince Charles's close friendLady Romsey, and the Queen Mother's cousin Simon Bowes Lyon, have all been hard hit.
Lloyd's members known as Names - have had a disastrous year, facing losses of£2 billion.
The crisis has shattered the royal circle, with members of it facing demands totalling millions of pounds.
Confidential documents obtained by The People show the depth of Lloyd's royal disaster.
Lady Patricia Ashmore, wife of Vice-Admiral Sir Peter Ashmore - who for 13 years was the Master of Her Majesty's Household faces crippling claims of more than £500,000.
Shattered Lady Ashmore confirmed at her home near Sevenoaks, Kent: "We have big losses."
The Queen's personal vet in Windsor,Philip Ayrton Grime honoured with the Commander of the Victorian Order and the man who looked after her horses and corgis - is threatened with demands of £1 million plus.
Princess Anne's former father-in-law,Major Peter Phillips, is another big loser and is being forced to quit his luxury home. He put his £385,000 Tudor manor house on the market last August.
Lady Romsey, Sir Angus Ogilvy, Prince and Princess Michael of Kent and the Duchess of Kent are all on the hit list, with losses totalling hundreds of thousands of pounds.
Now red-faced Lloyd's chiefs face a royal rollicking as a bitter legal battle erupts over allegations o f negligence.
Lloyd's have been accused of "structural rottenness," with allegations that fat-cat insiders stitched up the low-risk high-profit business at the expense of outsiders.
Author Jonathan Mantle - who wrote the best-sellerFor Whom the Bell Tolls on the inside story of the Lloyd's crisis - said: "I have been told on good authority that the Queen is furious with Lloyd's.
"She virtually gave them a royal seal of approval. But the trusted and once respected institution has ruined some of her closest friends' lives.
"The majority of Lloyds members don't work there and simply pledge assets to make what they expect to be a modest return.
"They are sleeping partners without which Lloyd's cannot function. But now these sleeping partners have woken up to a nightmare.
"Disastrously for members of theroyal inner circle, they were on some of the worst-hit syndicates."
He added: "It'snot surprising that Lloyd's recently retired chairman David Coleridge didn't get a knighthood in the New Year honours.
"If the Queen had taken out the ceremonial sword,' she might have been more inclined to chop off his head!"
13 Jan 93
Financial Times: Merrett deal aims to attract corporate capital to Lloyd's
Merrett Group, one of the largest agencies at the Lloyd's insurance market, yesterday announced the launch of a company formed to reinsure exclusively business underwritten by its nine syndicates.
The deal involvingJ.P Morgan, the US investment bank, Marsh & McLennan, the world's biggest insurance broker, and other international investors - represents the first step by any agency to attract corporate capital to the Lloyd's market, in the wake of recommendations last year by the Rowland task force.
Merrett Group itself will have no stake inUnderwriters Capital (Merrett), which will be Bermuda-based. But Mr. Dennis Purkiss, chief executive, insisted that the company represents a "a new source of capital" for the group. J. P. Morgan and Marsh & McLennan will each invest $7m in Underwriters Capital (Merrett). It will start with $70m in capital
Thenew company will provide quota share reinsurance - reinsuring a certain percentage of risks underwritten by Merrett syndicates in return for the same percentage of the premium - for a minimum five-year period.
Many Lloyd's agencies areexamining ways to attract outside capital, following the decline in the number of Names - individuals whose assets back the market's underwriting - and Mr. Purkiss predicted that the deal could be the first of a number at Lloyd's. He said: "There is not much doubt that Morgan and Marsh McLennan will use it as a blueprint."
Some syndicates have already taken advantage of new rules introduced by Lloyd's last year allowing them tomake greater use of quota share reinsurance deals, but Merrett is the first agency to have negotiated arrangements of this type.
Merrett group's capacity - themaximum amount of premiums it can underwrite under Lloyd's rules - will amount to about £400m. Under the revised regulations Merrett can underwrite an extra 25 per cent of this amount if premiums in excess of this capacity are ceded to an outside quota share reinsurer.
Both Marsh & McLennan and J. P. Morgan have won a reputation for sponsoring innovative insurance deals. Theylaunched another reinsurance company, Mid-Ocean, with capital of $350m, last November.
17 Jan 93
Sunday Telegraph: British insurer arrested in US
British insurer Alan Teale, who used to run the failed Miami Insurance Exchange, has been arrested by the FBI in Atlanta, Georgia, after what the authorities are calling one of America's biggest insurance frauds. On Friday he and his wife Charlotte Rentz, were charged with robbing 5,500 clients of $50 million.
Victims, mostly Californian, included owners of businesses destroyed in last year's Los Angeles riots, motorists and people denied health cover by conventional insurers. Teale's aim, said the FBI, was "to receive millions of dollars in premiums while failing to pay claims".
Aformer secretary of the Lloyd's Insurance Brokers Association, Teale, 61, and his wife were arrested after a grand jury in Mobile, Alabama, named them in a 41-count indictment. It described a scheme ranging from America to the Caribbean, Belgium and Ireland involving more laundering and fake deals to disguise Teale's involvement.
The indictment charges Teale withusing foreign companies and bank accounts to avoid American licensing and auditing procedures. The grand jury alleged: "Once the defendant's companies were shut down by state insurance regulator, they and their [unnamed] co-conspirator would start new companies under different names."
After the Miami exchange collapsed, Teale gained controlof Georgia-based Victoria Insurance, which itself folded in 1988. There hare been suggestions that $16 million of premiums vanished into the Bank of Credit and Commerce International in London.
An investigator described the network allegedly run by Teale from Atlanta as the
"Super Bowl' of insurance frauds. The FBI said he became so well known to regulators that he always tried to hide his role in companies.
18 Jan 93
Daily Telegraph: Syndicate wins claims against Eagle Star
Syndicate 640at Lloyd's of London has won its case against Eagle Star, so removing a threat to the quick settlement of claims by Lloyd's underwriters.
The insurance company hadrefused payment on the syndicate's reinsurance policies unless there was a "demonstrable legal liability".
Similar difficulties have been raised on other recent reinsurance policies for other syndicates.
Such a bar would have meant the "Wellington Agreement" at Lloyd's set up to accelerate payment to suffers from asbestosis, might have been stopped. It would also prevent underwriters reaching a compromise over claims.
The decision from Judge Diamond awarded victory and costs to the syndicate. He ruled thatEagle Star had to pay monthly debit notes against "honest payments" without demanding legal liability proof in each case
The syndicate. formed in 1919, is being closed and Syndicate Underwriting Management wassealing off accumulated liabilities by taking out "whole account unlimited run-off" reinsurance cover with Eagle Star for the risks still lingering from pre-1965 policies.
Up to June 1991, Eagle Star paid claims on that coverbut since then the two sides have been locked in legal battle.
Patricia Mitchell, of Warner Cranston, solicitors to the syndicate, said last night that the syndicate will fight any appeal by Eagle Star - to the House of Lords if necessary.
22 Jan 93
Shell "Rocky Mountain" Arsenal Case. California's Court of Appeal partially upheld the December 1988 ruling in that Shell could not collect on policies issued after 1969, and ordered a re-trial on the issue as to whether Shell had expected and intended the pollution, and not as to whether Shell should have known that it was polluting the site.
22 Jan 93
The Recorder: Limited victory for Shell in coverage appeal.
Shell gets second chance on pollution coverage, but appeal court reads exclusion clauses broadly
22 Jan 93
Daily Journal: Shell insurer must pay for toxic cleanup
The 1st District ruling hinges on a faulty jury instruction and the definition of a word
29 Jan 93
Business Review: Aetna Boosts Reserves by $180 Million For Asbestos, Environmental Claims
NEW YORK - Investment analysts calledAetna Life & Casualty Co.'s $180 million boost in asbestos and environmental claim reserves a sign that the Hartford-based insurance company has gotten a better grip on its current claims adjustment expenses, primarily legal fees.
Aetna announced late Tuesday that thereserve increase, plus continued poor results in its commercial property/casualty business, accounted for a fourth-quarter after-tax loss from continuing operations of between $155 million and $165 million.
But the announcement caught many analysts off guard, even thoughITT Hartford Insurance Co. of Hartford, Conn., and Crum & Forster Inc. of Warren, N.J., recently pumped billions of dollars into their reserves for the fourth quarter of 1992.
"It's not that anyone hasn't known the company has asbestos and environmental exposures. But it gaveno Indication earlier that the company would be doing something with property/casualty reserves," said senior analyst Gloria Vogel of Shearson Lehman in New York.
"I was a little surprised. I don't think anyone expected it," agreed Jay Cohen, an analyst with Salomon Brothers in New York.
However he said he was not surprised by the company's timing. "It makes a lot of sense to take the loss in the fourth quarter of 1992," he said. "From an investor's point of view,1992 has already been written-off as a bad year" for insurance companies hit with billions of dollars in catastrophe claim including $3 billion for Hurricane Andrew alone.
Chris Heller,Aetna's spokesman. denied the insurer was trying to hide the losses in the fourth quarter. "This is not a case of us dumping," he said. "There are very specific things in recent months that led us to this action."
Mr. Heller said$80 million of that increase is to fund asbestos claims. He said the company now can estimate its legal claims as a result of recent action by the Center for Claims Resolution, Princeton, N.J., which worked out a settlement in 800 asbestos cases consolidated by a Maryland court. The center is a mechanism created by 20 former asbestos makers and their Insurers to pay claims of people injured by asbestos.
Theremaining $l00 million reserve boost is for the company's continuing increases in environmental cases and the cost of litigating such actions, he said. "Aetna's one of the biggest players in environmental cases," said William Passannante, a partner with Anderson Kill Olick & Oshinsky of New York, which has represented plaintiffs in environmental cases. "There are hundreds of cases, and each one is potentially millions of dollars worth of exposure."
"Maybe it's the fact that plaintiffs are starting to score some wins" in environmental and asbestos litigations across the country, he said. These decisions are "giving Aetna enough exposure to set realistic reserves. Their experience is changing."
The three major ratings firms said there would be no change in Aetna's financial or claims-paying ratings with the fourth-quarter loss.
"We anticipate taking no action," said William Cavanagh, a director atStandard & Poor's, which rates Aetna "AA" on its senior debt. "They, like all other commercial companies, are going to have to deal with losses from toxic liability losses over time."
"A lot of companies need to be doing this. This is anaccounting recognition of those losses," agreed Chester Murray, associate director of Moody's Investor Services, which rates the company "AA2." Aetna is "catching up to the economic realities of the situation," he added.
"Thecompany wants to clean the slate and position themselves to report improved earnings going forward," said John Snyder, senior vice president of the P/C department of A.M. Best of Oldwick, N.J. which gave Aetna an "A" rating.
29 Jan 93
Business Review: Weather woes send shivers up the spines of Lloyd's names
Perhaps the greenhouse effect is a flaky theory concocted by hair-brain greenies to scare the world for fun. Even scientists aren't in full agreement about the alleged phenomenon. But the international insurance industry is taking it seriously.
A paper recently presented at theannual congress of the National Insurance Brokers of Australia catalogues the enormous increase in claims resulting from natural disasters over the past five years. It also outlines reports by various insurance and reinsurance firms to deal with such claims in the future.
31 Jan 93
Sunday Telegraph: Worst fears confirmed at Gooda
ABOUT4,000 Lloyd's Names on the stricken Gooda Walker syndicates face bad news tomorrow when Ralph Sharp, head of GW Run Off,. delivers his interim report.
Already fearful of eventual combined losses of more than£580 million, they are likely to find the figures for the 1989 open year and 1990 at the outer limits of their loss estimates. Worst news is likely in spiral Syndicate 298 and stop-loss Syndicate 387, though 290 may not be as bad as feared.
Meanwhile. another action group. representing Names onSyndicate 126, where Ian Posgate was underwriter, are launching a protest campaign. They have not been able to close their accounts for 1980, 1981 and 1982, showing a loss of 150 per cent of capacity on United States liability and pollution business, much placed by broker Minet.
UnderwriterMichael Harris of the A J Archer agency is managing the run-off - he also writes for Syndicate 947, which reinsured with 126. Action group founders Kimbarra Mahon and Richard Micklethwaite want Lloyd's chief executive Peter Middleton to pressure Archer to close the years rather than run them off for a fee. They have protested to agency chairman Jeremy Hardie.
2 Feb 93
Financial Times: Losses for Gooda Walker syndicates put at £924m
GOODA WALKER syndicatesat Lloyd's of London suffered losses of nearly £924m in the four years to 1990 - possibly the largest experienced on the Insurance market according to estimates released yesterday.
Aninterim report from GW Run-Off, the agency managing the defunct syndicates, showed losses for 1989 of £621m - or nearly 30 per cent of losses across the entire Lloyd's insurance market for the year.
Some4,000 Names - the individuals whose assets underwrite the market - on the seven Gooda syndicates also received initial estimated losses for the 1990 underwriting year of £188m.
Mr.Michael Deeny, chairman-elect of the Gooda Walker Action Group, said last night: "This is absolutely horrific. It's larger than we expected and very depressing for Lloyd's Names."
But Mr.Ralph Sharp, GW Run-Off chairman, said the estimates could increase substantially because they took no account of asbestosis and pollution losses or allowances for the collapse of reinsurance companies.
In a measure of thedifficulty facing Names, the report showed that only two thirds of the £598m in calls made from syndicates during 1991 and 1992 had been received by the end of last year.
Syndicate 387alone posted losses of 750 per cent of its underwriting capacity for 1989, the last year in which it wrote insurance business and the highest proportion on a Lloyd's syndicate.
The other syndicates -164, 290, 295, 296, 298 and 299 -showed losses of between 5 per cent and 150 per cent in 1986-90.
Additionalcosts for 1986-89 rose by £142m, of which £46m was attributed to exchange rate losses and £24m was in further reserves against claims connected with Hurricane Hugo.
GW Run-Off said that it wasinvestigating several aspects of the management of the Gooda syndicates, including "under-reserving" - making insufficient provision against possible losses -on syndicates 164 and 290, and bonuses and salaries paid to former staff and a fleet of cars charged to syndicate funds.
2 Feb 93
Daily Telegraph: Gooda Walker loss tops £1bn
Gooda Walker loss tops £1bn
THEHUGE losses on the Gooda Walker insurance syndicates have worsened further, taking the estimated total deficit to more than £1 billion.
Members agents, who look after the3,500 members of Lloyd's involved in the syndicates previously managed by Gooda Walker, were yesterday told that the combined loss is estimated at £925m for the open years up to and including 1990.
This does notinclude the expected losses for 1991, which have yet to be quantified, hut will take the total over £1bn.
G W Run-Off, the substitute agency formed to look after the Gooda Walker syndicates' affairs, isinvestigating bonus payments and salaries paid to former Gooda Walker staff. In particular, it is looking at the salary increases paid to Derek Walker two years ago.
It has alsodiscovered that a fleet of 19 cars for the use of former Gooda Walker senior staff was charged to syndicate trust funds. These cars were subsequently sold under a sale-and-leaseback agreement and G W Run-Off is trying to recover the money.
Ralph Sharp, chairman of G W Run-Off, said; "I amnot interested in what cars they were but I can assure you they weren't Mini's." Mr. Sharp refused to disclose the size of bonuses paid to former Gooda Walker staff. "It is a legal matter. I can't comment."
Mr. Sharp said the1989 accounts worsened by £142m during last year. Some £46m of this deterioration is blamed on sterling's devaluation and a further £12m for interest charges resulting from the delays in losses being funded by members.
Lloyd'sof London is charging interest of 5pc over base rates on overdrawn balances and has refused calls for help on currency hedging, despite a considerable proportion of its Central Fund being held in US dollars.
Cash callstotalling £403m have been collected but a further £195m remains outstanding.
David Young, deputy chairman of accountants Touche Ross, is to take over as chairman from Mr. Sharp, who will remain a director.
3 Feb 93
Financial Times: No Rewrite for Lloyd's Horror Story
High above the trading floors of Lloyd's of London, David Rowland. chairman of the troubled insurance market, contemplated thelatest round of bad news. It was, he said, "horrific."
The source of his concern was in nearby Lloyd's Avenue, where managers were trying to salvage the fortunes of3,500 underwriting members whose affairs were once managed by the Gooda Walker agency.
They had just announced thatlosses had climbed to £925m. For individuals in insurance syndicates, that meant an average liability of £264,285 each. Since the bulk of the losses will have to be met from their private wealth, many face financial ruin.
The Lloyd'smarket as a whole is expected to report up to £2bn worth of losses this year - on top of £2bn in losses last year and £500m in 1991.
Fewfinancial institutions have suffered so big a loss over so short a time and survived intact. There has been widespread comment that Lloyd'', the oldest insurance market in the world, is close to "meltdown." In other words, not only are the members facing financial ruin, but Lloyd's itself might be facing bankruptcy.
Entering this troubled area is Mr.Rowland. He took over as chairman of Lloyd's at the beginning of last month but he has already created a small place in Lloyd's 305-year history. As the first paid chairman of the market, Mr. Rowland, 59, will receive £450,000 a year.
Previously, Lloyd's chairmen came from the companies that operated in the market and they returned to them after a two to four-year period in the job - with or without a knighthood for services rendered.
How did he feel about the losses now threatening to wipe out the generation of accumulated wealth of Lloyd's20,000 members?
"Ifeel horrific but I cannot rewrite the past," he said. "What I am trying to do is to think about the future in such a way that it can benefit all members, and practical ways in which we can deal with the past. The losses are real. There is nothing I can do about that."
That is cold comfort for underwriting members, forced to watch their wealth spent on thefinancial consequences of oil spills or transferred to American companies that have been sued successfully by former employees who have contracted the lung disease asbestosis.
One again their anger is growing and after a series of stormy meetings with the Lloyd's authorities last year the members will be expecting positive action this year from Lloyd's new and paid chairman to provide them with financial relief.
The courts have been deluged with writs from those facing the largest losses. Some members have committed suicide. Last month a professional underwriter at Lloyd's was found dead with a gunshot wound in circumstances that the police did not regard as suspicious. An inquest takes place takes place later this month.
Inevitably, any chairman will be called to account by the members, for the problems they now face, even though he was not leading the market when the troubles surfaced.
"I am not trying to avoid responsibility," Mr. Rowland said. "We should all feel responsible for those losses in a proper sense." He stressed that this statement did not suggest legal responsibility, obvious mindful of the minefield that he might get into.
"The fact that Lloyds's has brought benefit over generations is not much help to people who are suffering at the moment."
How then can the members be helped? "I cannot invent money, I cannot rub a magic lamp for money to appear from it. I try to explain what the situation is."
Thereis, he says no solution other, than to try to increase Lloyd's resources through profitable trading in the future, to apply that profit to the members who have risked their own capital, and to strengthen the internal institutions within Lloyd's.
"I and my colleagues do not have the universal truth but we are trying to chart a course through difficult waters."
In spite of the turmoil within Lloyd's,dramatic changes are being made in the style of management. Until comparatively recently Lloyd's was run like a club rather than a business. The lunches were good and the management was indifferent.
The management structure has been strengthened. In the past few months a dynamic chief executive,Peter Middleton, has been appointed at £250,000 a year.
A former monk and diplomat, whose last job before joining Lloyd's was running the Thomas Cook travel agency, Mr. Middleton has made a good impression among the underwriting members. He has persuaded them that he is looking for solutions to their problems and isanxious to head off further rounds of costly litigation.
On the regulatory front, Mr. Rowland is supported byBrian Garraway, a former trouble-shooter at BAT Industries.
If Mr. Middleton has struck a hopeful note among the members, Mr. Rowland is more cautious about whether past troubles can be dispatched. By the end ofApril Mr. Rowland hopes to have drawn up a business plan for the market, incredibly the first ever produced at Lloyd's.
"I am not suggesting that we will have an answer to every possible problem at the time. But we have a duty to explain how we are going to handle those problems and chart a route for the members in which they can have faith."
Mr.Middleton's brief extends to giving a strong lead to the hundreds of companies and executives that operate at Lloyd's
"He doesnot have the right of instruction over competing companies in the market but he can provide an influence," said Mr. Rowland, who formerly headed Britain's largest independent insurance broker, Sedgwick Group.
The two men have yet to decide on their specific responsibilities in the new structure. "We are assessing what our respective strengths are," Mr. Rowland said.
But it is perhaps revealing that both are keen to move their offices down from the marble halls of the 12th floor of the Lloyd's building to nearer where business is traded on the market.
Meanwhile Mr.Rowland wants new capital brought into Lloyd's. In a report on the market's future last year, he recommended that not only individuals but also companies, and particularly insurance companies, should be allowed to invest in Lloyd's.
"It would beunwise in the present situation to bank on our future capital being provided by individuals," he observed.
So in the future he wantsmarket forces to "produce" a framework for incorporated capital, a fair structure which will have the support of all members.
6 Feb 93
Economist: British insurers - Royal romance
FOR the last three months of 1992 British investors and Royal Insurance enjoyed a passionate love affair. Shares in the company have soared sinceSeptember 16th, when sterling left Europe's exchange-rate mechanism (ERM); Royal's share price plunged to 118p during that day, then more than doubled to touch 294p in January. Though the price has slipped a bit recently, most analysts expect a further rise soon.
Attitudes have changed fast. Before the rally, rumours were rife that Royal faced collapse. InFebruary 1992 it announced a record pre-tax loss of £373m ($660m) for 1991 and did not pay a final dividend. The following year seemed bound to be worse, thanks to big losses on mortgage-indemnity insurance. which partly reimburses lenders for losses when borrowers default.
Royalhas made provisions of £360m to cover mortgage-indemnity losses, and further provisions are expected. The insurer was already badly weakened by trouble abroad. Between 1988 and 1990 it had had to give its loss-making American subsidiary £700m to boost its reserves. Royal's solvency ratio, a main measure of financial strength which shows capital as a proportion of non-life premium income, tell to 25% in June 1992 - its lowest level since 1974. The average for the five British composites (which insure both lives and general risks)was then 38%.
Yet the insurer's six month figures were less awful than expected. And at the end of 1992 Royal's solvency ratio had edged up to around31% (against the industry's 44%), helped by the sale of foreign assets,
Off-loading an 18.8% stake in Aachener und Munchener (AM s), aGerman insurer that has since been bought by a French rival, raised £249m in December 1991. In February 1992 Royal's Dutch subsidiary was sold to Epic, a joint-venture with AMB and Italy's Fondiaria in which Royal has a 33% stake. Royal got £110m and lost £165m of non-life premium income from its solvency ratio, boosting the figure by four percentage points. In November Royal and Sun Alliance. a British insurer, merged their Australian units; Royal received about £50m, 40% of the combined firm and a further one-point boost to its solvency ratio. A convertible bond issue in December raised £76m.
An upturn in Britain's insurance cycle allowed Royal to raise premiums; this,tighter financial controls and a new emphasis on profits rather than market share, helped it make money. So did the interest-rate cuts following sterling's exit from the ERM; these probably saved the company, reckons Youssef Ziai, an analyst at Morgan Stanley. Even before September there had been signs that the worst of the mortgage-indemnity problem was over, among them the slowing of house repossessions, lower interest rates further reduced the rise in mortgage defaults and more recently have begun to buoy house prices. Without its mortgage-indemnity losses, Royal would actually have made a profit in 1992.
Theshares of all the composites have prospered since mid-September. If ‘s have outperformed the others, it is largely because the insurer's starting position was shakier. Yet some analysts think that Royal is still undervalued. At the end of 1992 its shares traded at a 20% discount to its net asset value. The other composites were at a premium of at least 11%; Commercial Union, which avoided the mortgage-indemnity debacle, traded at a 41% premium. Royal's net assets would, in fact. shrink if it turned out that the insurer had not made sufficient provision for mortgage-indemnity losses. But most analysts reckon Royal is a good short-term bet (though the other composites have probably peaked). They are less bullish long-term.
Royal's American businessis now profitable but only a shadow of its former self. And for all that the firm insists that its European and Australian joint ventures make "Strategic sense", it has in fact had to slash its overseas ambitions. Britain now generates around half of Royal's non-life premium income, compared with a quarter in the mid-1980s. Premium income is anyway falling as customers balk at higher prices. Royal admits to an 8-10% decline in volume in the past two years.
David Nisbet, an analyst atCounty NatWest, reckons the firm is only half-way through its long-term shrinkage. On January 29th it decided to cut its losses by winding down Royal Re, the reinsurance subsidiary that it nearly sold to America's General Re in 199:. There may be further sales, possibly of Royal Life. When this process ends, a big international company will have become a middle-sized British firm with a few overseas bits. Will investors love Royal still?
7 Feb 93
Sunday Telegraph: Lloyd's ponders public status
A RADICAL proposal toconvert Lloyd's of London into a public company is being considered by the insurance exchange's market board as it works on a new business plan. Lime Street sources said yesterday.
If adopted. the plan, to be put to Lloyd's chairman David Rowland and chief executive Peter Middleton next month, could enable Lloyd's, whichfaces 1990 losses of up to £2 billion, to issue shares.
That would takecorporate membership, mutualisation and limited liability much further than initially envisaged, but there is support among underwriters for radical measures.
Former Lloyd'sdeputy chairman Richard Hazell is expected to resign soon from the exchange's regulatory board, which was set up last month. He is leaving Lloyd's to chair the United Kingdom subsidiary of American insurer Liberty Mutual.
Until last summerHazell underwrote for Syndicate 190, run by discount house Cater Allen's Lloyd's arm. The syndicate has been hit by past losses on US liability and other policies, though Hazell's successor John Wetherell says syndicate reserves of £300 million should be adequate and 1991 and 1992 should be profitable. Cater Allen is in expansionist mood, though company sources say talk of an imminent tie-up with Sturge is premature.
7 Feb 93
Sunday Mirror: £30,000 blow hits Camilla
PRINCE Charles's close friend Camille Parker Bowles is facing losses thought to top £30,000 as a Name" at insurance Giants Lloyd's of London.
She is a member of 10 underwriting syndicates at Lloyd's, hit by estimated losses of £2 billion last year.
Mother-of-two Camilla, 45 - whose taped phone conversation with Prince Charles shocked the world - is a member of the "badly-holed" Marine Wellington 448 syndicate among others.
Membersof the Royal Family and others in their circle are also under threat. They include Prince and Princess Michael of Kent, the Duchess of Kent, the Queen Mother's cousin Simon Bowes-Lyon, and Prince Charles's close friends Lord and Lady Romsey.
8 Feb 93
Financial Times: Life groups in Japan gain losses concession
JAPAN'S ministry of finance is likely toallow life insurance companies to postpone booking foreign exchange losses on international bond investments for the year ending March 1993.
The move is part of the ministry's efforts to support the ailing Tokyo stock market by restricting stock sales by institutional investors. The ministry has already instructed the country's banks not to sell stocks to shore up profits, and now wants to prevent selling by life groups, Japan's leading institutional investors, to cover for their investments in Australian and Canadian bonds.
Although life assurers are allowed to value foreign securities at book value, they are required to book losses once themarket value of the investments falls more than 15 per cent. Both Canadian and Australian dollars have fallen sharply against the yen this fiscal year, and leading life assurers are believed to be holding some Y300bn ($2.41bn) in unrealised losses.
The ministry is also considering whether to allow life assurers to book unrealised profits on stock holdings to prop up profits. While the move is likely to attract criticism as window dressing of accounts, the finance ministry intends to allow life assurers to include unrealised stock profits to increase their dividend reserves for policy holders.
Unrealised profits on stock holdings have sewed to cover the loss between dividends on policies, which average around 6.5 per cent, and the return on the assurers' investments, which is declining rapidly due to the fall in interest rates.
The ministry ad life industry are becoming wary over further erosion of the "buffer" against lower returns through realising latent gains on stocks. Combined unrealised profits on stocks at the largest life assurers totalled some Y6,000bn last September, Y2,000bn lower than the previous year.
8 Feb 93
Independent: Increased losses likely at Lloyd's
Twoof the most troubled underwriting syndicates in the Lloyd's insurance market are poised to announce increased losses.
Managers ofsyndicate 745 are expected to warn underwriting members that losses are far worse than the anticipated £132.5m so far announced. A letter will be sent to members by the M J Marchant agency, which looks after the affairs of the syndicate.
Already, the syndicate's managers have been warned by a leading professional insurance broker,
Edward Benfield, chairman of Kininmonth Lambert Marine XL thatlosses on the 1989 and 1990 underwriting accounts could rise as high as £400m.
Mr. Benfield is leading an action group which is attempting to gain some financial restitution for the
syndicate's1,750 members. He has urged Lloyd's to reopen the 1989 account and hold a fresh audit.
Marchant took over the management of 745 from KPH Underwriting Agencies allthe end of last year and since then managers have been struggling to get more reliable information about the syndicate's trading position.
David King, the former underwriter for the syndicate, was asked by the board of KPH to resign on
l4 October last year because of the deteriorating position.
Thelosses have been caused by larger-than-expected payouts on insurance claims arising from European storm damage in 1990. KPH has already warned that the forecast £132.5m losses expected for the 1990 account could be "subject to material change".
At theSpratt & White underwriting agency company managers are attempting to draw up a detailed report on the affairs of syndicate 475 following the suicide of the former underwriter Roy Bromley, found dead from a gun-shot wound last month.
Losseshave climbed from £14m to £54m and underwriters and brokers expect them to be higher.
The syndicate suffered fromlarger-than-expected losses from Hurricane Hugo in 1989 and early 1990 European storm damage.
Meanwhile, anaction group of underwriting members who form syndicate 418, which is fighting for financial restitution in the wake of nearly £200m worth of losses, has replaced its lawyers, Richard Butler, with More Fisher Brown.
14 Feb 93
Sunday Times: Lloyd's insiders ‘failed' to warn names
THE implication of asingle letter must be causing David Rowland and Peter Middleton, Lloyd's of London chairman and chief executive respectively, more sleepless nights than any other issue as they tackle the intractable problems of the insurance market.
They now know that for11 years many agents did not follow advice from the then deputy chairman and inform names about asbestosis claims which might have stopped many of the 19,000 new names from joining the market and encouraged others to leave. Instead many of these names now face ruin.
Neville Russelland other panel auditors wrote the letter on February 26, 1982, during the passing of the new Lloyd's Act which granted the market self-regulatory powers and immunity from prosecution. In it, Lloyd's Council received a bleak warning that many syndicates faced unquantifiable losses "arising from asbestosis and related diseases ... there have been ... 13,000 individual claimants. Total exposure... appears to be considerably in excess of this figure . . . most syndicates are not very certain of their reinsurance recoveries ... most syndicates will incur losses on their own writings of reinsurance business. Very little of this has been advised so far."
MurrayLawrence, then deputy chairman, wrote to agents on March 18, 1982 and, inter alia, advised them "... where the reserve for asbestosis represents a material proportion of the total reserves of the syndicate, agents should consider whether or not to leave the account open".
Theletter continued: "It is the agent's responsibility to ensure that the reserves provided for asbestosis are sufficient to meet the syndicate's liabilities … Managing and members' agents are strongly advised to inform their names of their involvement with asbestosis claims and the manner in which their syndicates' current and potential liabilities have been covered."
It is unlikely agents realised the extent of the real dangers. But without action by agents to satisfy the auditors, affected syndicates simply could not be given a clean bill of health.Agents faced a simple choice. Should they expand into the problem and find new names in the hope of absorbing the losses, or be frank and risk undermining the market?
Manyagents chose the former and hoped for the best. They added 19,000 new names to the existing 20,145 in 1982. Old names were encouraged to write more business and join the syndicates. At the same time the volume of business and the risk borne by affected names, who have unlimited liability, rocketed by 250%.
Agentspresumably hoped all would be well. They must have convinced themselves it was in the interest of everyone to be economical with the truth. If they blew the whistle, the accounts of these syndicates in the 1982 year could not be closed; all but the deaf would leave the blighted syndicates.
Worse still, several agencies were being fattened for public flotation, so potential profits from such deals would have melted. With open years draining away to the millennium, existing names and insiders would face ruin. So what agents saw as promoting "the good of the market" fortuitously coincided with the self-interest of the professionals.
Thefig leaf they offered to satisfy the panel auditors, apparently, was that some syndicates took out "unlimited syndicate stop-loss policies," in which one syndicate reinsures the "tail" of another. This is a kind of insurance ‘‘daisy chain'' otherwise known as whole-account reinsurance, and its value is cosmetic. Risks go round in a circle but liabilities stay firmly with names.
Little warning was given by the members' agents during the 1980s to the 19,000 new recruits.Nor was a waning given to the new names at their obligatory meeting prior to joining the syndicate with a senior Lloyd's representative, whose job is to point out the risks of the insurance market.
So assyndicate years were closed and the problem built up, managing agencies were floated on the stock market, new names were recruited and money was coined for the agencies for another 11 glorious years.
Agents appear to havegambled that the asbestosis losses would not be as large as they had been warned and that profitable business would soak them up over the years; they lost both bets. Claims ate pouring in. With the bill for natural disasters reaching £4 billion, even the most optimistic agree there is little chance of profits this side of 1996.
The panel auditors' letter now forms the foundation of various actions being brought by names who joined since 1982 and face ruin. Theyclaim agents did not tell them about it so they were recruited on a false prospectus. If they had been warned they say they would not have joined in the first place.
Those who joined before 1982 claim that if they had been shown the letter theycertainly would not have increased their underwriting. These names are not only drained of cash in the short term by the losses of the "spiral", but also face never-ending losses from these open years "down to their last waistcoat button". Who knew what and when will become clearer in court hearings.
14 Feb 93
Sunday Times: Nightmare on Lime Street
TOMBENYON, former Tory MP, former business and former chairman of Lloyd's Society of Names, may not be everyone's cup of tea, but he has become something of a hero to the thousands of names who have been forced to the edge of ruin by huge losses.
From the ashes of the legal battles of the past few years, Benyon has rescued what he reckons is a vital document: aletter from Neville Russell, the firm of auditors, which suggests that Lloyd's agents knew more than it was letting on to its names about the potential disaster of huge asbestosis claims.
His point is that after this portentous warning, there should have been alarge "Joining Lloyd's Can Damage Your Wealth" warning attached to every application form. Instead some 19,000 inspired to join the Lime Street insurance market, attracted by the easy, almost guaranteed pickings that had the rule for many years.
When that fateful letter arrived 1982, the situation at Lloyd's was very different from today. TheCouncil of Lloyd's, then chaired by Sir Peter Green, knew thousands of Workers in Britain and America were dying long, agonising deaths from asbestosis. Two years earlier they had set up a working party to look into the problem of the lung disease, worried that Lloyd's might face big pay-outs. But nobody at this stage could have predicted the huge damages awarded by the American courts which have so far cost Lloyd's £1 billion, with the prospect of more claims stretching into the next century.
When the letter arrived, Murray Lawrence, then deputy chairman, and later chairman, responded quickly by warning market professionals and their accountants to increase their reserves and study all the available information on asbestosis.
At the end of a letter to them hestrongly advised managing and members' agents to inform their names of their exposure to the risks. Whether the agents actually warned names is the main matter now in dispute. Many of the 19,000 names who subsequently joined Lloyd's claim nobody ever mentioned the word "asbestosis".
A big and successful recruitment drive was launched, although Lloyd's denies suggestions that this was to dilute the cost of asbestosis claims. Eager new names, many of them newly rich, leapt aboard the illusory gravy train. Buster Mottram, the tennis player, Sir Peter de Ia Billiere, the Gulf war hero, and Princess Michael of Kent all joined Lloyd's in following years.
For a while the expected cheques continued to arrive. Then. came news of the losses and suddenly everybody wanted to know about asbestosis and how much information had been available on it when underwriters took on the risks.
In 1989 John Donner, a members' agent whose names were losing millions on asbestosis claims, complained to Lloyd's that some underwriters had been privy to valuable information on the disease which they had kept themselves. He suggested thatunderwriters "in the know" had quickly dumped their asbestosis exposure on other underwriters, notably Richard Outhwaite and Stephen Merrett.
Lloyd's investigated allegations but pronounced them groundless: "No evidence has been established that information was withheld from the market by the asbestos working party," said a statement in 1990. "On the contrary, the market was fully informed at the time of the existence of information which was available about these claims and was encouraged to make use of it."
The suspicions have persisted. Last year, names tookOuthwaite's agencies to court for negligence and succeeded in negotiating an out-of-court settlement for £116m compensation.
During the trial Outhwaite said he had not seen the results of the Lloyd's asbestos working party when he took on the risks.
14 Feb 93
Sunday Times: Lloyd's names take fresh hope from 1982 letter
Some of the19.000 people who became names at Lloyd's since 1982 are taking fresh hope from a letter that clearly shows Lloyd's was warned about the wave of asbestosis claims about to hit it.
In the letter, datedFebruary 1982, a group of auditors including Arthur Young and Ernst & Whinney, warned that the potential exposure to asbestosis claims, which already totalled 13,000 by that stage, was being seriously under-estimated.
Tom Benyon, former chairman of the Society of Names, which represents more than 5,000 names who are showing large losses, claims Lloyd's agents failed to pass on the warning. He sees it as an important plank m the dozens of legal cases names are bringing against Lloyd's or their agents.
Another leading critic of the Lloyd's executive, Christopher Stockwell, chairman of the Lloyd's Names Association Working Party, said: "What happened in 1982 was a disgraceful cover-up. Information known to Lloyd's was withheld from the external names."
But Lloyd's insists Benyon is simplyraking up old allegations which it has already disproved. David Rowland, the new chairman, said: "This is not a revelation. An investigation by outsiders found there was no substance to these claims."
Lloyd's points out that Murray Lawrence, deputy chairman in 1982, wrote to all underwriting agents, instructing them to warn their names about the big asbestosis claims. It has produced copies of the relevant letters. However, many names who joined after 1982 complain that asbestosis was never mentioned to them.
John Rew, who succeeded Benyon as chairman of the Society of Names last year, said he, too, believed recruiting agents had not warned new or existing names of the dangers. Peter Middleton, newly appointed chief executive, said he was not worried about the letter. "Sir David Walker who conducted a special investigation of Lloyd's for the council and other independent figures didn't find any substance to it," he said. "Second, I don't believe a conspiracy is possible at Lloyd's because I haven't met any people who can keep their mouth shut."
Bob Hughes, director of regulatory services at Lloyd's said: "A huge amount of information on asbestos was available to all underwriters and they were invited to visit the asbestos-working-party office. It is wrong to suggest Lloyd's failed to do all that it could."
One prominent member of the council in 1982. who did not wish to be named, said: "Of coursenames were suckered into joining Lloyd's, but they were suckered through snobbery and greed, not because they weren't told about asbestos."
However, in 1990 Lloyd's announced thatWalker's inquiry had found no truth in allegations that some underwriter's had access to privileged information and used this to dump their asbestos liabilities on other underwriters. "No evidence has been established that information was withheld from the market by the asbestos working party," said a press release at the time. Significantly, however, there was no Comment in the release about the amount of information made available to outside names.
This is now the crucial issue and although Middleton is cautiously optimistic that some cases can be settled out of court, many names are placing their faith in this letter.
14 Feb 93
Sunday Times: Lloyd's luck
Lloyd'sinsists it did pass on the warning, from a panel of auditors in 1982, that asbestosis claims were going to be far greater than had been anticipated. Indeed there is a letter from the previous chairman, Mr. Murray Lawrence, passing the information down the line.
Buthow far did the warnings go? Since then, some 19,000 unfortunates have been recruited as names and it is difficult to imagine many of them willingly putting everything at risk with that warning in front of them. Indeed, I have the letter Lloyd's received in front of me as I write and would run a mile from joining Lloyd's if I had seen it.
On page 21 Tom Benyon,. admittedly a man with an axe to grind, sets out his own personal view of the letter and the behaviour of Lloyd's
Benyon, like most who have lost money (which is just about everybody in this past decade), would cheerfully hang the lot of them at Lloyd's, but he has a point.Asbestosis did not come as the bolt out of the blue we were led to believe.
There weresolemn warnings that this problem was going to be huge and all-encompassing (the letter says that the losses were being apportioned on an industry basis, so that if one carrier went bust, the loss would be spread over the others - which is what happened) yet new names were busily recruited.
Given what has emerged, those names can hardly be blamed for thinking they were brought in just to help shoulder the burden.
21 Feb 93
Sunday Telegraph: Lloyd's £1bn call
ASWEEPING plan to compel Lloyd's of London's 270 insurance underwriting Syndicates to pay between £500 million and £1 billion into a central market-owned body, CentreWrite, is being considered by the Lloyd's market board. This would be accompanied by an equally large loan to Lloyd's or a membership levy of a similar amount and would clear the way for radical restructuring.
Theproposal is designed to ensure the market would have enough money to meet its 1990 losses and be able to attract new individual and corporate members without deterring them with the legacy of past disasters. It would require all syndicates to reinsure their 1990 results and place all their reserves with CentreWrite, which would receive no premium.
Seniorunderwriting agents have been canvassed already about the proposal, which some in Lime Street see as the way to clear the decks before turning Lloyd's into a public company. It is one of several ideas presented to the market board, which is due to submit a business plan to Lloyd's chairman David Rowland and chief executive Peter Middleton in April.
Thathappens to coincide with the expiry of many of the writs served against Names who have been unwilling or unable to meet their syndicate losses.
Aglobal settlement of disputed calls is also seen as crucial, but it still hinges on agreement by so-far unwilling reinsurers of agencies' errors and omissions policies to underwrite it.
Meanwhile, members ofSyndicate 745, whose former underwriter, David King, is suing for wrongful dismissal, face a 50 per cent 1990 cash call in April and the final result could be several times worse. The Outhwaite agency's Syndicate 317 could show a loss of more than 30 percent for 1990.
24 Feb 93
Independent: Lloyd's names asked to find £43m
MANAGERS of the troubled Lloyd's insurancesyndicate 745 have asked 1,750 underwriting members to provide £43m from their own resources to help meet steadily rising insurance claims.
The syndicate is facing losses of more than£132m for the 1990 underwriting account, caused mainly by a flood of claims from the European storms of 1990.
Laurence Cheetham, a director of theKPH Underwriting Agencies company that manages the affairs of the syndicate, has told other agents who introduced members to the syndicate: "We must warn you that there will be a deterioration." Underwriting members will be asked to pay £22m in April as a first instalment and the balance in July.
Because of themounting losses on the 1990 underwriting account KPH has decided to leave the books open so that liabilities can be more accurately assessed.
The agency's managers are carrying out anextensive review of the background to the losses, and a detailed explanation and full details of the cash call are to be sent to underwriting members later this week.
There iswidespread speculation within Lloyd's about the eventual size of the losses for the 1990 underwriting account. Andrew Elliott, an underwriter working closely on sorting out the problems of the syndicate, admitted yesterday that some speculation at Lloyd's had suggested that the eventual loss could be as high as 1,000 per cent of the syndicate's financial capacity.
If thathappened, it would mean a loss of more than £430m for the syndicate.
Mr. Cheetham has told other agents: "There islikely to be a further cash call in the early part of 1994 and you and your names [the underwriting members] will be advised of the estimated amount that will be required in the report and accounts."
Anaction group has already been formed among the under-writing members to protect their interests and gain financial help.
Edward Benfield, a professional insurance broker who is a member of the syndicate, has urged Lloyd's to reopen the syndicate's 1989 account, which showed a loss of £22.3m, and hold a fresh audit.
25 Feb 93
Independent: Lloyd's set to probe losses suffered by two syndicates
LLOYD'S of London is poised toappoint internal inquiry teams to examine how losses of nearly £200m have fallen on two of the market's insurance syndicates, writes John Moore.
Bothteams will include an accountant aid two market professionals. They will examine the affairs of syndicates 475 and 745.
Theaffairs of syndicate 475, formed of 1,750 underwriting members, were once managed by Roy Bromley, who committed suicide last month after losses rose from £14m to £54m.
The othersyndicate, 745, managed by KPH Underwriting Agencies, is also formed of 1,750 underwriting members. Its managers are seeking £43m from members to help to meet £132.5m of losses that have fallen on it.
6 Mar 93
Daily Telegraph: Shaw strides centre stage
7 Mar 93
Australian Sun-Herald: Grilling for Lloyd's chief over huge insurance losses
AUSTRALIAN member'of giant international insurer Lloyd's of London are planning a hot reception for chief executive Peter Middleton when he arrives in Sydney this week.
Local "names" - the term for members of Lloyds who provide the capital to underwrite insurance risks - will meet the newly-appointed Mr. Middleton on Tuesday.
Lloyd's names, of whom Australia boasts more than 500 out of a total 20,000 world-wide, have incurred massive losses recently, leaving trail of bankruptcies, court actions and even suicides.
Already local names have prepared alist of explosive questions seeking information on a host of issues ranging from Lloyd's solvency to alleged concealment of losses, the extent of massive asbestosis claims, claims of malpractice and the real extent of losses in the US from Hurricane Andrew.
During thelate 1980s, Lloyd's was rocked by massive losses - the first in more than 20 years - after a spate of natural disasters, including Hurricane Andrew, severe storms in the UK and Europe and the loss of the Piper Alpha oil production platform in the North Sea.
Lloyd's was also hit by claims worth more than$150 billion from victims of asbestosis world-wide.
Amid thecrisis surrounding Lloyd's, chairman David Coleridge resigned last July and chief executive Alan Lord retired two months later.
Senior Lloyd's broker, David Rowland, was appointed chairman soon after and Mr. Middleton became chief executive.
Theinsurer's underwriting capacity has now fallen by 40 per cent to $18 billion and many names regard Mr. Middleton's visit - officially to discuss Lloyd's direction for the 1990s - as a recruitment drive to attract new capital and placate angry members
Localnames are keen to quiz Mr. Middleton, a former travel business executive with no experience in the insurance industry.
After leaving school, Mr. Middleton spent five years training to be a monk. He then studied philosophy at the Sorbonne in Paris for a year and then three years studying for a BA in social studies.
Before joining Lloyd's, Mr. Middleton was group chief executive of theThomas Cook Travel group and was head of banking operations at the Midland Bank for two years. Early in his career he spent 16 years in Britain's diplomatic service.
Lloyd's, which reportsthree years in arrears, is forecast to incur a $1 billion loss for 1991 after suffering losses of $A4.6 million in 1989 and $A3.3 billion in 1990.
"We havebeen through some very bad years," Mr. Middleton said recently.
Afteroperating for 305 years, the worlds biggest insurance market next month will produce its first business plan Mr. Middleton said
"Thebusiness plan will be radical," he said. "Names will begin to benefit from the restructuring over the next few years."
Lloyd's - which has a reputation for insuring anything - acts as a marketplace where brokers, acting for clients, negotiate with syndicate underwriters who decide whether or not to accept part of a risk offered to them and then the premium to be paid.
"Against the background of substantial losses in recent years, our members want to see profitability restored," Mr. Middleton said.
Butlocal names are expected to subject Mr. Middleton to severe examination.
Informationprovided to local names alleges "concealment of the huge amount of known asbestosis claims in 1982 in order to dump the ‘reinsurance' on other members and to give time for insiders to escape their liabilities.
Even now much of the losses being called fur asbestosis and pollution will not be payable for several years the information alleged.
Aspokesman for Mr. Middleton in London said the chief executive was unavailable for comment.
7 Mar 93
Australian Sun-Herald: Lloyd's may be facing $5bn loss
HUNDREDS of investors in Lloyds of London may face crippling losses following another apparently disastrous year for the insurance industry.
The losses for1990, due to be reported in June, are expected to be the worst in Lloyd's 306-year history.
Aleaked report suggests the loss will be higher than the $5 billion announced for 1989.
The Lloyds crisis is thought to be so deep that some City commentators believe a bail out may be necessary.
It would be aimed a saving investors - or "names" - from bankruptcy, and rescuing Lloyds itself as the world's premier insurance market.
In the pastthree years Lloyd's and its 20,000 members have suffered losses worth more than $10 billion.
But a spokesman describing the news as speculation, said Lloyd had resources of$40.9 billion, there was no question policies would not be honoured, and name should he able to meet commitments.
17 Mar 93
Asbestos producerUSG Corporation, the parent holding company of United States Gypsum Company, filed a pre-packaged plan of Reorganisation under USCA Chapter 11.
0 Apr 93
The Chairman of Lloyd's, David Rowland, forwards the document entitled "Planning for profit: a Business Plan for Lloyd's of London" to Members.
5 Apr 93
Times: Global warming sends cold shivers through insurers - Violent weather could destroy the reinsurance market and leave the public uninsured against natural catastrophes
World weather patternsare changing dramatically, triggering a string of natural disasters and forcing the insurance industry to take harsh remedial action t6 stave off a crippling flood of losses. The recent storms that ripped through America, leaving more than 100 dead and wreaking havoc from Cuba to Quebec, are unlikely to cost as much as earlier hurricanes. But they have worried insurers.
Later this week,Sun Alliance, one of Britain's strongest composite insurers, is expected to reveal, in its figures for 1992, losses from Hurricane Andrew, which swept through the Bahamas, southern Florida and the Gulf of Mexico before blowing itself out in Louisiana. It resulted in the biggest claim the insurance industry has ever faced.
Several rivalshave already announced losses from the hurricane, which has cost more than $17 billion - a figure that is still rising. Last month, General Accident, for example, disclosed worse that expected losses of £65 million.
OneLloyd's underwriter said: "We are living in a much more dangerous climate. There is no doubt that global warming is taking place, causing much stronger and much more frequent hurricanes."
Thisview is shared by Jeremy Leggett, a scientific director at Greenpeace, who said: "A globally warmer atmosphere is expected to herald stronger and more frequent windstorms, storm surges, rising seas, floods, droughts, increased subsidence following soil shrinkage on clay substrates, and many more unpleasant impacts."
Signs of climate change are evident.Over the past 20 years, the average snowfall over the northern hemisphere has fallen 8 per cent and lake temperatures in Canada have increased 2 degrees Celsius. Mountain glaciers are in retreat, the Arctic ice-cap is declining, California is in its seventh successive year of drought, southeast England is in its' fifth and southern Africa is in the grip of the worst drought in living memory, Dr. Leggett noted in recent research.
Thecosts to insurers from wind-storms and other natural catastrophes have run into tens of billions of dollars, and the bulk of disasters have been in the past six years. In January 1987, Siberian winds howled across Europe, submerging Georgia in floods, followed in October by severe windstorms in the UK, which cost British insurers £2 billion, of which £430 million was reinsurance cover.
Between 1966and 1987, there were no catastrophes that caused losses in excess of $1 billion. Of the 15 catastrophes that have cost more than $1 billion each since 1987, ten were windstorms, which accounted for more than 85 per cent of the combined total loss of $53 billion.
Theselosses have sent cold shivers through the insurance industry, leading to a massive pricing reaction. George Lloyd-Roberts, a leading Lloyd's underwriter, said premiums have been hiked up to reflect the crippling losses suffered in recent years while academic evidence is triggering further upward shifts. "However, we don't yet know whether this is a short term blip in weather patterns or is of a longer-term nature," he added.
While academics like Dr. Leggett argue that the changes are permanent, others point to evidence from the past 100 years, which shows two or three similar blips in European weather patterns. However, whatever the nature of the changes, the increased occurrence of catastrophes has forced reinsurers to leave the market in their droves.
Thelatest fall out from the market is NW Re, a three-way joint venture between Norwich Union, Winterthur, of Sweden, and Chiyoda, of Japan, which has been a big market player. NW was driven out because of the huge losses it made as a result of Cyclone Iniiki, which cost the world-wide insurance industry more than $1. 4 billion and Hurricane Andrew. NW's move
follows thedeparture of a string of other insurers, including English & American and the reinsurance arms of Cigna, of the US, and Yasuda, of Japan. As a result, the amount of catastrophe reinsurance available in the London market, which probably provides about 50 per cent of the world-wide catastrophe cover, has shrunk from an estimated $100 billion five years ago to its present level of between $35 billion and $50 billion.
Thissharp contraction is making itself felt. Insurers are unable to lay their hands on as much reinsurance as they want and, as a result, many companies are being left with inadequate catastrophe cover. Five years ago, companies could pick up cover for $500 million of losses. Now, they are lucky if they can get cover for more than $100 million.
There is worse news elsewhere. Some regions around the world are not able to lay their hands on any reinsurance at all. Earlier this year, a lament was heard from the Caribbean thatinternational reinsurers were shying away from the area with the hurricane-prone region north of Trinidad and Tobago suffering the worst. The problem has surfaced because local insurers are failing to demand high enough premiums from the insured, and, as a result, they cannot afford to buy the reinsurance, the price of which has gone through the roof.
High-risk areas, such as Hawaii, Florida and the Caribbean, are thought to be suffering the most. In the Caribbean, it now costs an insurer between 50 per cent and 60 per cent of its insurance premiums to buy catastrophe cover. One underwriter said he knew of one northeast American company that was having to shell out 37 per cent of its total premiums for catastrophe cover; five years ago, the figure was about 8 per cent.
Theincreased premiums were necessary to "bribe the reinsurer to do business", Mr. Lloyd-Roberts said. In 1987, there were about five reinsurers covering a risk, this fell to three to four the next year, to two in 1990, one in 1991 and in 1992 "that one would be decidedly wobbly", he added.
In order toentice the limited amount of reinsurance cover available, insurers are having to bear a bigger portion of the risk before the reinsurer's cover kicks in. That is, the level of deductibles are rocketing, resulting in the reinsurers bearing a lower amount of any losses. Because of this development, the London markets share in the losses from the recent US storms is expected to be negligible, despite estimates of total insurance losses ranging from £600 million to £3 billion.
TheUK reinsurers are looking relaxed as they have covered only losses that exceed £3 billion. Five years ago, they would have been in a very different predicament, covering losses in excess of, say, $2 billion, with a resulting $1 billion hit. Furthermore, the amount covered has fallen. The reinsurers have provided cover for $8 billion of losses, after the $3 billion deductible, compared with the $16 billion layer they would have been likely to provide before 1987.
Themarked contraction in reinsurance has also forced the insurers to look more closely at the risks they are underwriting. Countries such as the US are being broken down into zones of varying risk and reinsurers are picking and choosing where and how much they will cover. This is a marked change from the good old days when regions were more homogeneous.
Also, thedays when insurers could subcontract the risk to reinsurers, enabling them to be ignorant of the facts, are gone. Insurers are beefing up their analysis because they are being forced to bear a bigger slice of any risk and because some believe the risk is on the rapid increase.
Dr. Leggett gives a warning, however, that this may not be enough. "Healthy economies are impossible without a healthy international insurance industry. It is becoming increasingly clear that a healthy insurance industry ‘will not be possible in a world in the grip of human-induced climate change." Changes in terms and premiums will only buy time for the insurance industry and unless action is taken to cut greenhouse-gas emissions, the insurers' prospects look bleak.
"Everybody is very nervous," Mr. Lloyd-Roberts said. "If there is a major catastrophe this year, I think the catastrophe market could collapse."
Thethreat of continued violent weather patterns is real and, as a result, there is a serious possibility of the reinsurance market collapsing. The effects would be far-reaching and the ultimate result would be the unacceptable situation of the public finding itself without any insurance cover against natural catastrophes.
16 Apr 93
The Chief Executive of Lloyd's, Peter Middleton, writes to a Member of Lloyd's and states inter alia
"I see the role of the Chairman and myself as executing the requirements necessary to ensure that Lloyd's has a profitable future. In doing this, we certainty cannot ignore the problems of the past and both of us have said this publicly".
16 Apr 93
Financial Times: Report raises new criticism of syndicates
MANAGERS of four loss-makingGooda Walker Syndicates artificially inflated their profits in the 1980s through the improper use of specialised reinsurance policies, a detailed report alleges.
A200-page report prepared by GW Run Off, which is now handling the affairs of the syndicates. was passed to the Serious Fraud Office earlier this week, and has prompted fresh criticisms of regulation at Lloyd's.
Mr.Michael Deeny, chairman of the Gooda Walker Names Action Group, which is co-ordinating the Names' own legal action said: "It reveals an appalling state of affairs. It shows a total failure of regulation by Lloyd's."
One agency manager said theevents showed that the system had failed Gooda Names completely. "We have to recognise that."
Thereport's findings have also been sent to the insurance market's investigation committee, whose examination of the syndicates has been underway for some months. The report could also be used as evidence in the legal action being taken by more than 2,000 Gooda Walker Names against their agents.
Membersof the Gooda Walker syndicates are among the worst-hit of the insurance market's Names - the individuals who supply its capital. Their losses amount to more than £900m, with many individuals facing losses in excess of £1m.
The report focuses on the use by Gooda Walker syndicates of "time and distance" policies -reinsurance policies which allow Lloyd's syndicates to manage their reserves against long-tail claims which emerge many years after the inception of policies more effectively.
Suchdeals allow insurers to "discount" their reserves against future claims. Policyholders pay a reinsurance premium which is then invested by the reinsurer, with the proceeds - less a profit for the reinsurer - repaid at an agreed future date to meet claims.
Insurers are allowed tocredit future benefits from such policies in the year in which they buy the policy. The report shows that between 1980 and 1988 the profits of four syndicates - numbers 164, 290, 295 and 298 - were increased by some £37m as a result. In some years in the early 1980s virtually all profits were generated from such policies. But few details of the policies were included in syndicate accounts.
During thesesame years the profitability of Gooda Walker syndicates attracted many Names to join, with each of the syndicates' capacity - or capital base - expanding significantly.
The report says that thereinsurers of some of the policies in turn reinsured their exposures with the same Gooda Walker syndicates.
The investigators wereunable to find any evidence that the Gooda Walker syndicates had prepared formal cash-flow forecasts which would detail when they expect future claims to emerge. These are essential for the controlled use of "time and distance" policies.
Warningsfrom Lloyd's regulators that "there could be no question of [a Gooda Walker's syndicate] reinsuring its own risk back to another Gooda Walker syndicate" were apparently ignored, adds the report.
Investigators have identifiedthree policies purchased from Pinnacle (the Bermuda-based company which provided reinsurance to the Gooda Walker syndicates), elements of which were reinsured to other Gooda Walker syndicates.
16 Apr 93
Times: Lloyd's syndicates' profits enhanced'
HUNDREDS of Lloyd's names were attracted to join the Gooda Walker syndicates because of profits that had been "significantly enhanced" by reinsurance policies according to the latest report from the affairs of the agency.
The200-page report, which took more than a year to complete, was commissioned by GW Run-Off, the company appointed to manage the syndicates after the Gooda Walker group went into voluntary liquidation in October 1991. Written by Ken Randall, a former Lloyd's regulator, the report criticises the running of the syndicates by professional agents at Lloyd's to the detriment of names, many of whom are amateur investors.
Thelatest revelations come as a severe blow to the Corporation of Lloyd's as it prepares to unveil the business plan, which is aimed partly at ending costly litigation by names. More than 2,000 Gooda Walker names are suing 67 Lloyd's agencies for negligence in an attempt to recover losses totalling £925 million.
Michael Deeny, chairman of the Gooda Walker Action Group, said the report strengthened the names' cause. "Itportrays an appalling state of affairs and reflects badly on various parties."
Thereport reveals that by using time and distance (T&D) policies, a type of reinsurance, three syndicates in particular 164, 290 and 295 - managed to report profit enhancements running into millions of pounds. The annual syndicate reports failed to disclose the extent to which the policies were used. As a result, names were unaware of the impact on profits.
One Lloyd's underwriter said "Names rushed to join the syndicates because of their profit performance. If you were one of those names, you would be angry to find that these profits were primarily the result of these reinsurance contracts.
Thecriticism levelled at the disclosure in the accounts places Littlejohn Frazer, the syndicates' auditor, in the spotlight. No specific Lloyd's rules required full disclosure of T&D policies in accounts.
T&D policies are a generally accepted reinsurance technique at Lloyd's. One insider estimates that there are policies worth hundreds of millions of pounds in the market. Lloyd's has regulations governing the use of T&D reinsurance and has recently reviewed them as a result of new guidelines for insurance companies from the Department of Trade and Industry.
ALloyd's spokesman said: "We believe our existing rules are adequate. But we keep all our requirements under constant review." In the light of the report, the rules would probably be looked at again, he added.
However, therevelations cast serious doubt over the effectiveness of Lloyd's regulation of T&D policies. "Lloyd's have a lot to answer for," Mr. Deeny said.
Mr.Randall's report has been sent to the Serious Fraud Office.
TheGooda Walker agency has already been the subject of one enquiry last year and is
currentlybeing investigated by the Corporation of Lloyd's.
16 Apr 93
Times: Report critical of Gooda Walker syndicates
A REPORT into the circumstances surrounding losses of£925 million suffered by names on the Gooda Walker syndicates at Lloyd's of London adds fuel to the legal action being pursued against members' and managing agents.
TheGooda Walker agency, which went into voluntary liquidation in October 1991, has already been the subject of one enquiry, completed last year, and is currently being. investigated by the Corporation of Lloyd's. The agency's affairs may be the subject of a further enquiry; this time by the Serious Fraud Office.
This week, theSF0 received a report written by Ken Randall, a chartered accountant and a former head of regulation at Lloyd's. The report was commissioned at the end of 1991 by GW Run-Off, the agency appointed to manage the syndicates' affairs after the Gooda Walker group went into liquidation.
Thereport delves into the back-ground of the syndicates' extensive use of time and distance (T&D) policies, a generally accepted financial reinsurance technique in the Lloyd's market. T&D policies involve paying premiums to reinsurance companies, often based offshore for tax purposes. Syndicates are then able to take as immediate' profit amounts equal to the premiums plus the rolled-up interest that accrues over the policies' lives.
According to the report, in the case of several Gooda Walker syndicates,T&D policies turned losses into profits or increased small profits. Three syndicates in particular - 164, 290 and 295 - used T&D policies extensively. As. a result, "virtually all of syndicate 164's profits for the 1980, 1983 and 1984 years of account resulted from the benefit taken from T&D policies", the report states.
For example,excluding the benefit of T&D policies, syndicate 290 would have reported a loss of £1.7 million for 1983. However, a £2.1 million benefit from the policies transformed that into a £400,000 profit.
Similarly, the report reveals that"all of syndicate 290's profits for the 1981, 1983, 1985 and l987 years of account" resulted from T&D contract. In 1985, such policies transformed a £4.3 million loss into a £3 million profit.
The result of T&D policies was double-edged. The syndicates suffered a premium outflow to purchase the policies , while their reserves - funds set aside to meet future claims - were depleted because the bolstered profits were distributed to names.
In addition,reporting higher profits meant commissions paid to managing and members' agents increased. An analysis by Mr. Randall reveals that in the case of syndicate 290, commissions paid between 1981 and 1988 were enhanced to the tune of £3.7 million by the policies. For syndicate 164,. the profit commissions paid over four years were enhanced by £119,295. However, for syndicate 295, there was a fall of £227,980 for the 1983 and 1986 years of account because of the policies.
The report says that because of the profits enhancement,, the Gooda Walker syndicates shot up theAssociation of Lloyd's Members league table of syndicate performance as a result, hundreds of Lloyd's names, who rely partly on the tables in making underwriting decisions, flocked to join the syndicates. In 1984, capacity at the Lloyd's market as a whole grew 16 per cent, while syndicate 164's nearly doubled and syndicate 290's increased by 66 per cent. The following year, the disparity was even greater.
The report also says thatsyndicates 164 and 290 were writing inter-syndicate reinsurance but the terms may not have been on an arm's length basis. Furthermore, the syndicates failed to make adequate cash-flow projections to test whether they would have sufficient cash to meet claims as these fell due for payment. As the report states, there is nothing improper about the use of T&D reinsurance, provided that there is full disclosure of the material transactions and that cash flow forecasts are prepared.
16 Apr 93
Financial Times: Auditors Seek to Limit Legal Actions
The largest eight UK accounting firms are planning to launch a campaign to protect themselves from increasing litigation against auditors.
They have hired consultants and are considering a range of options including legal reform to limit court damages which can be awarded against them.
They are likely to call forchanges to Section 310 of the 1985 Companies Act, which forbids accountants from being able to contractually limit their liability.
Their concern follows arise in the number and value of law suits brought particularly in the U.S. by investors and other users of audited accounts.
Many firms saylitigation is rising to levels where it will either drive them into insolvency or force them to cease acting as auditors.
The campaign follows lobbying in the US by a pressure group of accounting groups.
Theinformal gathering last week of the heads of the "Big Eight" accounting firms received a report commissioned from a political lobbying group.
It is believed to have suggested that many lawyers, politicians, academics and accountants were sympathetic to reform.
Mr. Roy Chapman, senior partner ofArthur Andersen in London, is co-ordinating the Big Eight's campaign in the UK. The other firms are Coopers & Lybrand, KPMG Peat Marwick, Ernst & Young, Price Waterhouse. Touche Ross, Grant Thornton and BDO Binder Hamlyn.
The big eight accountancy firms:
17 Apr 93
Financial Times: Record loss as Lloyd's plans altered structure
LLOYD'S of London hopes to soften the shock ofanother record loss totalling more than £2bn by announcing plans within the next few weeks for a radical restructuring of the insurance market's operations.
The Lloyd's "business plan," however, will not provide for an immediate settlement to the legal actions dogging the market.
Negotiationsto settle out of court will continue, but Lloyd's appears to be resigned to a continuation of more than a dozen legal actions between Names - the individuals whose assets sup-port the market - and the agents who organise their affairs.
The market's governing council hopes its new business plan willre-establish confidence in the market by paving the way for a substantial injection of corporate capital as early as January 1994. It is understood that Lloyd's council has agreed in principle that corporate investors would be "ring-fenced" from the heavy potential losses that are emerging from liability business underwritten in the past.
The price for such "ring-fencing" would be ahigher contribution by the new participants into Lloyd's central reserve, which meets claims when Names are unable to fulfil their obligations. Corporate Investors might also be asked to pay an entrance fee.
Senior members of the board now acknowledge that thelosses in 1990 - the latest under the Lloyd's three-year accounting system - will total more than the £2.06bn in 1989.
Mr.David Rowland, chairman, and Mr. Peter Middleton, chief executive, want the business plan to be presented before June to a meeting of all the market's participants.
Themarket has suffered a sharp decline in its capital base in recent years, but with insurance rates rising and the prospect of profits returning, informal contacts are understood to have shown up a substantial interest among potential corporate investors.
The plan is also understood to include areinsurance scheme allowing syndicates to reduce the uncertainty arising from old liability policies, from which claims are continuing to emerge.
17 Apr 93
Financial Times: Lloyd's insurance
Whatever the fine details of the business plan being prepared for the Lloyd's insurance market, it mustnot fail to attract fresh capital. A £2bn loss for the 1990 underwriting year would mean a serious erosion of capital. Lloyd's cannot be far from the point where it is simply not viable as a marketplace for big international risks. There is a good opportunity to attract corporate capital while insurance rates are hardening, but new entrants will need insulating from mistakes of the past, such as long-tall claims on pollution and asbestosis.
Theidea of leaving underwriting years open right across the market seems to have been rightly dropped. That would have been unfair on profitable syndicates. A central fund to manage such long-tail risks would be a more equitable solution. What remains open is quite which risks should be covered - and exactly how it should be funded. New entrants might readily accept a levy, but only if they can expect a decent return on capital.
TacklingLloyd's bloated cost base is thus an obvious place for the business plan to start. Central overheads are only part of the problem. The complex system of managing agents and members' agents entails too much duplication of effort. That leaves the sensitive question of pricing, especially the solvency requirements applied to different forms of capital. If that can be cracked too, Lloyd's would have at least a fighting chance.
17 Apr 93
Daily Telegraph: Here comes plan for Lloyd's, allowing for wise virgins and non-virgins
Now undernew management, the old firm of Lloyd's of London is about to reveal its business plan. This is, I think, the first time that Lloyd's has made and published any plan of any sort, other than those for its vainglorious building, so I welcome it. The plan's shape is becoming apparent. It must start with the good news, which is that the insurance cycle has turned upwards, in Lloyd's favour. Competition has dropped out, premiums have risen, margins are healthy, and there is rewarding business to be done, if Lloyd's can find the capital to do it.
The trouble is that Lloyd's capital comes from its members and many of them have been knocked out or been scared out by a series of disastrous years, with the1990 results (which look dreadful) still to come. The plan must foresee bringing in new capital, this time from corporate bodies -Lloyd's lawyers seem to have found a way round the obstacles. New investors are being lined up to take on new risks. What they cannot be expected to do is take over old risks. They will need to be certain that Lloyd's will not pass the hat round for the ‘open years' - the unquantified liabilities, cranked up by American lawyers, still lurking in accounts that Lloyd's cannot close.
Some way must be found to insulate these liabilities. I expect the business plan to propose that anew entity should take them over, together with the reserves already made to meet them. It would have to be done on an equitable footing, so that the wise virgins did not subsidise the foolish virgins, let alone .the non-virgins.
Aftera decade or two, Lloyd's would be able to see whether the reserves were still running ahead of the liabilities and, if not, could then decide what to do. It might even choose to tell the American legal system to pollute a lake by jumping into it. In New York last year, meeting someone who called himself an environmental lawyer, I was able to tell him that this was a contradiction in terms.
Dealing with theopen years would be the best start on tackling Lloyd's troubles; but only a start. It would still leave all those luckless Lloyd's syndicates which found that they had taken in each others' dirty washing.
If there is an instant remedy for them, I have yet to hear it. They will have to fight out their quarrels, with their agents, with the agents' insurers, with the reinsurers... Ultimately, what matters is how much of the loss can be recovered from cover placed outside the market and outside the country - from the chaps in the spiked helmets, as my Lloyd's friends so tactfully put it.
The short answer is: not enough. When thebills for 1990 start to go out, Lloyd's will be in for a stormy few months. Much is hoped of the new management but what it cannot do now is to conjure up money. The chairman of Lloyd's, like the Chancellor of the Exchequer, has no money of his own - it all belongs to the members. If he raises a loan to help Lloyd's, he sentences his members to pay interest for ever, like the Chancellor.
What Lloyd's new management can and surely will do is to concentrate on Lloyd's best asset, which ought to be its name. If Lloyd's were a franchising operation, like The Body Shop, and instead of insurance sold banana conditioners, its name would have been better protected. A whole lot ofduds, sharps, second cousins, free riders and nodding donkeys would have lost their right to it by now, leaving it to the professionals who would take care of it.
Lloyd's has toset and enforce standards, not only of probity but also of competence, appropriate to the world's best-known name for insurance. Once it can do that, it could and should charge new Investors a franchising fee for the use of the name. Lloyd's could always find a use for the money.
27 Apr 93
Financial Times: Bermuda sunbathes as Lloyd's shivers. The Colony's reinsurers are gaining from London's turmoil.
‘As the market has got more difficult we've seem more broker inquiries than we have ever seen before' - Doyle Stephens, OIL Insurance
For years, the tiny British colony of Bermuda has played a specialised role in world insurance, as the tax-haven home of more than1,300 "captive insurers" insurance subsidiaries formed to insure the risks of their industrial and commercial parent companies.
Now, it is taking advantage of the turmoil at Lloyd's and in the London market to turn itself into a much more rounded reinsurance centre. Since themid-1980s a new breed of independent companies, backed by European and US capital, have been formed in Bermuda to insure specialised commercial insurance and reinsurance risks.
Their growth has been impressive.Centre Re, the biggest of the companies, in which Switzerland's Zurich holds a majority stake, expects to have doubled its revenues to $1.5bn (£990m), when it reports its figures for 1990, its fourth full year of operation.
The revenues ofthree of the biggest companies amounted to more than $2bn in 1992, just less than a sixth of the estimated $13bn in gross premiums earned by Lloyd's in the same year.
And theprofitability of each of the companies has produced a mood of optimism, which contrasts sharply with the gloom in the London market, where news of losses and closures has virtually become a daily occurrence in recent weeks.
In the pastsix months investors have raised or announced plans to raise more than $1.5bn for Bermudan-based companies.
Many of these developments have initially brought comfort to the Lloyd's market. Bermudan companies provide important reinsurance capacity for London. Bermudan-based insurers frequently talk abouttheir market "complementing" the London market.
Centre Re, for example, agreed at the end of last year to back a multi-million pound reinsurance schemes which will allow Lloyd s Names to obtain stop-loss, or personal, reinsurance. Centre Re also provides dozens of financial reinsurance policies - called "time and distance" policies - which allow Lloyd's syndicates to manage their reserves more flexibly.
Another new company,Underwriters Capital (Merrett), has been formed exclusively to provide reinsurance for the nine syndicates that the Merrett agency manages at Lloyd's, indirectly increasing their capital base.
However, in other respects developments on the island present a challenge to the leaders of Lloyd's and the entire London market.
Somebusiness formerly underwritten in London has already been lost.
Mr. Brian O'Hara, president and chief executive of XL Insurance, which like ACE also insures US liability business, says, for example. it isnow winning some contracts that in the past would have been placed in London.
Oil companieshave set up TOPS Insurance in Bermuda to insure catastrophe risks for North Sea oil rigs, because they were unable to buy the cover in London.
The deal "hasmajor implications for London," says Mr. Doyle Stephens, chief executive of OIL insurance, one of Bermuda's longest established mutual companies, which manages TOPS. "Maybe we were depending on Lloyd's too greatly. Brokers are now much more likely to visit Bermuda. "As the market has got more difficult we've seen more broker inquiries in the last year-and-a-half than we have ever seen before," says Mr. Stephens.
Andonce lost by London, business is unlikely to be won back quickly.
Centre Re underwrites contractsthat stretch over a number of years and reimburses premiums if losses turn out to be lower than expected. Mr. Michael Palm, executive v ice-president of Centre Re, says a big aim of his company is to "introduce stability to insurance costs, taking out the year-to-year volatility".
Bermudan companies can build up tax-tree reservesand companies operate with much lower expenses than many of their competitors.
In particular the Bermuda companies are able toavoid the very high so-called "frictional'" costs, which are typical of a market - such as London - in which dozens of relatively small insurance and brokers combine to insure and reinsure large risks.
They tend to conduct asmall number of high-value transactions, transferring huge blocks of risk on to their own books in exchange for multi-million dollar premiums .
Centre Reearned an average of $25m for each of its 175 transactions currently on its books.
"Thecommon element in al our business is a lot of premium per transaction," says Mr. O'Hara.
The Bermudan companiesemploy more highly skilled professionals - such as actuaries - than their equivalents in London, which should allow them to improve their underwriting performance .
Nearly a third of Centre Re's 30 or so professional staff are actuaries, whom the group deploys as underwriters.
"Wedon't believe in the kind of subjective underwriting where you simply guess what the range of losses w ill be," says Mr. Palm. Because the Bermudan companies generally dominate their market sectors, they have been able to avoid the rate competition which has been suicidal for many companies and syndicates in London.
Mr. O Hara of XL says: "Liability insurers in the past have shot themselves in the knee or even higher."
More importantly, Bermudan companies are not exposed to the same old pollution and asbestosis liabilities, stretching back to policies underwritten in the 1940s and 1950s, that are bedevilling both the London market and insurers world-wide.
For investors attracted by the prospects of increasing reinsurance rates, but worried by the industry's legacies from the past, Bermuda looms as an attractive option.
Certainly Mr. David Saul, the Bermudan finance minister. is relishing the prospect of more insurance business, joking "Bad news for Lloyd's has been good news for us".
27 Apr 93
Agency Agreements (Amendment No. ?) Byelaw(No. 6 of 1993, 27 April 1993)
28 Apr 93
At a Society of Names Conference on 28 April 1993, R A G Jackson, Chairman of the London Market Asbestos Working Party, stated, inter alia, in a speech that some50% of the American Legal Liability claims impacting Lloyd's arise under reinsurance contracts of American direct writers.
30 Apr 93
The Corporation of Lloyd's writes to a Member in relation to a request to provide copies of the Reports of the two Lloyd's Inquiries, chaired by Peter Millett QC and Nigel Holland FCA, and by Adrian Hamilton QC into Alexander Howden and states:-
Lloyd's has ageneral policy of not releasing enquiry reports. This policy was determined some time ago following consultation with the chairmen of several of the enquiries. It was the view of those undertaking the enquiries that the interests of the Society would be best served by a policy of confidentiality. Protected in this way those persons whose co-operation was sought by the enquiry were more likely to provide information and full and frank assistance. The policy also facilitates the production of an uninhibited report which can form a basis for further regulatory action"
30 Apr 93
Times: Names great and small welcome Lloyd's rescue plan
LLOYD'Snames, the private Investors who provide the capital for the beleaguered insurance market, cautiously welcomed yesterday's action plan to revitalise the institution. However, some expressed concern that not enough had been done to help distressed names.
The list of Lloyd's names, which reads like an extract fromWho's Who, includes members of the aristocracy, politicians, senior businessmen, show business personalities and sports people It includes the Duchess of Kent, Princess Michael of Kent, Sir Anthony Pillington, Sir Edward Heath MP and Sir Freddie Laker.
Dr. Mary Archer, who chairs the Lloyd's hardship committee, greeted the plan enthusiastically: "This is theright way forward to bring in fresh capital, unencumbered by the problems of the past." However, she acknowledged that some might feel dissatisfied. "I know some of the action groups will be disappointed that nothing more is being done for them but David Rowland cannot rub a magic lamp and simply. produce money." Dr. Archer remains confident about the future of Lloyd's: "Trading conditions are now good and I hope names will decide that the right course is to stay on and get the better returns which will be available to iron out their losses."
Virginia Wade, the tennis player, was also pleased by yesterday's events: "This will greatly enhance the market's prospects," she said. "After all, Lloyd's has to survive - it is too valuable an institution not to." Eddie Kulukundis, the theatrical impresario, who is married to Susan Hampshire, the actress and a fellow name, shared Ms Wade's enthusiasm. He said the plan "has tackled many of the problems and is a useful start which should begin to sort things out so that we can all make money in the future". Mr. Kulukundis sympathised with distressed names who are not helped by the plan, but added: "I don't see how they could have been helped." He hoped that a proportion of future Lloyd's profits would be set aside for them.
MarkCox, the tennis player, who has lost hundreds of thousands of pounds, said: "A lot of people got into Lloyd's without being told what the risks were. If they had known, they would not have got involved. Lloyd's must look after the names who have lost the most money."
Litigationby distressed names, which is likely to continue, received support from Buster Mottram, another tennis player, who is believed to have lost as much as £300,000. Roger Seelig, the former corporate financier who is now a non-executive director of Norman Hay, the engineering group, said: "The question has to be asked, why much of this was not done earlier."
Most professional names were cautiously optimistic.Neil Shaw, chairman of the Association of Lloyd's Members, said the plan addressed all the issues worrying members and was "a ‘well thought out strategy".
Lord Strathalmond, chairman of Sturge Holdings, one of the largest Lloyd's agencies, said: "I am particularly pleased to see the moves to control capacity coming into the market"
Others had reservations.Tom Benyon, director of the Society of Names, said little had been given to names who had been pushed out of the lifeboat. "I am not confident that [they] will make it back to the shore," he said.
30 Apr 93
Daily Telegraph: Lloyd's trims sails to survive'
THERE is much that issensible in the new business plan from Lloyd's of London, but Lloyd's has much to start being sensible about. The years in which the brokers, agents and working members grotesquely overpaid themselves, and the market practices which many maintain were tantamount to fraud have taken a terrible toll. The only comfort for the outside members, whose capital financed these adventures, is that the scale of the losses is such as to cause severe financial pain for the inside members too.
The question that the plan dare not ask is whether thelosses which are still coming to light are such as to overwhelm the institution. Despite months of softening up for the worst, the estimates of losses of "well over" £2 billion in 1990 and £1 billion in 1991 are shocking. Many members, faced with the bill for their share of the £2~1 billion loss for 1989, have already sold their assets to meet those liabilities. They cannot do so again.
Thoseliabilities which the members cannot meet will fall on the central fund, which stood at £1.1 billion at the end of last year, and one-third of that sum is already earmarked. The business plan points out that the gross figures for losses include an element of double counting, as reinsurance claims may take years to work their way round the market (the notorious "LMX spiral") but the losses may yet turn out to be worse than the estimates. The risk that the whole enterprise might founder remains.
This is why the plan starts off by painting such aglowing picture of prospects, talking of a target rate of return on members' capital of 33pc. Considering that members do not have to invest the capital, but merely to risk it, this is a handsome reward if it can be achieved.
As theworld's need for insurance becomes more desperate, it is not entirely fanciful. Lloyd's has unique advantages of flexibility, reputation and (potentially) low cost. Those joining a cleaned-up business as described in the plan should themselves clean up.
Much of the document iscommonsense-costs and jobs must be cut, old practices modernised, professional standards introduced, and the balance of risk and reward tilted back from labour towards capital.
For a decade or more, Lloyd's, under the lash of outside criticism, has been worrying about itsregulatory processes and taken the profitability and the structure of the business for granted. These changes are necessary for Lloyd's survival. On their own, though, they are not sufficient. If new capital is to be attracted in, its owners must be convinced that they are not at risk from the disasters of the past.
This is why the two key proposals in the plan are the attempt to draw a line under old year losses, and the admission of limited liability capital for the first time in Lloyd's 300-year history.
In theory, Lloyd's members are liable for everything they own, and this was supposed to be a great boost to policyholders' confidence that they would get paid. In practice,unlimited liability is a convenient fiction since creditors of individuals who go bust are in the same position as those of companies, and today the security of an insurance policy with any large, limited liability company is just as good as with Lloyd's.
Subject tosafeguards for the capital adequacy of the new, limited liability members, the target of bringing them in for next year's account should be met. The proposal that such members will have to bid for the right to underwriting capacity is an imaginative one, and is a welcome first step along the road to making membership tradeable, like seats on the New York Stock Exchange.
The issue of sealing off past years' losses is another matter altogether, and remains the rock on which the ship may yet founder. The proposal to put all thepre-1985 liabilities into a single organisation, "ring-fenced" from the rest, is eminently sensible-in theory.
But even to get to phase 1, "laying the foundations for a solution" requires "objective testing of the adequacy of the reserves" against the liability of each syndicate. This will produce a hollow laugh from many members, who have been seeking just this information, while wondering if they are still solvent, for several years now.
Besides, thepre-1986 liabilities are not where the worst problems lie, as the new loss projections show. The real damage done since then is in the courts, particularly in America, where imaginative lawyers are pressing claims beyond the nightmares of the writers of the original policies, and where experience is still worsening.
As if theAmerican courts were not doing enough damage from outside, there is more legal damage being inflicted by the internal legal disputes over where the buck should stop. Members facing ruin because of their liabilities, who believe their agents have been negligent, are tempted to give the money to solicitors rather than pay up and die financially.
Beyond a pledge to give priority to the efforts to settle these disputes internally, the plan offers little incentive for the members to resist going to law.
This, then, is Lloyd's dilemma. It carries a huge weight of past liabilities, but can glimpse the sunlit uplands if it only had the strength to reach them. Thestandard commercial way of getting from here to there is by borrowing; this would still put a burden on future members, but it is one they could understand and would probably bear.
Unfortunately, for reasons which the plan does not explain,Lloyd's advisers reckoned that large-scale borrowing was "impractical and undesirable".
Yet Lloyd's hasno hidden source of funds; it can only look to its members, present and potential, for its salvation. This plan is a fine start, but there are still storms ahead. Perhaps a new working party is needed, to spell out the value of Lloyd's to the nation, in case the nation is one day called upon to save it.
6 May 93
The Guardian: Fire and brimstone - Do rising sea levels trigger volcanic eruptions? As greenhouse gases threaten the Earth's ice caps, a new EC study looks to a fiery future for our planet
IMAGINE that the whole 4.6 billion year history of the Earth was compressed into the 12 hours following the striking of Big Ben at midnight on New Year's Eve On this timescale, the explosion of new life which characterised the Cambrian period would have occurred at 10.30 the following morning, just as you opened one bloodshot eye and tried to work out what day it was. At 11.50 am the dinosaurs would finally succumb to a major asteroid impact, the echoes of which would still seem to be reverberating around within your head at 19 seconds to midday when, as you retreat once again beneath the bedclothes with an aspirin, humankind and his immediate ancestors appear upon the scene.
Those last few seconds before lunch also correspond to the Quaternary period, two million exciting years during which the Earth experienced some of the most dynamic surface changes in its long history. Alternating cold and warm spells, probably related to changes in the Earth's orbit about the Sun, led to the ebb and flow of Ice sheets several miles thick over much of the planet's surface. As might be expected, such enormous variations in the volume of surface ice were accompanied by dramatic changes in sea level as water was locked into and released from the ice sheets.
The Quaternary period was also characterised by a dramatic, global increase in volcanic activity, with many more eruptions than during the preceding Pliocene and Miocene epochs. This apparent correlation between volcanic activity and glaciation has tantalised scientists for years, but a clear causative link has now been established.
Increasing concentrations of volcanically-derived gases in the atmosphere lead to a lowering of global temperatures. This is accomplished by the conversion, high in the stratosphere, of sulphur-rich gases to micrometre-sized droplets (aerosols) of sulphuric acid. These are now known to cool the Earth by back-scattering and absorbing solar radiation which would otherwise warm lower levels of the atmosphere and the surface.
During thepast decade, eruptions at volcanoes such as El Chichon, Mexico, in 1982, have temporarily combated the effects of global warming by lowering temperatures by half a degree centigrade or so. More recently, the huge eruption of Pinatubo in the Philippines in 1991 has not only increased the depletion rate of atmospheric ozone and led to spectacular sunsets, but also caused a noticeable lowering of surface temperatures due to the world-wide dispersion of sulphur aerosols.
A number of scientists have proposed a similar link between erupting volcanoes and falling temperatures for the Quaternary period, suggesting that episodes of intense, explosive volcanism may have been responsible for the ice ages by means of sulphur-aerosol triggered stratospheric cooling.
There are, however, two problems associated with this hypothesis. Firstly, much evidence suggests that the alternating cycles of warm and cold climate which characterised the ice age have, ultimately, an astronomical cause, with changes in the shape and orientation of the Earth's orbit, combined with the "wobbling" of the planet's rotation axis, leading to predictable, cyclic variations in the level of solar radiation reaching the surface. Secondly, no unequivocal mechanism has been identified to explain why a rapid increase in global volcanic activity should coincide with the start of the ice age.
If glacial episodes in Earth history are largely controlled by orbital and planetary mechanics, the most likely role for accompanying volcanic activity lies in its ability to modify or modulate the global temperature curve during ice age conditions. There is no doubt now that large volcanic eruptions can influence the climate, but can the nature of the climate influence the level of volcanic activity? Could the increase in eruptions during the Quaternary be the result of drastic climatic changes rather than their cause?
There is increasing evidence that this is possible, and that it was accomplished by changes in ocean volumes and sea levels as the Ice sheets waxed and waned. To verify this relationship and determine its precise nature, theEuropean Commission has committed 500,000 ecu (£392,500) from its Environment Research Programme to establish the effects of sea-level change over the last few hundred thousand years on the eruptive activity of island and coastal volcanoes.
Project Seavolc, a major Anglo-Italian research project, is co-ordinated by the Applied Volcanology Unit at Cheltenham and Gloucester College of Higher Education, and includes research teams from the Open University, University College London, and the West London Institute, together with Italian groups from the Universities of Milan and Calabria and the International Institute of Volcanology in Sicily.
The project will concentrate on island and coastal volcanoes because these are most likely to be affected by the 100m or more changes In sea level which accompanied the repeated advance and retreat of the ice sheets. The Mediterranean will form the main region of study. Here, volcanic ash layers in drill cores taken from the sea bed indicate that most large explosive eruptions over the last 200,000 years occurred when sea levels were either rising or falling, with little activity at times when sea levels were very high or very low.
Exactly how, then, can changes in the volume and depth of the oceans cause volcanoes to erupt? When optimal astronomical conditions lead to falling global temperatures, increasing amounts of water become locked up in growing continental ice sheets, causing the volume of the oceans to shrink and sea levels to fall dramatically. On a broad scale, decreasing ocean volume will reduce the weight of sea water covering the Earth's crust around the margins of the continents. This may allow magma (molten rock) to reach the surface, causing established volcanoes to erupt and leading to the growth of new volcanic centres, Where volcanoes are in contact with the oceans, the effects of falling sea levels are likely to be more dramatic and diverse. Removing the weight of water from the flanks of a volcano may trigger eruptions by reducing the pressures con-fining the magma at depth. Alternatively, explosive eruptions may result from the opening of new conduits by means of fault reactivation and earthquakes, or by the sudden decompression of a body of magma because of the seaward collapse of parts of the volcano.
The effect of dramatically increased explosive volcanism at a time when planetary cooling is already well established would be both rapid and profound. The hugely increased quantities of sulphuric acid aerosols pumped into the stratosphere would act as a "forcing" agent, accelerating the fall in global temperatures and initiating unstoppable progress towards full glaciation.
More volcanoes also seem to erupt explosively when sea-levels are rising. This takes place during the inter-glacials, relatively short, warm spells which punctuate the ice age, and during which much of the accumulated ice melts. Huge landslides may result from erosion of coastal volcanoes and volcanic islands, triggering eruptions such as that ofMount St Helens. Alternatively, the increasing weight of sea water bearing down on volcanoes may cause faults in the Earth's crust to open, allowing fresh magma to rise to the surface. Some of the most violent explosive eruptions on record, such as Krakatoa in Java (1883), resulted from magma coming in direct contact with water - and this becomes increasingly likely as sea levels rise.
The consequences of many such eruptions occurring just as the Earth is warming up again during an interglacial can be enormous, with the greatly increased levels of stratospheric dust and sulphur aerosols curing out much of the solar radiation which would otherwise reach the surface.
By causing the Earth to cool again, volcanic activity is thus able to shorten the relatively warm inter-glacials and to increase the length of an "ice age" as a whole by hindering the planet's attempts to warm up.
Researchers working onProject Seavolc will attempt to determine an accurate record of both eruptive activity and sea-level change, so that a clear relationship between the two can be established Mount Etna in eastern Sicily will constitute the primary site for investigation. Other test-case volcanoes are located in the Aeolian Islands to the north of Sicily, in the Aegean Sea, and in the Azores and Canary Islands.
In the light of current projections for rising sea levels over the next century, although not yet on the scale experienced during the Quaternary, the EC study is particularly timely. Should greenhouse gas emissions continue to rise, with the consequence that catastrophic melting of the Greenland and Antarctic ice caps becomes inevitable, then the study results are expected to forecast a fiery future for the planet.
13 May 93
Financial Times: 1,000 Lloyd's Names face £300,000 call
ABOUT1,000 Names could eventually be asked to pay an average of up to £300,000 each because of far heavier-than-expected losses from the storms, explosions and oil spills that hit Lloyd's underwriters in the late 1980s.
Many of the Names - the individuals whose assets back the insurance market - already face financial ruin.
The Names were members ofRose Thomson Young syndicate 255, one of the leading underwriters of catastrophe reinsurance business in the late 1980s.
Even before yesterday's projections thesyndicate was known to face some of the worst losses at the insurance market and was one of nine syndicates whose losses have been subjected to independent investigation by Lloyd's.
Areport to be published this week on syndicate 255 concludes that there were "errors of judgment" and the lack of "a full appreciation of the market" in which it was operating. The report, prepared by Mr. Timothy Boatman, of accountants Coopers & Lybrand, says there was no malpractice.
Syndicate255 closed at the end of 1991 and RTY appointed new managers last year. Following an extensive examination the new team reported yesterday that cumulative losses between 1988 and 1990 would be at least £145.7m, £60m worse than feared. These losses could eventually rise to a maximum of £362m. By contrast, the syndicate's capacity (capital base) amounted to £27.9m in 1988, £34.14m in 1989 and £13.06m in 1990.
Names, who havealready been asked to pay more than £130m, will face an additional cash call of 62 per cent (£6,200 for each £10,000 traded) for 1989 and 136 per cent for 1990 in July. Further cash calls of 19 per cent for 1988, 66 per cent for 1989 and 12 per cent for 1990 will follow in January next year.
Names who have beenunable to fund cash calls to date will be asked for more to cover exchange losses and interest charges (17 per cent for 1988 and 50 per cent for 1989). Mr. Vernon Ashford, RTY finance director, said: "We are not expecting the Names that do pay claims to subsidise those who do not."
Mr. Stephen Edwards, underwriter, said thesyndicate had been forced to create additional reserves because some reinsurance policies had been exhausted or proved to be deficient.
In addition,claims from the European hurricane of 1987, three large petrochemical explosions and hurricane Hugo in 1989 had been heavier than expected.
Claimsfrom the Exxon Valdez oil spill in 1989 could also be higher because Exxon is seeking to recover a further $700m (£446m) under policies reinsured at Lloyd's.
14 May 93
Financial Times: Names win right to take action against agents
LLOYD'S NAMES cantake legal action against their agents even if they have not paid their insurance losses, a High Court judge ruled yesterday.
Mr.Justice Saville was ruling on a preliminary issue in proceedings brought by several thousand Names against their managing and members' agents at the insurance market.
Theagents had contested that "pay now, sue later" clauses in the agreements signed with them by Names - the individuals whose assets support underwriting at Lloyd's - precluded those Names who were unable to meet their losses from pursuing legal action.
In a10-page written judgment Mr. Justice Saville said that if the "pay now, sue later" clause were applied in these cases it would "deprive a Name with no funds of the only asset which could be utilised to pay the call, namely the value of his claim against his agent". Mr. Justice Saville also awarded immediate costs to the Names.
Names' leaders yesterday welcomed the decision. Mr.Michael Deeny, chairman of the Gooda Walker Action Group who is named in the action, said: "This is a very important victory in the fight to obtain compensation for Gooda Walker Names."
Mr.Colin Hook, chairman of the Feltrim Names Association, described the ruling as "a victory for common sense".
Theagents may appeal, but the ruling clears the way for actions by several thousand Names to proceed. In the two biggest actions more than 2.000 Gooda Walker and Feltrim Names are arguing that negligence by their agents was responsible for insurance losses of more than £1bn.
TheFeltrim Names have filed for a summary judgment in their action in a case set to be heard in court in the autumn.
Meanwhile, Mr.Hook said he hoped that the ruling "would act as a spur and an encouragement to those at Lloyd's trying to resolve the litigation". Mr. Deeny and Mr. Hook are expected to meet Mr. Peter Middleton, Lloyd's chief executive, on Monday to explore a possible out-of-court settlement of their actions.
Feltrimand Gooda Walker syndicates were active in the market for catastrophe reinsurance at Lloyd's in the late 1980s.
17 May 93
Financial Times: Lloyd's acts to ensure a fresh supply of capital
MRROBERT Hiscox, deputy chairman of Lloyd's of London, waxes lyrical about the prospects of a new wave of investors at the insurance market. "The US investment banks are beating a path to my door," he says.
Lloyd's moved torevamp its capital structure last year. But the publication last month of a business plan outlining the basic terms on which new incorporated capital can participate, has unleashed frenetic activity among the market's 100 or so insurance agencies.
While Mr.Hiscox has been crossing the Atlantic with bewildering frequency, other agents and brokers are working on plans ranging from the incorporation of existing Names, to the establishment of ambitious new investment funds.
"People are running around on corporate capital all over the place," says Mr. Cliff Hampton, of Phoenix Securities, a specialist securities house which is also working on its own schemes.
Almost universallyat Lloyd's, an influx of incorporated capital - which would have limited liability - is seen as essential for halting the decline in the market's capacity to compete in international commercial insurance and reinsurance markets. The market's traditional capital supply - individual Names trading on the basis of unlimited liability - is drying up in the wake of losses of some £6bn in the past five years. Capital supplied by Names is expected to fall to less than £8bn in 1994, compared with £1l.lbn in 1991.
Corporate capital could come from several sources:
cannow form companies - with limited liability. To do this though they would need assets of at least £1+m - compared with the £250,000 required by existing Names.
Existing less wealthy Names:
Members' agenciesare also working on schemes which would allow Names to form groups trading on a limited liability basis.
Two Lloyd's agencieshave set up "consortium" arrangements, in which the insurance company underwrites business alongside the Lloyd's syndicate. Japanese insurance companies are understood to be expressing tentative interest.
A number ofinvestment banks - mainly from the US - are looking to venture capitalists to back new funds, through private placements. These would trade at the Lloyd's of London market as corporate Names. They will be encouraged by the backing offered by private US investors - such as Texas-based financier Mr. Richard Rainwater and Vermont-based Mr. Jack Byrne - to a number of new Bermudan reinsurance companies over the past year.
Anumber of agents hope to establish funds, backed by institutional investors or directly by individuals who would buy shares in investment trusts sold on the retail market. "It would be the nearest thing to buying shares in Lloyd's," says Mr. Michael Wade, a broker who has teamed up with Sedgwick Group, the Lloyd's agency and broker, to examine the possibilities here. There are hopes that some of these new funds and new companies could be listed on the New York or London stock exchanges, making the investments more liquid and providing capital with an exit route.
US investment bankslike JP Morgan and Salomon Brothers, and international insurance brokers like Marsh McLennan and Johnson & Higgins, are most active in exploring these new ventures.
The banks believe thatsharply increased insurance rates create attractive opportunities for profit, while the brokers are keen to find new sources of capacity to allow them to place clients' business more easily.
Morganand Marsh have already teamed up a number of new Bermuda-based ventures including one which will supply reinsurance exclusively to Lloyd's syndicates.
"We'vetaken a lot of interest in Lloyd's over the last six months," said Mr. David Jarvis of Salomon Brothers.
"We havenot made a final conclusion but we are looking at a number of possibilities. The insurance market is going through a period of very considerable change and all these things are very interesting to us."
Mattersshould become clearer when Lloyd's publishes a rule-book in the summer, providing more details on legal and accounting arrangements, as well as on the regulatory and tax implications for incorporated Names. Lloyd's plans to control the amount of capital which comes into the market to avoid the growth of capacity, which led to disastrous rate competition in the late 1980s. This will possibly be achieved through a bidding system, although the rules as to how this will work have still to be spelled out.
Some agents fear that the new rules will be too late to allow any corporate Name to participate in 1994.
Lloyd's must surmount a number of obstacles if its plans are to be successful. It still has to convince the markets that billions of dollars of old liabilities from US asbestosis and pollution claims can be isolated in a new reinsurance company, whose formation is a centrepiece of the new business plan. Many investors will also want to see evidence that a settlement of the litigation dogging the market is on the horizon before they commit themselves.
Moreover,many agents and syndicates may still have ground to make up before they can meet the much tougher standards of professionalism and disclosure that corporate investors will demand.
"Attracting corporate capital is not like falling off a log," says one senior industry analyst in London. "The businesses at Lloyd's will have to develop presentations that have real arithmetic substance. It won't be enough simply to say we think we can make 50 per cent underwriting margins."
Mr.Hiscox admits it will be hard work. "There are a lot of horses out there and a lot of water to drink. But there is also a lot of barbed wire in between."
19 May 93
Daily Telegraph: Rail widow's record award overturned
ARECORD £440,000 damages award to the widow of a former worker at British Rail's Swindon works who died from asbestosis was cancelled by the Court of Appeal yesterday.
Thecourt allowed an appeal by BR and ordered a fresh hearing of the compensation claim, launched by Mr. Percy Coombs, who worked for BR from 1955 to 1966, and taken over by his widow, Sally, after he died in July 1989 aged 50.
MrsCoombs, 55, of Stratton St Margaret, Swindon, can keep the £330,000 she has received so far on the understanding that she will be liable to repay some if the new hearing awards her less.
Theaward, by High Court judge Mr. Justice Johnson at Bristol in 1991, was the highest ever in respect of an asbestos-related disease.
BRhad admitted liability to pay damages but contested the amount awarded.
Three appeal judgesheld that Mr. Justice Johnson wrongly refused to allow BR time to amend its written defence so as to challenge more than £100,000 of the losses put forward by Mrs Coombs's lawyers in her statement of claim.
Thedisputed figures related partly to her husband's lost career prospects at Rover, where he later worked.
Lord Justice McCowan, sitting with Lords Justices Stuart-Smith and Kennedy, said yesterday it should have been obvious to the judge that he had done an injustice to BR because Mrs Coombs's case had been overstated.
6 Jun 93
Sunday Telegraph: New £85m Lloyd's hock
MORE bad news will reach several hundred of the hardest hit Lloyd's of London Names this weekend. UnderwriterRichard Outhwaite is warning members of insurance Syndicate 317 already smarting from cumulative losses of £215 million, of a further £85 million of losses on the 1982 and 1990 underwriting years.
Theextra £42 million loss on 1982 kept open to meet asbestosis and other reinsurance claims, represents a further 101 per cent of underwriting capacity for each Name. The 1990 loss represents 60 per cent of capacity for that year. These losses are not covered by last year's settlement between Outhwaite and some of his Names. In a parallel development, Outhwaite is one of the underwriters trying to find out what happened to reinsurance claims due to his syndicates handled by now-defunct Lloyd's broker Derek Bryant. The Serious Fraud Office is investigating Bryant, whose rump became part of Welsh group Culver Holdings.
Analysts estimatetotal claims now causing concern to Outhwaite and many others could exceed £8 million. Bryant also handled reinsurance contracts for the Oakley Vaughan agency, formerly run by the late Charles St George. Questions have been raised about payment of a large French reinsurance claim and other business between Oakley Vaughan and Bryant.
6 Jun 93
Sunday Times: Big names of industry burn their fingers at Lloyd's
SIMON KESWICK, who last month replaced Alan Clements as chairman of Trafalgar House, has emerged as one of the bigger losers at Lloyd' s of London. According to independent market analysts, Keswick, a director of Jardine Matheson and a non-executive director at Hanson, stands to lose up to £198,000 on the 1990 year of account, and £189,000 on 1991, a total of up to £387.000.
Other casualties includeSir Simon Hornby, chairman of WH Smith. Hornby was underwriting on a far smaller spread of syndicates than Keswick - 26 compared to 61 - but is still expected to lose up to £123,000 on 1990 and a further £19,500 on the following years, a total of up to £142,500
The list of Lloyd's losers includes many of thebiggest names in industry. Analysts reckon Sir Patrick Sheehy, chairman of BAT Industries, the tobacco conglomerate, could be liable for losses up to £89,000 in 1990 and £37,500 in 1991, a total of up to £126,500.
Allestimates are based on the assumption that names have an average exposure on each of their syndicates of £25,000.
Among other businessmen facing losses isEdmund Vestey, a director of Union International, which owns the Dewhurst butchers' shops. Analysts expect him to face losses of up to £48,000 in 1990 and £13,500 in 1991, bringing his total losses up to £61,500.
His cousin and fellow director at Union International,Lord Vestey, is set to escape with lighter losses. He was underwriting on only three syndicates, likely to produce total losses for 1990 and 1991 of up to £24,000.
Sir Christopher Benson, chairman of MEPC, one of Britain's largest property companies, and a director of the Royal Opera House, could face bills of up to £114,500. The bulk of the losses are expected to fall in 1990, with bills of £82,500 for that year. and £32,000 for the following year.
Sir Freddie Laker, chairman and managing director of Laker Airways (Bahamas) and the creator of the failed Skytrain, looks set to lose a similar amount - up to £80,200 for the 1990 and 1991 year of account combined.
Lord Reeschairman of the Lasmo Oil company, and chief secretary to the Treasury from 1983 to 1985 has been a name since 1971. He could face bills for 1990 and 1991 totalling up to £119,000.
One well known businessman avoided these losses with his customary acumenLord Hanson, chairman of Hanson, the industrial conglomerate. resigned from the market in 1986, close to the peak of profits.
Rocco Forte, chairman of Forte, the hotels and leisure group, was shrewd enough to resign from Lloyd's at the end of 1989. This spared him any involvement in the record £2.8 billion losses of 1990 to be announced this month.
However,Forte still faces cash calls on open years - where claims continue to arrive years after the policies were issued. Cash calls could total £32,000 for syndicate 190, which left the 1989 year of account open.
These men areunlikely to have much difficulty in paying their losses. Many of them will also have taken out stop-loss insurance, which transfers liabilities above a certain limit to other syndicates.
6 Jun 93
Sunday Times: Lloyd's losses
THE ultimate irony of the Lloyd's of London story is thatinstead of maintaining an entire class in the style to which it was accustomed, it has threatened to wipe it out. The "blue hook", published once a year (three years behind. like everything in this crazy market), lists the MPs, judges, barristers, landed gentry and businessmen who have borne the brunt of the losses. There are not many nouveaus there. This is, or rather was, old money.
The process of identifying who has lost what is complex but interesting. Theblue book lists the names on each syndicate, and although theoretically it is only available to other names and market professionals, in practice anybody can see it - I have a copy of both volumes on my desk. One can then identify which syndicate each member is on, and a firm called Chatset can provide a very good estimate of what those particular syndicates have lost. The figures assume average exposure to those particular syndicates, which may or may not be right, but provides a fair approximation.
There is no pleasure in looking at the lists of sufferers, but there are someinteresting social lessons to he drawn. Most members seem to me to be mole or less inactive investors who inherited money and sought to do what their fathers or uncles had done: use it twice, once on the stock market, and again at Lloyd's, giving them that bit of extra income to pursue their private pleasures. Most of the MPs and judges certainly fall into this category. Some of the businessmen are more recent.
It is almost as interesting to see who has been a member and come out.Rocco Forte, for instance, is marked "Not Underwriting", indicating that he, wisely, pulled out before the big losses arrived. There arc plenty of Hansons on the list, but no Lord James Hanson - he never joined: nor did Jimmy Goldsmith. One of the more interesting names on the 1990 list is that of Robert Maxwell, who was a member of literally dozens of syndicates. I have not tried to compute his losses, but they must be vast. Who will pay them? One thing is for certain: dead or alive, Maxwell never would have. He would have led an enormous crusade, using the Daily Mirror and everything else to hand, against Lloyd's, which might have pushed that wretched institution over the brink. One of the few reasons for missing Maxwell is that he is not around to take on Lloyd's; what an epic struggle it would be.
I don't suppose anybody ever expected that Lloyd's, seen as the ultimate institution for making the rich richer, would prove agreat social leveller, playing an active part in John Major's classless society. Yet that is exactly what it has proved to be.
14 Jun 93
Guardian: Pollution blamed as Zimbabwean elephants suffer fatal trunk droop
19 Jun 93
Independent: Failure of Deloitte talks raises spectre of ruin. Record professional negligence settlement with US government feared over savings and loan scandal
Deloitte & Touche, the US arm of the international accountancy firm Deloitte Ross Tomatsu, could be forced into a record-breaking professional negligence settlement following a collapse in >talks does pose serious questions about the firm's future, industry officials believe it is more a case of brinkmanship by both the RTC and Deloitte, which ranks as America's third-largest accounting firm.
TheRTC is unlikely to drive Deloitte into bankruptcy, but it has shown considerable ruthlessness in past S&L liability cases, at one point freezing the assets of a big New York law firm, Kaye, Scholer, which eventually paid $40m to settle its malpractice charges.
Thesix big international accounting firms recently disclosed that defending themselves against professional liability claims cost them 12 per cent of their total 1992 revenues, a sharp increase over the 9 per cent they paid out the year before.
22 Jun 93
Simmonds & Simmonds- Legal Advisory Panel
The Legal Advisory Panel comprisesSir Michael Kerr (chairman), Stewart Boyd QC and Stephen Tomlinson QC. The Panel will give advice to Lloyd's on the strength of Names' claims against their member's and managing agents.
ThePanel will advise on claims referred to it by Lloyd's. It is expected that the Panel will be asked to concentrate on the losses which have given rise to claims on agents' E&O policies for the 1989/1990 and 1990/1991 E&O policy years.
ThePanel procedure is not intended to be an alternative form of litigation. The Panel will act on a basis which will be without prejudice to the legal rights of the parties and its report will not be binding on them or on Lloyd's. The Panel will not try the cases but will give advice which will assist Lloyd's in its attempt to promote an offer in settlement of Names' claims. The Panel is not a court and has no power to compel the co-operation of the parties to any dispute. It will take account of the need to complete its task in a limited time.
Simmons & Simmonswill act as the Panel Secretariat and will be writing to the parties to the relevant claims with information about the panel procedure and terms of participation. The Panel is expected to report in autumn 1993. It will make its report on the basis of the documents and expert evidence made available to it by the parties. It is likely that claims will be presented to the Panel by the parties counsel or, failing that, by counsel appointed by the Panel.
The work of the Panel isdesigned to lead to an offer in settlement of Names' claims. There is, however, no guarantee that an offer will be :made or, if made, will be accepted by a sufficient number of Names to become effective. Until their claims are settled Names are, of course, entirely free to pursue their legal rights without reference to Lloyd's or the Panel and any Name who decides to await the outcome of this initiative before commencing or continuing proceedings should take legal advice to ensure that his rights are preserved.
22 Jun 93
General Meeting of Members of Lloyd's. Statement by David Rowland, Chairman – Turning prospects into reality
In the business plan published at theend of April we forecast that 1990 losses would lie in the range of £2.5 to £2.8 billion. In fact they total £2.91 billion. At the time, I made clear to members my concern about the reliability of our current information. This result confirms my instincts and shows how necessary is a complete revision of our reporting systems and the discipline with which the market observes them. It is not acceptable by any standards of competent business management to report so late, following forecasts. of syndicate performance which have proved so inaccurate. Like many other matters in this Society, this will change. We are already working both to improve the standards of forecasting and to speed the timetable of reporting so that, as soon as possible, we may reach the standards of our best competitors.
Let me return to the result itself and provide you with some clarification. The losses made by the Society for the year 1990 amount to £2.91 billion. This followslosses of £2.1 billion in 1989 and of £510 million in 1988. I have already made clear to you in the Corporation's annual report my views of such a performance. It represents in every way the low point of Lloyd's history in the last 305 years.
Thegross figure of £2.91 billion can be understood better if we divide it into its components. This year ‘double counting' has inflated the total by around £600 million. This double counting occurs when syndicates at Lloyd's provide cover and make reserve provisions for personal stop loss, errors and omissions and estate protection plan policies in those cases when the original loss-making business has been provided for also - either as a paid loss or by way of reserve - by other syndicates in the market. These reserves have been increased significantly in the past two years and can, therefore, have a material impact on the size of the overall loss attributable to members. For the results reported this year, the ‘double count' component identified is of the order of £600 million.
Whilst at this level of global performance we can estimate the consequences of double counting, at this stage wecannot allow all of the benefit to be shown in individual members' accounts, unless and until the disputes with agents and the consequent errors and omissions (E&O) problems and other similar matters are finally settled. These are amongst the many reasons why we attach so much importance to the task of resolving these issues.
Theneed to reserve more for earlier liabilities accounts for £1.1 billion. This figure is much larger than in previous years because it contains a substantial additional figure for London market excess of loss (LMX) losses in addition to that for long-tail liabilities. At present, old year reserves are part of the general pool of reserves for outstanding claims held by syndicates and the investment income generated is not attributed separately. When NewCo is established at the end of 1995 this will be one of its advantages. We shall be able to quantify and manage the reserve pool in order to produce the best possible result for members.
This meeting is concerned with the examination of theCorporation's report and accounts sent to you at the end of April. Two particular notes need to be drawn to your attention. First, the note in the accounts about the Central Fund, repeated and amplified in the Global results statement which you will receive in the next few days. As our losses increase, so too do the demands on the Central Fund to meet the shortfall where members are unable to meet their commitments. On all our present forecasts we can meet the strain this year caused by the losses I have reported to you. We must insist, however, that where members have the resources to pay their debts that they do so.
We must at all times preserve our chain of security, so wewill enforce payment from those who can pay. For those who cannot, then understanding and assistance to come to sensible arrangements through our Hardship Committee will continue. We will separate those who ‘can't pay' from those who ‘won't pay'.
The strain which these losses will place on the membership is obvious. We outlined in the business plan our ideas for providing the maximum help to members within the proper framework of our regulations. We have been able to implement those ideas so that thecredit for solvency and the maximum possible cash credit of up to five per cent of premium income limit are available. The cash credit depends on each managing agent's assessment of syndicates and resources. The manner in which both these measures affect individual Names' affairs will be communicated to them as soon as possible by members' agents.
Stop loss claims paymentsreached many members far too slowly in respect of the 1989 account. Many members did not appreciate that their policies entitled them to payment only after receipt of the relevant Inland Revenue form (LL9). This delay was compounded by administrative inefficiencies so that many payments were not paid until well into 1993. This year we have been working with the full co-operation of the market and have agreed a programme whereby 90 per cent payment of loss will be made ahead of policy conditions in August and September in order to ease the strain on members' finances as far as we are able.
In one area we have been frustrated. Last year, David Coleridge outlined to you the creation of aSupport Fund drawn from contributions from those either within the Society or closely allied to it in order to have the resource to provide help beyond the rules set out by the Hardship Committee in cases of real need. The Council was further encouraged in that initiative by a resolution proposed at the Extraordinary General Meeting (EGM) last summer.
Since that time we have been engaged in lengthy exchanges with the Charity Commissioners in order to constitute the fund in such a way as to meet their conditions. There are two reasons why this is important: first, many firms have made it clear, following legal advice, that they would only contribute to a recognised charity; and second, tax recoveries are only possible for the benefit of the fund with that status.
Following many exchanges apparently leading us close to agreement, we heard last week that the Commissioners had finally turned down our application. We understand that their principal reservation is that the rules may not constitute a trust in the legal sense for the relief of poverty. We need to consider the consequences of this decision and consider the best means now open to us to achieve our original objective.
The second note in our accounts to which I draw your attention is the note onLioncover. This company, set up to undertake the discharge of the liabilities under the PCW settlement, required a further input of funds of £43 million in 1991 and £51 million for 1992 now being reported to you in a note in the Global statement.
Apure year loss of £1.3 billion is bad enough but at least the performance of our current underwriters deserves to be seen not confused either by double counting or by earlier years. The study published by UBS Limited last month analysing Lloyd's performance argues persuasively that it is no worse than that by the London market insurance companies writing similar accounts. Of 115 syndicates in profit in 1990, 90 are still operating today. Whilst that may be of some considerable comfort for the future results, I have already made clear my own views and I repeat them: this overall level of performance is unacceptable and must never be repeated.
Much has happened and needed to happen to make this no hollow boast. Let me remind you of just what has been achieved in recent months. We have introduced the new system of governance.Market and Regulatory Boards have been formed and new appointments made, regulation both at board and staff level being separated from the market functions of the Corporation. As far as it is possible under the Lloyd's Act, Brian Garraway, Chairman of the Regulatory Board, is seeking to simulate external regulation for the Society. Committees have been swept away, direct accountability has been introduced, expenses have been reduced and staff numbers cut. We produced a business plan.
The process was important; market and regulators each fulfilling their proper function but working hard for a common goal - the benefit of members.Reactions throughout the world have been good. Serious commentators in the press, amongst brokers and amongst our clients, perceive Lloyd's ‘getting its act together'. Powerful voices throughout the insurance world have given their support to our plan and, above all, have endorsed the need for Lloyd's at the heart of a thriving market in London for the benefit of the world-wide insurance industry.
Theauthorities to whom we answer are continually helpful to us. We work closely with the Bank of England, the Department of Trade and Industry and the Inland Revenue. Our relationships with them are excellent.
We were pleased to see the relevant clauses in the Finance Bill pass through the committee stage last week, giving force to theChancellor's statements in the budget speech about members' reserves.
Potential new capital managershave besieged us with their interest. And let us be clear about the likely composition of this new capital in its incorporated form. Some of our discussion has centred around capital coming from individual sources packaged into corporate groupings. Therefore, some part of our capital is likely to come from similar individuals who might have subscribed in the past but packaged in a different fashion; some may come from new sources altogether.
The interest has been very encouraging; it has come from firms of quality. Now, we have but a short time in which to turn these prospects into reality. Our reserves are better than many of our competitors. The market, ourmarket, has been changing dramatically and I have no doubt of the exciting prospects which lie ahead.
Despite these encouraging signs, that part of our capital base unable to trade forward has expressed doubts about the plan and its relevance.
It would be extraordinary if it were otherwise. Asection of our capital base has been so severely damaged that visions of future competence and prosperity are of interest only if there is a direct relationship to their own suffering. For many, the prospect of continuing in membership to offset past losses against future profits is impossible. Their only interest is to claim from the future recompense for past suffering and, if it is not to be forthcoming, then to question the right of the Society to trade forward for the benefit of others.
I want to address this issue today and to face openly the consequences of the alternative strategies that have been discussed in recent weeks. But before I do, I want to clarify the attitude and intentions of the Chief Executive, Peter Middleton, and myself - our attitude totally supported and endorsed by your Council and its supporting boards.
In taking responsibility for the leadership of the Society, I stated from the outset three things. First, that I represented all Names; second, that I was accountable to you, the membership, for the responsibility I had accepted; and third, I was determined to lead a profitable business. An essential part of that attitude has been a commitment to be open at all times to the ideas and attitudes of all the membership. Peter Middleton and I have met, either individually or in groups, thousands of members across the world. We both have been committed to meeting or speaking to any who wish to do so. We havereceived thousands of letters, we reply to all of them - sometimes not as swiftly as we would like because of their volume. Frequently, I telephone the most angry letter-writers to make direct contact with them.
I do not believe now that there is any aspect of our recent history or of the concerns of the membership of which we have not heard. Of course there are different personal stories which have not been passed to us, but we know what you think about the conduct of your affairs over the last fifteen years. We know the wide range of attitudes and ideas which you have for our future.
Time for action
Many are loud in their criticism. Many, many others, the substantial majority I believe, wish us to treat fairly with the past but above all to rebuild the Society for the future.
So far this year Peter Middleton and I have received around three thousand letters, the substantial majority containing messages of support and encouragement.
We have listened - but now is the time to take action.
To that majority the diversion of another Extraordinary General Meeting to be held on July 5th is, I believe, both irritating and perceived as a diversion of effort and energy desperately needed in so many areas of the Society. Until our last Council meeting when we passed a new byelaw,one hundred members could petition for an EGM, and if it was received, the Council had no option other than to summon a meeting within the defined notice period. Knowing that such a meeting was likely to be called, we made every effort to see that it was held today to avoid unnecessary inconvenience and disruption to our business. Unfortunately we were not successful. Despite our efforts, the requisition was not received until too late. As you will have seen from press reports, we have now passed a new byelaw requiring 1500 signatures in future. In no way do I wish to constrain proper debate, but let us be sure that a reasonable proportion of members do want an EGM to be held.
We have also announced that we will hold a postal ballot on the resolutions submitted to the EGM. I wish that the first two resolutions posed clearer choices for the membership but I hope the brief explanatory notes which will be sent with the ballot papers after the meeting itself will help you. These papers will include those prepared by the sponsors of the resolutions.
Thefirst resolution attempts the impossible by seeking to rewrite the provisions of the Lloyd's Act 1982 regarding our duties to members and our immunity from suit. Let me not mince words: I and my colleagues are fully aware of our responsibilities to members - as well as to policyholders and the employees of the Society. Regarding immunity, the provisions of the Act implemented the recommendations of the Fisher Working Party that those governing Lloyd's should be able to act freely in the interests of the membership as a whole without being inhibited by fear of legal proceedings. The Fisher Committee views were endorsed by Sir Patrick Neill QC who reviewed the workings of regulation at Lloyd's on behalf of Government. Other self-regulatory bodies receive similar immunity.
If ever there was a time for the Council to be able to act fearlessly in the interests of the Society it is now.
As for thesecond resolution dealing with corporate capital, I believe it to be neither practical nor timely. We are well aware of the need to reconcile the legitimate interests of members with the need to introduce corporate capital. There are many difficult issues and time is of the essence. I am concerned that the procedures suggested by the second resolution are unworkable and would delay us and seriously impair our ability to act in the best interests of the Society.
Thethird resolution is necessary only to set out what I hope everyone can agree. I agree with its terms.
I agreethat it is in the best interests of the members of the Society that Lloyd's should continue to trade; and that the business plan represents the most feasible means of securing the future of the Society;
I agreethat the new management of Lloyd's should be allowed the opportunity to implement the business plan and, in so doing must ensure utmost good faith in the existing members of the Society; and
I agreethat the introduction of corporate capital has a critical role to play in ensuring the Society's future and emergence from the difficulties of the present and recent past; and that the Council of Lloyd's should ensure that the membership terms offered to corporate capital are as favourable as possible to existing Names.
This is the position anyway.
In time, there will be other matters which I am sure we will wish to change and which may cause us to wish to seek to amend the current Lloyd's Act. These are priorities much lower than those we face in setting our business to rights. We are not constrained in what we now seek to do by the workings of the Act
You will remember that as part of our constitutional changes recommended by Sir Jeremy Morse's committee and adopted by the Council last year, we are committed to reducing Council's numbers to 16 by January 1st 1995 - 6 working, 4 external and 6 nominated members. Council has already been reduced in size from 28 to 20 in 1993.
To achieve the reduction to 16 members by 1 January 1995 Council has decided that there should not be an election of either working or external members to the Council this year. Next year, after rotational retirements, there will be elections for3 working and 1 external member and this will enable the Council to comprise 16 members by 1 January 1995.
Framework for a settlement
Let me state my own views again. We areanswerable to you for our conduct. The past fifteen years contains a catalogue of events which have caused real suffering to many of our members and, together with others less severely financially affected, they question much about the Society's leadership, governance and business methods. I want to see that proper recompense is made to any who have been wronged by their agents or others in the market place. But I must stress time and again that whatever the perceived grievance, the financial resources available are limited and always involve the transfer of benefit within the Society. Even the resolution of the E&O disputes largely involves the benefit of the claimant group of Names at the expense of those other members underwriting the policies. There is no other money or asset which does not belong to the membership. Let me repeat, it is all your money. Recompense, if it is justifiable in terms of the use of any limited central resources, must be seen in that context.
We have already clarified to you our proposals for aframework for settlement of the legal disputes between members and their agents. Discussions are under way to try to reach agreement on how the panels chaired by Sir Michael Kerr and Sir Jeremy Morse will proceed. The first meeting of the financial panel will take place today. There is still far to go, but most members appear to agree that the initiatives are sensible and must be given every chance of success.
I am fully committed to this; I want the maximum benefit to be put in the hands of those who deserve recompense as quickly as possible. The prospect of years of costly litigation in the search for some pot of gold seems to me to have virtue for but a few, compared to the prospect of as swift a settlement as possible in the interests of the maximum number of people. This would give personal benefit and benefit, in the broadest sense, to the whole Society thereby freed from those disputes and from the ‘double counting' which I referred to at the beginning of my statement.
I must emphasise that our initiative involves a process separate from and outside the litigation. Where litigation has commenced, action groups pursue claims only on behalf of Names who are parties to litigation and have funded it. Should our initiative fail, then unless you are a litigating Name you will not benefit from any successful efforts of the relevant action group. Whereas at present we envisage that any settlement reached under our initiative will embrace all Names on a syndicate, whether litigating or not. In recommending any offers to be made the financial panel will, of course, take into account all relevant factors - including membership of an action group, although this will be only one of the matters to be considered. Ourmembers fall into three broad categories:
It is understandable that reactions to our plan differ from each category. I would be naive if I did not realise that the good of the whole Society is scarcely the strongest motivation of those who have suffered most although the expressions of encouragement for what we are attempting even amongst those most damaged has been extraordinarily heartening.
However, I know that the only prospect of benefit to any section of our membership comes from the real prospect of a healthy and profitable future. Even the central contribution towards settlement of disputes is only possible if there are central resources. These can only be reinforced by contributions from our existing membership. So even those most hurt must see the sense of our forward plans.
Most, I believe, accept that we have excellent prospects. Everyone agrees that for an ongoing business new capital will be needed. Everyone, I believe, also agrees that it is extremely unlikely that sufficient capital will be forthcoming in our traditional form. Admitting incorporated capital must be the answer. But here lies the core of the dilemma. In admitting this new form of capital how much can they and should they pay for the privilege? The plan outlined a basis. Views have been expressed that this sold the present membership short. We have a business with a famous brand name, surely more benefit could be obtained from new capital which could either go towards the central resources of the Society, or to those who suffered past losses?
I have no intention of selling participation in the Society at a foolish price. I want new capital to join traditional capital on a basis that the whole Society considers fair. But let me be clear, there is no possibility whatsoever of attracting new capital on anything other than the sort of terms we have already outlined in the business plan. They just won't join us if the price is too high. Whilst they see good returns ahead from a properly run business they also see clearly the present state of the Society and the problems it faces. We have as our advisers the best brains available and they are clear in their advice. If we want new capital we have to compete for it with other attractive investments which do not carry with them the same track record. It is dangerous rubbish to portray any other possibility.
Of course these changes raise important issues on which members should focus. A consequence of our plans for new capital will be a need to review the present voting rights of members. Indeed it is somewhat curious that we have not done so already as we still have a system of one member one vote, unrelated to the scale of the member's participation in the Society.
With theremoval of the upper limit for underwriting and the introduction of new forms of capital, we need to review this, keeping in mind the interests of the whole membership. The Council has yet to consider this issue but I intend recommending to them that we set up a small working group representing all constituencies led by a distinguished expert on electoral systems.
No magic solution
Those that have difficulty in identifying with the future have commented: "If we face such major problems and we can't ‘sell' our business at a better price, why not put the lights out in Lime Street and walk away from the problem. So what if we are all individually liable, let American lawyers try and chase us -it simply won't be worth their while."
Let me try to explain just why that too is nonsense and why ceasing to trade would be a disaster of almost unimaginable proportions. We are governed by the Lloyd's Act; in it there are no provisions for cessation of trade. Winding up the Society would provide no magic solution, Names would remain liable come what may for all insurance contracts underwritten by them, steps would be taken to freeze our assets and the cost of organising a ‘run off' of our liabilities would be enormous. No new income would be generated from new business and the Names concerned would be left to pay for administration and claims with every lawyer in the world, from the USA or elsewhere, chasing them. And who will pay for all this? The membership. No Hardship Committee - no rescue - nothing but tough commercial reality.
No, ladies and gentlemen,putting the lights out has for me only one certain end. It would mean greater suffering for the membership of this Society and consequences far beyond the membership. Tens of thousands of jobs lost; the end of London as the international insurance centre; and a further illustration to the world of the terminal decline of Britain as a great trading nation.
In no way is that in the interests of anyone I serve and I will neither seek to bring it about nor will I allow anything to stand in our way of rebuilding a prosperous Lloyd's.
I have made it clear to you that Peter Middleton and I have listened. We understand your views.
My task is to lead and now is the time for action - and fast. We are well advanced in implementing the business plan. Whenever possible, we shall continue to listen, but I shall see that our first priority is the action necessary to create sustainable profit for our members. If we are diverted and delayed then the danger is obvious. The value of this Society will be damaged further and a point could be reached where that damage goes beyond a possibility of repair. We have not reached that point but the dangers are obvious.
You, our members, provide our capital. Our customers provide our business and the market contains the skills, the energy, enterprise and yes, many people with high standards, to serve both to their profit and satisfaction.
We have learnt hard lessons. Let us get on with the job.
Now let me turn to the conduct of this meeting.
Today you have the right to question my colleagues and I on the Corporation report and accounts or for any other general matters. The Albert Hall meeting allowed many views to be expressed and quite lengthy statements to be made. Today, please limit any statements simply to preparing the ground for your questions. We shall end this meeting by 1.30 p.m.
There are formal resolutions to be put separately noting the text of the report and of the accounts. In practice I will be happy to take questions on the whole report and the accounts and then see the two resolutions proposed at the end of the meeting. Would those asking a question, please give their name before asking their question. Microphone points are clearly labelled in the Festival Hall.
23 Jun 93
Independent: The hard questions still unanswered at Lloyd's
The cultural divide between the investors who make up most of the loss-making Lloyd's names and the market professionals was at its most glaring yesterday. The professionals beat their breasts with cries that everyone and no one is to blame, particularly those now in charge (the people on the platform at the meeting), since they were not running the show when things first went wrong.
But names quite rightly wanted answers to basic questions likewho was to blame, where to seek redress and what has been done to prevent similar disasters happening again.
They weregiven answers of a sort to the third question, based on the business plan and a regulatory overhaul, but once again they received short shrift on the others.
The names' case against the market has not been properly answered on several levels. Fraud may well have taken place, an issue for the Serious Fraud Office which is looking into Gooda Walker. There was individual incompetence among the professionals, which is a matter for the Lloyd's authorities, who have so far managed to make even the Securities and Investments Board look like tough guys.
There were examples ofseriously bad judgement by underwriters, not a hanging offence in itself, but questionable if the people concerned are allowed straight back into the market. And there was regulatory inefficiency on a vast scale
Throughout the 1980s, despite a decade of warning signs, Lloyd's stuck to its non-interventionist approach. An unforgivable result of this laissez faire was that there was no attempt to police firms in a way already becoming standard in the banking and securities markets, weighting types of business taken on by syndicates according to risk.
Indeed, there is no sign of this emerging even now, despite promises a year ago. It is extraordinary that a market dedicated to insuring against risk had not even thought seriously about risk management in its own businesses.
More than corruption and stupidity, which can happen anywhere, it is this history of regulatory incompetence that will dog Lloyd's efforts to revive the market. The only convincing solution is totake regulation away from Lloyd's altogether by bringing it within the Financial Services Act.
Until then, fine calculations about whether to reinvest in Lloyd's because the insurance cycle is turning are irrelevant. Intending names should keep out.
24 Jun 93
Times: Doubt cast on Lloyd's loss
TWOout of every five Lloyd's of London syndicates opted to leave their 1990 underwriting year open, casting doubt on the accuracy of the insurance market's calculation of a £2.91 billion loss for the 1990 account, unveiled on Tuesday.
Of the market's388 syndicates actively underwriting in 1990 a total of 157 left their 1990 year open, reflecting the underwriters' inability to quantify their syndicates' losses. In normal circumstances and under Lloyd's three-year accounting system a syndicate would reinsure, at a cost, its 1990 year of account into its 1993 year of account.
Thenumber of years being left open has risen sharply in the past two years. Last year, 64 syndicates left their 1989 year of account open, almost double the year before. The reasons for leaving such a large proportion of the 1990 underwriting years open hinge on the market's uncertainty over the final level of claims. As a result, Tuesday's £2.91 billion loss is much more of a guess than in past years.
Manyof the syndicates are leaving the year open because of a proposal in the Lloyd's business plan to strip out liabilities from 1985 and prior years and reinsure them into a new vehicle, NewCo. However, there is no way of knowing what NewCo will charge to take on these liabilities.
Anotherarea of uncertainty is caused by the mass of legal actions by names. Many syndicates have provided stop loss cover to names and errors and omissions cover to agents and as a result are reserving for any potential claims.
Inseveral cases there is no 1993 underwriting account into which the 1990 year could be reinsured or the 1993 account has too small a capacity to take the burden of the 1990 year.
28 Jun 93
Financial Times: Names seek change in Lloyd's survival plan
REBEL NAMES are pressing for radical changes to the Lloyd's business plan in an attempt to offer a solution to the legal actions overhanging the insurance market.
Mr.David Springbett, a founder of reinsurance broker PWS, has developed a series of amendments to the Lloyd's plan and is spearheading efforts to persuade Names to support his scheme. The plan, announced in April, involves cutting costs and agency fees and opening the Lloyd's insurance market to incorporated as well as individual Names.
Theplan has been criticised for failing to help Names facing immense calls on their assets after recent losses on the market. Last week Lloyd's reported record losses of £2.9bn for the 1990 year.
"We've made it clear that in terms of detailed implementation our business plan is not sacrosanct," Mr. Peter Middleton, chief executive, said on Friday. However, he stressed that Lloyd's was competing for capital. It would not get any if it "priced itself out of the market".
The latest draft of the Springbett scheme says that its initiative, described as "constructive" by Lloyd's, is needed becauseloss-making Names "will fight longer and harder - and more effectively than Lloyd's currently appreciates - to prevent Lloyd's collecting more funds from them". However, proposals to charge all future investors a total of up to £500m a year for membership of Lloyd's are certain to be resisted by the market's council - its governing body.
TheSpringbett proposal is to transfer billions of pounds in the market's current assets and liabilities to a new insurance company which would be owned by Names the individuals whose assets support underwriting at Lloyd's - and operate from Bermuda, which has a liberal tax and regulatory regime.
The new company, known as Lysold, would handle payment of all claims on policies underwritten before 1991 and settle outstanding litigation with Names. Lloyd's would in effect start afresh next year, backed by corporate capital and existing Names who wish to continue underwriting at the market. Lloyd's would pay Lysold an annual royalty of between £250m and £500m, with the money helping to fund some of the market's heavy recent losses and paving the way for an out-of-court settlement of litigation between Names and their agents.
Lysold would declare an immediate 18-month moratorium on writs and drawdowns for those unable to pay, andNames would be asked to settle only 40 per cent of all present known losses. Names still unable to meet their obligations would be offered more generous arrangements from the market's hardship committee, which would be renamed a members' ways and means committee.
Lysoldwould also attempt to reduce liabilities by reassessing outstanding claims and the methods used to settle them, and would also itself become an investor in Lloyd's.
However Mr.Middleton said that many potential corporate investors already felt that the entry fee being demanded by Lloyd's - an annual fee initially set at 1.5 per cent of premium limit - was too onerous. "This sort of thing is decided by market forces," Mr. Middleton said.
Lloyd's could be more receptive to other elements of the plan, however, especially to proposed modifications of the business plan's proposals to "ring-fence" long-tail liabilities that emerge many years after the original policies were underwritten.
TheLloyd's business plan proposed creation of a company into which all liabilities on policies underwritten before 1986 would be transferred, but Mr. Middleton is not ruling out the possibility of that year being brought forward.
Work on the centralisation of all information on old policies, which is due to begin this week, would be an important first step in any event, Mr. Middleton said.
1 Jul 93
Daily Telegraph: Names told losses could have been cut
JUST over2 p.c. of members suffered losses for the 1990 Lloyd's of London year of account of over £250,000 each. Almost one in five lost between £100,000 and £250,000, according to an independent analyst of Lloyd's figures.
More thanthree quarters of Names lost less than £100,000. Only 1 p.c. of Names made a profit. Lloyd's announced record losses of £2.91 billion for the l990 year last week but refused to say how the loss was spread among Names.
It is likely thatmembers will not be called on to pay losses in full this year; they may be able to defer up to 40 p.c.
The real pain for Lloyd's Names lies in theaccumulation of losses over several years. Between 1987 and 1990, which includes the profitable 1987 year, just over 15 p.c. of Names made a profit and 54 p.c. lost less than £100,000.
Just overone in five names lost between £100,000 and £250,000, 7 p.c. lost between £250,000 and £500,000. About 2.5 p.c. of members lost more than £500,000 and 74 members lost at least £1m.
John Rew, co-editor at independent Lloyd's publisher Chatset, said the figures heavily underestimated the size of losses but the spread of losses underlined the plight of the worst hit Names.
A spokesman for theLime Street Names, who are among the worst hit said: "This confirms that a very small percentage of the membership is required to pay a vast proportion of the losses." Had more Names insured themselves against losses the picture would have been a lot less bleak.
SBJ Harrison Stuart, the personal stop-loss broker, said if the Names had had access to the stop-loss policies available now, no one would have lost more than £500,000 between 1987 and 1990 and 62 p.c. of members would have lost less than £100,000.
9 Jul 93
Hansard: House of Lords - Questions tabled
Lloyd's of London
rose to ask Her Majesty's Government whether they consider that the current arrangements for the regulation of Lloyd's of London are satisfactory.
The noble Lord said: My Lords, since the Government have made no effort to initiate a debate in your Lordships' House on what has happened in recent years in Lloyd's, and what ought to happen in the future, I felt it was my duty to do so instead. I am aware that in doing so through the medium of an Unstarred question considerable limitations are placed on all of us but on me in particular because I can speak only this once. I must, therefore, apologise to the Minister that she will have to carry the full burden of dealing with any complications and technicalities that arise in the debate. I shall not be allowed to help out by coming back a second time. I shall refer to that later, but it does not mean that this is the only time I hope to debate the matter.
My purpose today is not to examine individual cases of which I have no direct knowledge but instead toconsider regulation in general. Perhaps I ought to say at this point, because it appears to be a rather sensitive area, that I at least have no direct involvement with Lloyd's whatever; nor, so far as I know, has anyone with whom I am connected. That is my negative declaration of interest.
In considering regulation in general, it is myview that the system of self regulation under the Lloyd's Act 1982 has failed. It is also hard to believe that the proposed changes, following the reports of the task force and the Morse working party, do more than scratch the surface. Nothing essential has changed.
While it contains useful measures, I do not believe that the proposed business plan will work. There has been no suggestion that there will be a root and branch investigation and vetting of all names agencies, of all syndicates or of the behaviour of working members. In so far as there have been serious conflicts of interest - and there is no shortage of allegations on that - they seem to continue. It is hard to see how the new arrangements will prevent a recurrence in the future.
Therefore, above all, what we need from Lloyd's is a formal statement that theconflict of interest problem will be addressed and the highest priority given to exposing and removing such conflicts. By we I do not merely mean names I have pointed out that I am not one. Nor do I merely mean those directly connected with Lloyd's. When I say that we require a formal statement by "we" I mean all of us who are concerned with the probity of our financial institutions.
When your Lordships debated the Financial Services Act 1986,we on this side warned that the Lloyd's exemption under Section 42 would lead to disaster. Perhaps I may read to your Lordships the wording of that section of the Act because in my judgment that is precisely the cause of things going wrong. It states:
"The Society of Lloyd's and persons permitted by the Council of Lloyd's to act as underwriting agents at Lloyd's are exempted persons as respects investment business carried on in connection with or for the purpose of insurance business at Lloyd's."
That is precisely the mistake that underlies all the subsequent troubles. It is also of interest that that sentence fully recognises that what happens at Lloyd's is not simply to or even overwhelmingly insurance and reinsurance; it isan investment business.
As I said, wedivided the House on that matter. Our warnings were rejected by the Government but I have to say, to my regret and the regret of my noble friends, we have been proved right. Therefore, what is required urgently is new legislation to remove the exemption of Lloyd's from the Financial Services Act and to give clear cut roles to the DTI, in regard to overseeing insurance and reinsurance, and to the Treasury on the investment side.
I should also be interested to know - I do not know whether noble Lords or the noble Baroness can help me - theweight that can be attached to the approval by the Governor of the Bank of England to the appointment of what are called "nominated members" to the council. Can we be told who those people are and what they do? More to the point, what have they done in the past and, in particular, more recently in the past few years?
It also seems to me that weneed an answer to the question of what went wrong. I find it hard to believe that it was a matter of bad luck. Obviously, in any risk-taking business there is bad luck but I do not believe that that was the essence of what happened. It seems that much more of what we observe was due a great deal to poor judgment and professional incompetence. In addition, as we are all aware, there have been allegations of all manner of corrupt practices and fraud. Many of those involve legal proceedings and are, or have been, before the courts. Other noble Lords may refer in general to such matters in the debate. My concern is that we have heard little or nothing from the Government on that aspect of the matter despite, as I said, the public interest in maintaining the integrity of our financial institutions and the public image of the City of London.
I turn briefly to some specific problems and questions. There are the so-called "open years", from which the losses are still not determined. There are also more recent years involving large losses which are difficult to quantify or predict. I understand that much of the difficulty in all those cases has to do with decisions in the United States court. The consequence is that it makes it impossible for names to estimate the extent of their exposure or make any kind of rational decision for the future.
It is not altogether clear how Lloyd's themselves propose to deal with the problem of non-payment and whether existing reserves, including extra reserves, can cover the liability. I should guess - again, I look forward to hearing what noble Lords have to say - that all the openness and unfinished business will act as a deterrent to the entry of new names, including the entry of corporate capital, which is given a certain degree of emphasis in the business plan, assuming that it will be proceeded with. In other words, it seems to me, as someone completely from the outside, that what I understand is to be called "NewCo" could go bust. As someone who recognises the importance of our financial institutions, I feel that if that were to happen it would be little short of disastrous, not just for Lloyd's but for the City in general.
What I and, I am sure, other noble Lords would like to know is what the Government think about this situation and whether they have anything to propose. I ask the noble Baroness whether, purely for precautionary purposes, the Government's own experts have made an analysis of the scale of the problem and whether they have at least examined aworst case scenario.
In general, the remarks that I have just made relate to the burden carried by existing names. That is a topic which I am sure other noble Lords will address. The central question that I ask is: to the extent that the funds of those names are exhausted, how are the losses to be paid for?
I referred to the problem of litigation and, in particular, to theallegations of negligence. As I said, I do not feel able to discuss that issue in detail. However, there is an important and logical point to be made. If the powers that be admit that all is not right with Lloyd's and that they intend to make changes, they would appear to be adding support to those who are claiming negligence or worse. Moreover, it may be that one reason why the root and branch reforms for which I call appear not to be in prospect is the fear that recognition by Lloyd's of the need for stronger action will be prayed in aid by those who are suing.
In terms of Lloyd's proposed new detailed internal arrangements, I have not discussed the introduction of corporate membership. It does not seem to be a bad idea. However, I am doubtful about the future of unlimited liability. The market could work without that. Above all, there is a great need for more transparency in the future. Names need to be better informed of the nature of the risks that they run and of the position of the people with whom they are dealing. There needs to be a properly formulated procedure for dealing with conflicts of interest.
I have sought to explain that there is a public interest in what happened at Lloyd's and what may happen in the future. Damage has been done to the way in which the City of London is perceived, especially by foreigners Anyone who doubts that fact should read the overseas press. In my judgment the Government cannot sit idly by.I have called into question Lloyd's exemption and self-regulation. I reiterate that I do not believe that a new Lloyd's Act is required. The correct move is to add Lloyd's back into the Financial Services Act. In addition, the Treasury and the DTI need to play a bigger role; I hasten to add, which may disappoint some people, not as part of the social security system but as regulators or overseers of regulators.
There is a possible need for a new, fully independent investigation. As I understand it, the Morse working party did not do that. There may have been a full study done in-house. If so, I am unaware of it. Perhaps the noble Baroness is aware whether or not Lloyd's has done a full research study on what happened. I fail to see how a new business plan can have a proper basis unless there has been a full study on what went wrong by an independent person - by which I mean someone who has absolutely no connection with Lloyd's, past, present or future.
I have covered the points that I wished to raise. I look forward to the individual contributions to the debate and to the Minister's replies to my questions.
The Earl of Lindsey and Abingdon
My Lords, I am grateful to the noble Lord, Lord Peston, forinitiating this short debate on the current regulation arrangements of Lloyd's of London. I am sure that all those present this afternoon listened with interest to the noble Lord and that we will all wish to comment on what he said. I must begin by declaring an interest in that not only am I a name at Lloyd's, but I was also a director of an underwriting agency until my retirement last year.
In the past I have defended the Committee and Council of Lloyd's in your Lordships' House in their endeavours to come to terms with the Lloyd's Act 1982, which includes provisions for self-regulation within the market. For those noble Lords who were not present or around in 1982, the Private Bill had its Second Reading in your Lordships' House on April Fools' Day and came into effect in January 1983. Since that time the Council of Lloyd's has used everything in its power to try to improve the running of the Lloyd's insurance market by passing endless by-laws under the provisions of the Act. In fact, I thought that they were doing such a good job that when the Financial Services Act, to which the noble Lord referred, came along, I, together with many others, saw no reason to think that Lloyd's should be included within its regulatory powers like the rest of the City of London's financial institutions.
After all, the Lloyd's private Act had not had time to prove itself. However, since 1986 a lot of events have overwhelmed the international insurance market and especially Lloyd's, with its particular type of investor; namely, the unlimited liability member. Natural and manmade catastrophes followed one after the other through 1988, 1989 and 1990, all of which have recently been coming home to roost as insurance claims. On top of this, a small number of syndicates starting laying off risks among themselves. That went round in circles and which subsequently became known as the spiral. This greedy and irresponsible experiment by some underwriters has led to more than 4,000 unfortunate underwriting members of Lloyd's ending up in what can only be described as a financial slaughterhouse.
We must now ask the question: could some of this irresponsible underwriting have been avoided in the market if there had been an entirely independent regulatory body?Since all the bad news has come to light, the Council of Lloyd's has put together separate market and regulatory boards of its own. But the regulatory boards still have four out of 15 members who are working professionals from within the market. I do not query their honesty and integrity. But however good they may be, there is the question of the conflict of interest creeping into any dispute. The market board should be run in the main by the insurance professionals who work within the market; but serious consideration should be given to the setting up of an entirely independent regulatory board which might even require amending the existing Lloyd's Act 1982.
In conclusion, I believe that this approach would lead to a return of confidence within the market which will, in its turn, attract new capital, both individual and corporate, as proposed in the recently produced business plan, so that Lloyd's can continue into the future as amajor invisible export earner and a leader in world-wide insurance.
The Earl of Harrowby
My Lords, very rarely do I take up your Lordships' time because I discovered long ago that there are always at least a dozen people in the Chamber who know very much more about a subject than I do. However, my self-restraint has let me down on this occasion and I hope that it does not let your Lordships down at the same time. I thank the noble Lord, Lord Peston, for raising this subject at this most opportune time.I agree with him that it is surprising that it has not been raised before. I agree with 95 per cent. of his comments and conclusions; but I shall come on to those in a moment.
I have not a negative interest to declare; I have a positive interest to declare in that I am a name at Lloyd's. I am fortunately not a major loser no more than you would expect in a recessionary period. I suffer my loss as I expect to do. It is not a major loss. I have a son who is in the medium category but not a substantial loser.
Lloyd's is privileged to have its own Act and it hasabused that privilege. It has, in my experience, been inefficient throughout, negligent very largely, criminally negligent on occasions, and fraud has been perpetrated in a number of known cases.
In retrospect, they clearly ought not to have had their own Act; they ought to have been brought under the Financial Services Act which came in at a later date. I do not agree with the conclusion of the noble Lord, Lord Peston. I believe that moving to that now would upset the apple cart and it would be too dangerous. Remarks have been made about the business plan and its chances of success. It would damage any possible chances of success if we started trying to change the regulatory regime. That does not mean that I should not like to see one or two changes in the Act. My noble friend who has just spoken mentioned that. I believe that one or two changes are essential and it is probably now best that they are done internally, much as we all distrust the past leadership of Lloyd's.
The point has already been made that we arenot sole traders, but investors. We have not been protected. Only now is the new regime acknowledging that state of affairs, by implication only, and no formal apology has been made. But I believe that their thoughts, ideas and interpretation of philosophy have now changed and acknowledge that the outside names are investors and not traders and that they are not being properly advised.
I have been asked time and time again why I do not resign. I am a businessman. All my working life I have been a banker and an industrialist, and I do not know very much about the detailed workings of Lloyd's. I certainly know nothing about underwriting. But I have been fighting Lloyd's ever since Sasse because I recognised at that point, many years ago, the troubles they were in,the malpractices which were involved and the lack of control at the top which is at the root of all their troubles.
Their inefficiency beggars belief. To start with, they invariably - and until recently I believe, legitimately - over-traded. In my interpretation that means that premium limits were regularly exceeded and there was always a good excuse as to why they were exceeded. There is no point in having regulations if they are not adhered to.
Years ago I asked for my exposure. No answer was forthcoming and the reason for that is perfectly obvious: they were not capable of giving it. Until recently scientific risk evaluation has been absolutely nil. I imagine that it has improved now. I do not want to resign but to push Lloyd's back into the position of being the flagship that it was and something of which we were all proud.
In all this I am not criticising the new regime. I take my hat off to it. I believe that they are very brave men to undertake what they have. It is problematical whether they will succeed. I do not have total confidence in the business plan but, at last, and for the first time, somebody is taking control. As I said, I take my hat off to them for doing so.
I have a number of suggestions for the board, and I use the word "board" advisedly and on purpose the committee. It too recognises the need for change. In the introduction to their Business Plan summary, they say,
"We must manage the Society in a new and more directive way".
That is using the word "directed" for the first time. That is right and it was needed long ago - otherwise this crisis will not be circumvented.
My first suggestion is that non-executive directors must be in the majority; otherwise, they will not be able to wield the rod that is needed so badly to get rid of therotten apples, and so forth. Furthermore, it is beyond belief that someone facing litigation should occupy a very senior position on the committee. Can it be that that person was put there by working names? I have been asked on a number of occasions whether that is the way the City behaves. I have said, "No, the City does not normally behave like that. That is Lloyd's being a law unto itself." That sort of thing must end; and that is one of the reasons why the Act must be changed or some way round it must be found. If non-executive directors were in the majority, that situation would not be allowed to pertain for long.
It is right and proper that I should put on the record the fact that I warned the gentleman concerned that I would make these remarks in your Lordships' House today. That same gentleman might like to know that his office, which is one of the biggest at Lloyd's, is under heavy criticism from certain quarters among his active colleagues forits inefficiency and other misdemeanours.
My second suggestion relates to corporate investment. That means investment with limited liability. The rest of us do not have limited liability and, in equity, that cannot be allowed to continue. The introduction this year of compulsory high-level stop-loss should do that; but it must be acknowledged that that is the end of unlimited liability or is it merely shuffling risks around the market, as has happened so often in the past?
Thirdly, agents have a dual role. They are shareholders and investment managers paid by us, the outsiders; yet many have exposed their names to their total wealth and more.Is that not criminal negligence? It is certainly negligence and, in my view, it is more than that. No regulator would have allowed that situation to have occurred. A regulator would have intervened long before. I suggest that, for the next decade at least, subject to any court variations, 20 per cent. of the salaries and pensions of the worst offenders should be devoted to the Hardship Fund for those they have abused. There should be a lesser percentage for less guilty brethren. I am sure that the ingenuity of the leadership of Lloyd's could find a way to make that legally possible.
Fourthly, any prudent risk-taker caps his liability. That should be obligatory. We should be able to say good-bye to open-ended commitments.The extraordinary US court awards would then be of no effect. In parenthesis, the United States will rue the day if Congress continues to refuse to cap court awards.
Fifthly, I should like to talk to your Lordships for a minute (if you can spare the time) about the dangers of asbestosis.The dangers have been known since 1924. Industrial working regulations were issued in 1931. But reaction at Lloyd's only began in 1974 when Sturge divested itself of all its liabilities. One up for them. But full awareness only struck the market in 1981. On 10th November of that year a committee member of Lloyd's chaired a meeting explaining the position to the panel of auditors--and yet those agents and auditors never warned names in the period up to 1988, and even then, they did so only in muffled terms. One might say that that is perhaps understandable because there would have been a major capital withdrawal from the market if they had. It might be understandable, but it is surely criminally negligent.
Stupendous damage has been done. Some of the water has flowed under the bridge. The rest must be ring-fenced. The new board is trying to do that, and I hope that it will succeed. It has to find a way to protect itself from the type of exaggerated awards that are current in the courts today. I am sorry that much of that is being copied in this country. I warn the Lloyd's committee, having learnt the lessons of asbestosis, against involvement in pollution, tobacco and professional indemnity business. Those are traps into which it may well fall if it is not careful.
Sixthly,I urge the committee to steer clear of such risks in America until the American courts regain some sense of balance and until exposure is capped. I wrote recently in Lloyd's magazine as an outsider that profits were the name of the game, not turnover or even market share. Lloyd's has to manage the business downwards. Managing the business downwards is the most difficult thing one can do; but, nevertheless, it is essential that it does that. Then, if one is efficient and cost competitive one can re-enter the market when the time is right.
Lastly, I fear that old habits are still entrenched in Lloyd's. That is why it must get down to sorting out the place and getting rid of a large number of people. I put forward a scheme to the committee about a year ago designed to assist some names who want to retire when their open years are closed. I would have understood if I had been told in answer that the scheme was not philosophically acceptable or technically feasible. I did not receive that answer. What I did receive was buck passing. The corporation said that it was not its business to establish syndicates. That is untrue, incidentally, because it has already established Centre-Write. Try the underwriting agents. The answer from them was that it was not on because it was not profitable. What does one do when one is faced with that attitude when they should be trying to help some of their members who have been fleeced?
It is essential that the new management in which I have confidence - I believe that it will do its best -goes through Lloyd's like a dose of salts and applies a rod of iron, because I want to see Lloyd's back on its pinnacle as one of this country's biggest earners of foreign exchange. I wish the new team every success with its first - believe it or not, it is its first - business plan.
In conclusion, I should like to say a word to my noble and learned friend the Lord Chancellor. I hope that his attention will be drawn to these remarks. There are a great many unhappy people out there.There are many people who have been badly advised, ill-treated and fleeced. Some of them are meeting procedural difficulties in pursuing their litigation aims. I recognise, as do other noble Lords, that it is not practical to ask for a change of the law or even a change of rules; but where there is the option of discretion, I hope that the judicial authorities will exercise that discretion in favour of those people so that even if they do not come away richer - as some of them undoubtedly will not, because, apart from the rights and wrongs of the matter, there is a limited sum of money available - they will at least have the satisfaction of knowing that their case has been in front of a judge.
My Lords, I suspect that I am the only insider in the Lloyd's market to speak today so perhaps I may start by declaring my positive interest. I was for 40 years an insurance broker with the same international company. For most of that time I was a passive underwriter; what is known as a working name at Lloyd's. Myunderwriting life was from 1954 until the end of the 1988 account.
My personal philosophy on underwriting was by no means typical of most Lloyd's names. Briefly, it seemed to me that as a young man I always needed a lot of money and should take chances. The older I became, the greater was my earned income. Eventually my school fees became less and the less I needed to put my earned income at risk from underwriting. Unlike most other names at Lloyd's, throughout my life I maintained a low profile, minimum lines and just two syndicates.
I am told today that the average number of syndicates for a name at Lloyd's is 16. Even granted that each of those 16 has a minimum line, the aggregation must today expose an average underwriter to significantly more loss - and, indeed, to significantly more profit - than it exposed me.
I have another view of Lloyd's, which again is uncommon. As an employer I was anxious that my employees should resign from underwriting at or about the time of their retirement.It seemed to me wrong that they should put their pensions at risk from underwriting fortunes; that was unless they had private wealth of their own. Having explained my background and my views, I leave it to your Lordships to decide whether what I wish to say about Lloyd's and regulation at Lloyd's is impartial or prejudiced.
Today's Question undoubtedly arises as a result of the losses. But I wonder whether it is as widely known as it ought to be thatthese losses are not just Lloyd's-wide; they are certainly UK-market-wide and internationally-wide in various areas, although not wholly across the international underwriting scene. Perhaps the worst affected country of any from the losses at which we are now looking is Scandinavia; that is Sweden, Norway and Denmark. Certainly the UK has been hurt and as much as Lloyd's names have been hurt, so also have insurance companies. Companies which spring to mind immediately are the Municipal and Mutual, the Orion and the English and American, which have all folded during the past couple of years.
If one looks at the commercial scene one finds that a number of companies headed by thePrudential have pulled out of commercial insurance altogether and retired to life insurance and personal lines. If one looks at the reinsurance scene one finds endless companies which have pulled out of either all reinsurance or part reinsurance. Usually in the case of part reinsurance they have pulled out of treaty; certainly they have pulled out of excess loss. Therefore, the losses are not just problems at Lloyd's. As a result of Lloyd's unique system, it has received press coverage to a far greater degree than has been given to companies.
Why have we had these losses? There are basically four reasons. I wish briefly to go through them because it is fair and I should like to represent to your Lordships that at least three out of the four have little bearing on regulatory problems. The first reason wasthat we went through a long period of an sustained low rates based on sustained profits. We have been through a period of an almost continuous oversupply of underwriters around the world. It is a fact that in the 1980s those in the London market, whether Lloyd's or the insurance companies. could no longer control the rates which they required in a way that they could when I first entered the market in the 1950s and 1960s. So they had to follow the rates down or get out of underwriting altogether.
The second reason is that we have been through a period which seems, thank goodness, to be over, in which there was asignificantly greater than average number of catastrophes. That has been very difficult for everyone- Lloyd's, companies in the UK and abroad. Everyone has suffered from that far greater than usual incidence of catastrophes.
Thethird problem arises for anyone who underwrites business from America and there is the problem of the American Courts to which my noble friend referred earlier. In the United States' the social system and jurisdiction of that country has come to the conclusion that insurers have deep pockets which are there to be used for the nation's needs. That is based on the assumption that the insurers will get back their money in due course in any event. That is not the insurance on which I was brought up which was based on the principle of fortuity. Nevertheless, we have had to put up with the fact that those underwriters who accepted USA liability business have found that the policies which they underwrote in the 1950s, 1960s and I 970s which had no claims, because the claim that was originally submitted was regarded as being excluded, in the United States' courts is now found to be included; and of course, no reserves were set for problems of that nature.
All underwriters - British and American - have been caught by that. I do not regard them as negligent. Your Lordships may ask why a British underwriter underwrites in the United States if there are those problems. If one wishes to underwrite-and I hope to show your Lordships later on how important underwriting is to the economy of the country -you must underwrite in the United States. Until recently it contained over 50 per cent of the world's premium income, and it is still between 40 per cent. and 50 per cent.
Those are the first three reasons for losses. The fourth reason is quite clearly that there have beensome bad underwriters and agents giving bad advice. I am in no position to say whether those bad underwriters and agents have been negligent and I have no doubt that when the court cases come to fruition, those matters will be sorted out. But, yes, there certainly has been some bad underwriting. However, the reason that we are looking at such a disaster today is because of a combination of all those four reasons. That has caused our problems. Only the last reason has regulatory implications.
As has already been mentioned-and I thank my noble friends for the positive way in which they spoke about Lloyd's-there is now a new Lloyd's team as from 1st January 1993. With that team comes a major culture change. That change is simplythat today's leaders accept that they must manage the marketplace whereas yesterday's leaders only saw themselves as administering it. That is a big, big difference. I am extremely hopeful that it will make a major change for the future of Lloyd's, whether it be policyholders, names or staff.
As we have heard, the first thing that the new management did was to create a split. It set up two new boards -one for market affairs and one for regulation. For the regulatory board an outsider was brought in to be chairman who had nothing to do with Lloyd's - Brian Garraway. He had no previous connection whatever with Lloyd's. With respect, I do not believe that the fact that there is a minority of Lloyd's participants on that regulatory body will in any way influence its decisions because they are in the minority. It seems to me that there should be one or two people available who can tell the regulators what goes on. Therefore, I should have thought that it is a good thing to have a minority of players on the regulatory board to inform those who are not players at Lloyd's.
That board sets standards and minimum qualifications, and is looking at people to ensure that they are fit and proper. It is monitoring activity against bylaws and codes. Again, I am not sure how widely it is known that a number of bylaws and codes have been in practice for some time now.
On the market board side, we have seen continuous activity to increase the training and minimum standards required to bring in underwriters and others with responsibility. The regulatory board and the new market board are now just seven months old. I put it to your Lordships that they need time before we try to judge them.
Finally, I suggest that it is in everyone's interests that Lloyd's overcomes its current problems. I believe very strongly that it is in names' interests, because a bankrupt Lloyd's will be unable to give them the help which they currently seek with the losses that they have.
I have much experience of watching companies and concerns in the insurance world that have called in the liquidators and where, 25 years later, the claims are still coming in. Indeed, I do not yet know of a single concern that has wound itself up in the insurance company world that has actually been able to put in place at the beginning sufficient money to pay for claims received at the end of the procedure. Therefore, without doubt, a Lloyd's that was wound up by its membership would cause that membership far more trouble than a Lloyd's that was ongoing, continuing and - it is to be hoped-making some profits and, therefore, had money to help those members with their problems.
It is in the City's interest that Lloyd's should continue trading. There are currently about60,000 jobs in the City dependent upon Lloyd's. It is in the London insurance companies' interest that Lloyd's should continue to trade. I say that because each one of them will agree that Lloyd's is actually the hub that allows the Lloyd's brokers to bring in the business, a far higher percentage of which goes to the insurance companies than goes into Lloyd's. Finally, it is in the interests of the country, because of the importance of our invisible earnings arising out of the commercial insurance market.
I wish that I had the 1992 figures with me, but they have not yet been released. Therefore, the 1991 figures must suffice. They are as follows: £1.9 billion from the insurance companies;£0. 5 billion from Lloyd's; and £0. 9 billion from the Lloyd's insurance brokers, making a total of £3. 3 billion earned by the insurance market for the country's balance of trade in 1991. Much has happened at Lloyd's; indeed, an enormous sea change has taken place. Please, give it a chance to work.
Lord Lucas of Chilworth
My Lords, all noble Lords who have spoken thus far have advised the House as to the reason for them taking part in the debate. I shall do likewise. My reason for doing so is because during 1985 to 1987 1 sat where my noble friend the Minister is currently sitting. I had to respond to many of the questions that were put by the noble Lord, Lord Williams, which have today been similarly put by the noble Lord, Lord Peston.
I am very glad that my noble friend Lord Chelmsford underlined the importance of Lloyd's in his concluding remarks. Therefore, I need not repeat it. However, I should merely like to underline the fact that Lloyd's must be made to work. it has an international reputation; it is a big earner and a big employer. Now is not the time to suggest that another organisation be created. I believe-and I shall return to the point later that Lloyd's is capable of managing its affairs to meet the end described by my noble friend.
My noble friend Lord Lindsey and Abingdon said that he wanted an independent regulatory body, while my noble friend Lord Harrowby said that the 1982 Act should be scrapped.
The Earl of Harrowby
My Lords, with the greatest respect to my noble friend, I did not say that the Act should be scrapped; I said that there may be parts of it-for example, with regard to the board being able to veto certain directors-which should be capable of being amended. However, for the reason that I gave, I certainly do not think that it should be scrapped.
Lord Lucas of Chilworth
My Lords, I am most grateful to my noble friend for that explanation. 1 thought that he said that it was wrong that Lloyd's should have had its own Act. However, I entirely accept what he says.
I quote from the report of Sir Patrick Neill:
‘Shortly after the 1982 Act received the Royal Assent, a series of scandals came to light which showed the imperative need for such powers",
and so on. In that very splendid report, which admittedly was set against the background of the Financial Services Act, he described what changes he thought should be made.
Sir Patrick came to the conclusion that Lloyd's was capable of managing its own affairs and of being its own regulatory body. He set down 70-odd recommendations. When your Lordships debated that report in January 1987, the noble Lord,Lord Williams, said - I paraphrase his comments-that he knew that when Lloyd's was exempted from the Financial Services Act it would not work. I am sorry that the Liberal Democrat Benches are empty this afternoon. I am equally sorry that the noble Lord, Lord Peston, does not seem to have much support behind him. However the noble Lord, Lord Diamond, speaking from the Liberal Democrat Benches, said on the contrary he was happy that Lloyd's should act as its own self-regulatory body.
The Government reached that view also and held to that view. But in that debatemy noble friend Lord Kimball, who I believe-if memory serves me right - was then the chairman of the disciplinary and complaints committee of Lloyd's, assured the House that already a number of the recommendations had been put in place and that the others would be dealt with. I do not know whether or not they have all been put in place. Certainly the events of the past two or three years give rise to some doubt that they have all been put in place.
I do not believe for one moment that it is a failure of the regulatory system that has brought about the unhappy situation in Lloyd's today and any loss of confidence that Lloyd's is suffering in the international scene. I believe that all this took place against the background that my noble friend Lord Chelmsford described and against the background of a lot ofloose money tumbling over in 1986, 1987 and 1988 in all sorts of areas. Then the going got a bit tough, as has been said. However, human nature and natural greed overcame professionalism and proper management. I believe my noble friend Lord Harrowby said that that situation revealed inadequacy and an element of negligence. I will not disagree with him on that.
One then has to ask oneself what was being done to rein in the membership of Lloyd's. It has been suggested that the ruling body - the board - was inadequate and may still be inadequate. It may be that the culture was wrong and that it was a cosy club which thought that if it administered itself, everything would be all right. The culture may have to change but that does not mean there should be a new regulatory body. Where is a new regulatory body to come from? In 1987 the noble Lord, Lord Williams of Elvel, wanted an SFC kind of arrangement. Surely he does not want that today or does he? Unfortunately, the noble Lord, Lord Peston, cannot answer for him and is denied another opportunity to speak today. However, we shall hear from him again on this matter.
Should the regulatory body be taken away from Lloyd's? Where will it be put - in the DTI? It should certainly not be put in the Treasury. I am sure about that. The responsibility which is enshrined in the 1982 Act and which was put in place by Lloyd's in a series of bylaws against the recommendations in Patrick Neill's report all noble Lords applauded that report at the time, and I doubt whether any have any reason to change their opinion today- must be reconsidered. Perhaps a new arrangement might be satisfactory
It is not for me to talk about why names enter the business with unlimited liability. I would not do so even if I could. That is a matter of the contract arrangements they made. I do not find it inequitable. They enter voluntarily. I shall say no more about that. If Lloyd's wants to change those arrangements, either to defend people through capping or by attracting new money, whether corporate or private, that is a matter for the Lloyd's board to sell to the people it wants to attract into that market-place.
I am desperately sorry for people who have suffered as a result of the greediness which overshadowed prudence and professionalism and led us to this sorry state. However, I do not believe, as the Question of the noble Lord, Lord Peston, implies, that a new regulatory authority need be set up. Nor do I believe that we need a new Act. Do we need another inquiry'? Matters which may come before the courts could provide such an inquiry.
I should like to echo what my noble friend Lord Chelmsford said. Let the new culture - of which he has knowledge and I do not - which is evident in the new team which is planned have a chance. Let us stand behind that new culture to restore the confidence of the world in what is and always has been of importance to London as a world financial centre.
Earl Alexander of Tunis
My Lords, I am grateful to the noble Lord, Lord Peston, for initiating this timely debate. I must declare an interest, being a name at Lloyd's.
Insurance is a unique business in which the principle of good faith is paramount. When a party comes "on risk" he is entitled to know the nature and extent of that risk. Should any material information be withheld - even by mistake - he is entitled to repudiate that contract. That is the law.
As it is simply not practical to carry out the degree of "due diligence" normally undertaken in commercial transactions, the insurer - the man who takes on the risk - also takes on the word of the insured. As stated in a case in 1869:
"the law demands a higher standard of good faith between the parties, and there is no class of documents as to which the strictest good faith is more rigidly required than in policies of assurance."
I hope that your Lordships will bear those words in mind when I recount just a few of' the facts which have emerged since 1982. In 1982 the Lloyd's Act granted the Council of Lloyd's the status of' self-regulation and legal immunity from suit. As your Lordships have heard,that is a privilege unequalled in the world of commerce. A grave responsibility accompanies that privilege: the responsibility of good faith which goes with unlimited liability.
One would have thought that names could sleep easily becausethat status also included a duty of care. The Chairman of Lloyd's himself said so in answer to a question at a recent annual general meeting. At that meeting almost the entire council was present on the platform, including the corporation solicitor. There was not a single dissenting voice. I have in my hand a verbatim transcript of that exchange:
"Question; Does the Committee/Council owe a duty of care to its members?
"Well, the answer is of course yes. The Council of Lloyd's does have a Duty of Care. Due care to see that the society is properly regulated. It does not have a duty to underwrite on behalf of its members etc. etc. The answer to the question is that for regulation [purposes] we have a Duty of Care".
There was some understandable confusion, because Lloyd's had already instructed its lawyers to plead in court that it owed no such thing.
Far from sleeping easily, investors had unknowingly signed away all the legal rights and protections which are afforded those who invest in, say, the stock market. Parliament awarded Lloyd's the right of self-regulation after a number of meetings atwhich Members of Parliament were told that only Lloyd's knew how to regulate the market. Financial reports and accounts to support their argument showed that all was well. In fact, no less than 142 syndicate accounts should have remained open as the losses from asbestosis and pollution were so large as to be unquantifiable-and that was in 1981.
Auditors' letters to Lloyd's asked for instructions. The committee insisted that all accounts were to be closed. The Lloyd's Bill was going through Parliament at that time. The closing and signing off of the accounts was achieved by a device called rolling the losses forward, thereby passing solvency at a stroke.
Many years later, following overwhelming evidence of negligence by the underwriters - I believe that it was referred to by my noble friend Lord Harrowby -Lloyd's wrote to all names imploring them to settle their differences outside court. Some stuck to their guns and continued the action. The settlement in their favour was some £116 million. Those members who heeded Lloyd's found themselves not only time barred but liable to the full extent of their losses. I ought to add that I was not among that party.
The Council of Lloyd's has powers to investigate agencies. One particular report was so damning that it might well have persuaded Parliament that Lloyd's should have outside regulators. However, unfortunately that report was not allowed to be shown to the names during the passage of the Bill through both Houses of Parliament. Names had to go to the High Court to obtain a copy; but by then it was too late and the damage had been done.Those suffering names made a further application to the High Court to obtain vital documents that were stored by Lloyd's in a warehouse outside London. Within hours of the judge ordering their release, the papers were destroyed by fire. To the best of my knowledge, Lloyd's made no attempt whatsoever to investigate or to assist the names in their pursuit of the facts.
Those affairs clearly demonstrate, to me at least, the breathtaking incompetence of the Lloyd's regulators. I would be doing my fellow names a disservice if I did not say that I believe that it is sometimes worse than mere incompetence. It is the greatest pity that the intelligence available to the market on asbestosis and pollution was not disseminated to the affected names, just as Lloyd's went on a recruitment drive in the early 1980s when members' agents scoured Canada, America and Australia signing up names.
My informants tell me that American members, perhaps less shy than others, are invoking theRICO Act -the Racketeer Influenced and Corrupt Organization Act. My own judgment, as I told them, is that such action is misconceived. Should they win, the errors and omission underwriters would apply to the courts to have their contracts set aside. The successful plaintiffs would therefore be unable to collect any of their damages.
A consequence of self-regulation and non-accountability is the violation of the law of agency. That states that an agent must at all times act in the best interests of his principal. Not so at Lloyd's, my Lords. When a conflict of interest arises between a name and Lloyd's the agent betrays the name. In one case bank guarantees were called despite the clearest evidence - I speak of Lloyd's own evidence - of false accounting.
I have copies of names' correspondence with the regulators of the market going back to 1985 in which were detailed and verifiable complaints. In particular, premiums were written on their behalf and in their name of between two, three and four times the limit that they agreed in writing with their agent. Furthermore - I believe that it is absolutely ludicrous - names were put on syndicates, insuring other syndicates that they were on, thereby paying management fees twice over for the same risk.
The council has had every opportunity over many years to put its house in order. Legal immunity has left names with no redress. Lloyd's defence is that it can do its job only if it does not have to look over its own shoulder. How do other professionals manage it? Stockbrokers, bank managers, lawyers, accountants, all handle clients' accounts.
In conclusion, I believe that the only way that disputes of this nature can be settled is, unfortunately, through the courts. Every man and woman in this country should have access to law if they feel that they have been wronged. Those of a vexatious nature are always weeded out. I fervently hope that the courts will expedite those cases of the many, many names who have been driven to penury by their misplaced trust in an institution which was once upon a time held in such high esteem. I believe that it is now up to Parliament to look again at the 1982 Lloyd's Act which has so shamelessly been exploited at the expense of the society's members.
My Lords, the House will be much obliged to the noble Lord, Lord Peston, for initiating this sensitive debate. The pity of it is that we are discussing it late on a Friday afternoon, because the matter ought ideally to be debated before a full House of Parliament. There are those who are not only names at Lloyd's, but are involved in the whole international and national working of finance generally.
I declare a very bygone interest, as one who began working in Lloyd's in 1948 in a fascinating building in Leadenhall Street. I shall not comment on the new building because it is not germane to the subject of the debate, but noble Lords will draw their own conclusions as to its architectural niceties or otherwise. However, that is irrelevant.
I was a working name at Lloyd's between 1956 and 1963.Many noble Lords will remember the three hurricanes, Betsy, Carol and Hazel, and I think I am right in saying that the losses were spread more over the market than the present losses. Even allowing for inflation since those days, the amount of the losses was probably not as great but most names-and it was mainly inside names in those days, there were relatively few outside names-like myself, were working names. Many of us felt as bitter as the names do now. However, I do not believe that at that time Lloyd's itself could be held largely responsible for the losses. It so happened that they hit the marine market which was then, as probably now, the one which makes the most profit. The Maryland coast was badly hit, shipping was badly hit and enormous losses were sustained. However, that is water under the bridge, if I may use that expression.
Of course, when one becomes a name at Lloyd's one knows that one is taking a certain amount of risk. Whether all agents are as competent as each other is another matter. An inside name has the advantage, or at least some advantage of knowing how the market works.At the time when I became a name, it was obligatory for anyone working in Lloyd's, in whatever capacity, to have worked there for five years before there was any question of their becoming a name, so that by that time they had some knowledge, even as a junior, of how Lloyd's worked.
Those who saw the recent "Panorama" programme on Lloyd's will have been shaken by the examples. Many of those who are names at Lloyd's are relatively wealthy, but one's heart goes out to the pharmacist from Evesham in Worcestershire and the elderly lady who was secretary to a distinguished gentleman in the City.As a reward for the service which she gave to the company, in all good faith he made her a name at Lloyd's. Of course, both names faced the most enormous losses. Whether Lloyd's itself can be held largely responsible for that is a matter of individual judgment. In the present situation the outside names are in the majority.
There have been allegations (I donot know whether one can refer to insider dealing) that inside names have been given advantageous terms. They are allegations. As I do not work at Lloyd's, I am not in a position to comment. My knowledge comes from what I have heard, read and to some extent seen.
As other noble Lords have said, the organisation that has been set up within Lloyd's must be given time to work. My noble friend Lord Lucas of Chilworth put his finger right on the pulse. If Lloyd's is to lose its regulation, to whom will it turn? I do not believe that any government department will take it on because departments have enough problems on their hands as it is without having to handle Lloyd's. It would be a major tragedy if Lloyd's were to go under. At the moment it is the subject of intense criticism, some of it brought on itself, as noble Lords must face. But Lloyd's has been going for 300 years. It was originally a coffee house and the term ‘A I at Lloyd's" still, I hope, holds.
We live in a world of national and international turbulence. Nobody could foresee Piper Alpha. Nobody can foresee hurricanes in Florida or off the coast of the Shetlands or disasters anywhere else. Lloyd's can hardly be held responsible. But agents must warn those whom they are persuading to become members that such things happen. Some people assume that nothing can go wrong with Lloyd's. Of course, things can and do go wrong everywhere. It is to be hoped that the new organisation within Lloyd's will make it quite clear that the agents concerned must make quite sure that incoming names are aware of that. Obviously, this is not a very enthusiastic time for new names to come forward. We must face the fact that even in 1993 another hurricane or oil spill may occur. The risk is ongoing.
This debate has served to bring Lloyd's into the limelight. We must all hope that one of the greatest financial institutions in the world, which has been responsible for an enormous amount of foreign currency and export earnings, can ride the present storm.
My Lords, first I must declare an interest as a victim of Lloyd's. I am a long-standing victim who has been a membersince 1964 and who, after taking into account every cheque received, is now hugely out of pocket as a result of that membership. Lloyd's problems are both long-standing and of relevance to the future of Lloyd's. The crucial question, which was asked by the noble Lord, Lord Peston, to whom we are grateful for having raised the matter, is whether the current arrangements for the supervision of Lloyd's are satisfactory. I, for one, do not expect the Minister to give an answer when she replies to the debate. I hope that today we shall be opening a wider debate outside the House that will enable the Government to come to a balanced view on what can and should be done.
There are four main causes of the Lloyd's disaster. I shall first list them and then give examples of each. The first was a coincidence of external factors over which Lloyd's can reasonably claim to have had relatively little control; secondly, there was serious professional incompetence; thirdly, there was negligence bordering on fraud; and, fourthly, there was a widespread failure of moral standards which has sullied the reputation of the City of London for a generation.
There arefour external factors. First, the personal tax regime in Britain has always made membership of Lloyd's particularly attractive to high income individuals. With top marginal income tax rates of over 90 per cent., the Inland Revenue was in effect underwriting over 90 per cent. of any losses. In addition, there were certain tax free possibilities of capital gain. Rightly, in my view, loopholes in the capital gains tax provisions were closed and, even more rightly, the top rates of tax were slashed from 98 per cent. in 1979 - 80 to 40 per cent. in 1988.
I should point out that that was a lucky break for the Government. Noble Lords may have seen a recent Written Answer indicating thetotal of £880 million of tax repaid in respect of underwriting losses over the five years since 1988 and £386 million tax repaid in 1992-93. 1 imagine that the figures for 1 993~94 and 1994 - 95 will be at least double that. At 80 per cent. marginal tax rates there would have been an extra £1 billion or so on the PSBR. None the less, in recent years Lloyd's has been an extremely unprofitable enterprise for the ordinary British taxpayer.
Secondly, there has been the most unusual coincidence of both natural and man-made disasters over the past few years -hurricanes, earthquakes, oil spillages and fires. Thirdly, the American courts have gone quite mad. Fuelled by the pernicious system of contingency fees for lawyers, American juries have been handing out mega and punitive damages in cases where British insurers, by the standards of the British law of contract, could have repudiated liability. How long Lloyd's should continue to pay for awards which would be repugnant to British standards of justice is a serious issue which has not yet been addressed. One can only hope that the slaughter of American insurance companies and the consequential impossibility of obtaining cover at reasonable rates for many of the risks which must be covered by insurance for an advanced society to operate properly will stimulate the American Congress to take action.
Fourthly, there was a huge increase in insurance capacity which resulted inLloyd's being forced out of its traditional direct insurance markets into reinsurance, which is far more difficult to assess. Certainly, Lloyd's has proved that it was not up to the task, and that brings me directly to my next main point. which is incompetence.
It is deplorable that until recently no professional qualifications were required to be either an underwriter or a broker at Lloyd's. Even now many old hands are still operating who are hopelessly inadequate both intellectually and professionally. Lloyd's recently arranged for a group of parliamentarians-of which I was one-to visit the market. I spent some time in one of the boxes and was fascinated by the sophistication of the methods used to assess risks. I can only say that I believe that those methods are well beyond the capabilities of many of those whom I know personally to be working in Lloyd's, who are much better at the traditional method of writing their names on the slip based on the "quality" of earlier names on it.
There was, I suppose, an early warning of theincompetence in the affair of computer leasing. That goes back to the 1970s. Enterprising Americans purchased computers with bank borrowings to lease to users. Banks were rightly concerned that the computers could become obsolete. Astonishingly, Lloyd's were prepared to insure the computers against technological advance with predictable and considerable financial loss. I turn to negligence, of which again we had an early warning at Lloyd's. Many noble Lords will remember the unsavoury Savonita affair. It related to a reinsurance claim on a cargo of mainly Fiat cars carried in 1974 from Italy in a ship called the "Savonita". Part of the cargo was damaged at sea by fire. The Italian insurance company (part of the Fiat group controlled by the Agnelli family) had as their broker at Lloyd's a firm controlled by my noble friend Lord Pearson of Rannoch. Mr. Pearson, as he then was, became suspicious. It later emerged that some of the supposedly damaged cars were being resold in mint condition at near mint prices. Mr. Pearson refrained from pressing the claim on behalf of his client and, having obtained leading counsel's opinion on what he should do in relation to the fraud, reported the matter to the then chairman of Lloyd's. The net result was that Lloyd's did nothing about Mr. Pearson's submission. The business was transferred to Willis Faber who ultimately collected 96 per cent. of the claim for the Agnelli company.
Despite considerable pressure against him from the then Tory establishment this scandal was fully exposed on 23rd March 1978 in another place by my honourable friend Mr. Jonathan Aitken. Interestingly, the Minister of the then Labour Government who replied to the debate and who rejected the allegations made by Mr. Aitken was the noble Lord, Lord Clinton-Davis. At that time the Whitehall establishment was also protecting Lloyd's from exposure. I recommend noble Lords to look at that debate. Subsequently, the case led to the setting up of the Fisher Inquiry. The Savonita affair reflects nothing but credit on my noble friend Lord Pearson and nothing but discredit on the Lloyd's establishment at the time which, if it was not condoning fraud, was seeking to sweep it under the table.
A far more recent and significant case of negligence, or worse, is the cause of the growth of Lloyd's capacity by more than 70 per cent. from 1985 to 1988. The insiders knew the state of world insurance and of the fierce competition which had driven premiums far below what was prudent. Yet they deliberately pulled more and more people and capital into the market, assuring names that the market was turning at last. The then immediate past chairman of Lloyd's, Sir Peter Green, wrote to his names inSeptember 1984:
"A number of years have now passed since we have been able to offer our Names an opportunity to increase their shares. The Underwriters report that rates are now hardening in all Sections of our business and in some areas to a very significant extent ... I believe that you should most seriously consider increasing your share from 1St January 1985".
Where was all the money to go? TheLMX spiral was one answer-round and round incestuously, growing like a cancer. Another answer was in underwriting risks at premiums which should never have seen the light of day. So if the market for all this new capital was not there, what was it for? Why was it needed? Well, we have found out.
By 1982 it was evident to many in the management of Lloyd's, and to very many agents, that the environmental and health claims from America-pollution and asbestosis-showed every sign of turning from a row of molehills into a range of mountains as long and high as the Rockies. It was said last year that all the insurance money in the world is too little to pay for cleaning up America. No doubt there were those insiders, back in the early and mid-eighties, to whom it did not look quite so drastic. But most must have realised that if Lloyd's could broaden and deepen substantially its capital base it would have a better chance of riding out the fearful storm to come.
We still have to learn why the warnings of impending disaster over pollution and asbestosis, circulating in the Committee of Lloyd's in 1982, were not passed on to all names. We still have to discover whether the warnings were received or understood by a host of auditors who sanctioned reinsurance-to-close year after year.
However, the crucial point is that Lloyd's capacity was expanded between 1985 and 1988, not because the business existed to justify it - not even the agencies argued that - but because of their horrendous overhang from the past. Names, although made aware of their limitless liability for risks underwritten in their name, were enticed with the promise of greater profits, but wilfully kept in the dark about the true historic nature of those risks.
Was this a policy which the agencies pursued independently, all having come to the conclusion about the need to expand their capital base to avoid bankruptcy?Or was it a much wider conspiracy - of silence - starting at the top?
I now turn to the most distressing of all four causes of the Lloyd's disaster -the widespread lack of integrity. I shall focus on only one issue, the widespread practice and use of baby syndicates-technically known as preferential underwriting - to siphon off the best risks for a few favoured names. Typically, they would have under 50 names and often fewer than a dozen. They have been illegal since 1983 when a by-law was passed to require any syndicate to have at least 100 names.
I checked on the 1980 Lloyd's syndicate lists, a year when the baby syndicates were at their height, to see which of the high and mighty in the Lloyd's establishment were members of them.Two of the five most recent chairmen of Lloyd's were on them - Sir Peter Green and Mr. David Coleridge. Mr. Stephen Merrett, now a deputy chairman of Lloyd's, was also on one list.
Although they have only been banned since 1983, let us be quite clear that the baby syndicates are, and always have been,conceptually dishonest. There was never any excuse for them. They were of course one of the reasons why insiders did better than outside names, as is highlighted in Sir David Walker's report. And yet the baby syndicate ethos is still justified by many who still work in the market, sometimes with little shame. I myself received a letter from a Lloyd's members' agent (not my own) dated 15th September 1992, commenting on the Walker report:
"It is well known that Working Names have an average capacity substantially below that of Non-Working Names and, indeed, taking 1992 as an example, 45 per cent. of Workers write £150,000 or less, whereas only 5 per cent. of Non-Workers have limits this small, the Workers of course being of relatively small capital worth"
I have no reason, or confidence, to believe that, given half a chance, some of the Lloyd's insiders would not be up to their old tricks or new varieties of them. At present they are like the three-card fraudster on Oxford Street who pack up into a side street when the police are around and return when the coast is clear. What we need is to make sure that the coast is never again clear.
I have heard nothing but good of the new regulator, Mr. Brian Garraway, a former deputy chairman of BAT, who, with no previous links with Lloyd's, arrived in January of this year as chairman of the Lloyd's Regulatory Board. This board was set up under the Morse Report. The fact is he reports to the Council of Lloyd's.In my view he should report either to the Secretary of State for Trade and Industry or to the Governor of the Bank of England. That is for discussion.
Finally, I want to deal with a most important aspect of the new business plan - corporate capital - the part which involves its introduction. Lloyd's was faced with a choice.It could attempt to save the many individual names who face personal ruin or it could attempt to save Lloyd's as an institution. Understandably, especially as the careers of those involved depend on Lloyd's, it has given priority to the latter and the vehicle chosen is corporate capital.
There is a market for such capital and I believe Lloyd's will be successful in raising the required capital to keep it afloat. A number of brokerage houses and investment bankers are working on schemes to invest in Lloyd's. Such schemes are typically tax efficient structures, located offshore, and attractive to international capital.
As I understand it, a scheme would raise an amount of capital - say x million pounds. It would invest that in the short-term capital market earning 6 per cent. to 8 per cent. on its capital. In addition it would be possible to underwrite two times x million pounds in Lloyd's premium. I believe that for capital to be attracted the returns will need to be around 15 per cent. Hence the Lloyd's return on premium needs to be around 4 per cent.; that is to say, two times 4 per cent. plus, say, 7 per cent. on the capital invested which equals 1 5 per cent. If the premium returns are in the region of 10 per cent., as Lloyd's has hinted, such vehicles will return 25 per cent. plus to their shareholders. That return will suck in international capital and quickly restore capacity. But the rates on Lloyd's market will become more fiercely competitive and be held down.
These corporate schemes will be ring-fenced so that they have no liability for prior Lloyd's losses. The net impact will be that they will serve new corporate investors and Lloyd's intermediaries and brokers. They can only be negative for existing names, as they will supply capacity to the commodity business which is reinsurance. In effect, traditional names are being abandoned and, albeit in a different form, the strategy is once again to bring in new capital to save the institution.
So what is Lloyd's doing to help? It is offering Greek gifts. First, it is doing all in its power to prevent names going bankrupt. I believe that it would be better for many names if they did become bankrupt. At least then they could start life again instead of being left in bond servitude for life like the victims of money lenders in India. Secondly, Lloyd's is reducing, in many cases by as much as a half, the cash that is being demanded this year.Like the skilful blackmailer, the calls are being adjusted to what the victim will bear rather than driving him to the police or to suicide.
There is an overwhelming case for the ending of self-regulation.Even so, for most names it will be too late. For them, Lloyd's will have been a sad story, and for many, a personal tragedy.
My Lords, I rise to speak last and am glad of that because, as I shall explain, I declare no positive interest in Lloyd's. I am not a name and never have been. I started my career in the City with unlimited liability on the Stock Exchange. Therefore, somewhat luckily perhaps, I was not tempted to Lloyd's. However, I do know a great many members of Lloyd's and a great many names. Many of them are ravaged. Indeed, there are two in my close family.
The noble Lord, Lord Peston, should be very pleased with himself for stimulating what I think has been an excellent discussion from a very broad range of interests on this most desperately important subject. Without being personally involved, for the past six months I have been trying (in what spare time I have had) to understand the implications of the Lloyd's market and what has happened, and to discuss with various interested parties what could be done.
This matter is of national interest, as the noble Lord, Lord Peston, said. That view is shared to some extent by all of your Lordships who have spoken today. This debate is certainly in the individual interests not only of the 6,000 to 8,000 names whom I have been led to believe are very severely affected, but also of the 30,000 odd who make up the full complement of Lloyd's names.
I do not want to take up too much of your Lordships' time. I know that it is now late on a Friday evening and that this is but the first stab of your Lordships' House at being totally constructive in looking at regulations for this great institution and in discussing and looking at a way forward, which is something on which this House has a brilliant history.
I am sure that we all feel, with my noble friend Lord Chelmsford, that we need time to sort this out. We need to allow the new regime at Lloyd's and the new regulator the time to understand - asI have found it very difficult to understand - the full machinations at Lloyd's. I hope that there is time for that to happen.
I take the idea put forward by the noble Lord, Lord Peston,that there should be an inquiry by people totally unconnected with Lloyd's. Lloyd's has evolved over time as a very difficult market. As my noble friend Lord Harrowby said, it is difficult to gain information from within the market. He said that he looked to find the level of his exposure, but could not. Syndicates and groups of names who are having problems are finding it difficult to discover who is on which syndicate. So I am not sure that that will be easy. My noble friend Lord Marlesford asked whether we were confident that the old habits which die hard would not be continued within Lloyd's.
During the past few months a potential solution to the problem has been brought to my notice. Although I am not part of the group, I have been kept closely in touch with an extension of the Lloyd's business plan. I do not want to go into details now, but I can say that I believe it will be published and that the publication date is next Tuesday. It has been prepared by names and brokers who have experience of many of the things that have been discussed this afternoon. The solution has been proposed to the council. because, being an extension of the Lloyd's business plan, it is not something that the Council of Lloyd's can do itself. It is something that the members can do.
I have seen details that satisfy the requirement of all the players in this sorry saga. So it is with some hope, expectation and excitement that I announce this to your Lordships. The details will follow, because I do not want to refer to a small part of it and get it out of proportion. There is some hope not just for the names who have been worst hit but for the managing agents and members agents. It may also give some relief to my noble friend the Minister.
I am in no way anticipating my noble friend's reply to the debate. I am looking forward to hearing what she has to say. The plan involves the current players in the Council of Lloyd's I hope that there will be some relief for those names who have recently seen the 1990 results and have every reason to fear the 1991 results.
The Parliamentary Under-Secretary of State, Department of Trade and Industry
Baroness Denton of Wakefield
My Lords, I thank the noble Lord, Lord Peston, for bringing this matter before the House. It is, as he said, some time since the issue was discussed here or in another place. Two facts need to be borne in mind. The first-on which many of your Lordships agree-is that Lloyd's is an important market place which has been commercially successful for many years, contributing considerably to our invisible exports; and, as my noble friend Lord Chelmsford pointed out, responsible for providing a great many jobs.
When trading difficulties arise, it is important to distinguish between what is a straightforward trading loss, whether or not subject to civil legal dispute, and what is a regulatory question.
The second point is that insurance regulation may be for the protection of two distinct parties; the policyholder on the one hand and the investor in the insurance undertaking on the other. Most of the comment that we have heard today relates to investor or underwriter protection rather than policyholder protection, although I shall return to the latter.
Every investor is now warned that investments can fall in value as well as increase. At Lloyd's every new underwriter or name is warned before he joins that insurance is a risk business and that he has personal unlimited liability for his insurance obligations. Several noble Lords have pointed out that unlimited liability is just that-unlimited. Every penny they possess is pledged to their insurance underwriting for the protection of the policyholder.
Lloyd's is a unique institution and its self-regulatory regime has evolved specifically to deal with its particular features. It operates a system of professional independent regulation with a strong practitioner input. The corporation of Lloyd's employs 200 staff dealing specifically with regulation. None of these employees may be names themselves, either as underwriters or as market practitioners.
There have been significant changes in the past decade in self-regulation at Lloyd's to improve the protection afforded names. This process is continuing. However, it is in the very nature of the insurance industry that problems take a long time to emerge and to resolve. Much of the underwriting giving rise to the losses emerging and being suffered by names today took place in the 1970s and before. For Lloyd's, as with other insurers, these problems have been compounded by the industry passing through the low point in its cycle between 1988 and 1992. As my noble friend Lord Lindsey and Abingdon said, low premium rates have coincided with an abnormally high level of catastrophes.
Lloyd's regulation encourages ethical standards of behaviour and not just obedience to the letter of the law. However, the Government recognise, as does the new management team at Lloyd's, that practice up to and during the early part of the 1980s fell short of what was required.
Much has changed since then. The Lloyd's Act 1982 revised the constitution of the society and a council was created to take over from the old committee of Lloyd's responsibility for regulation of the members of Lloyd's and all those businesses which operate within the market. A key aspect of the council was the introduction of outsiders to be nominated members whose role can best be approximated to that of a non-executive director. Since the council's inception and throughout the 1980s it undertook a massive overhaul of Lloyd's regulatory structure through the promulgation of new by-laws covering all aspects of the market's business.
A general review department was established to monitor the ability of agents and brokers to comply with the by-law requirements. It visits agents and brokers to assess the adequacy of their management, systems and procedures.Investigation and discipline in cases of misconduct are handled through council committees with tripartite representation.
The information available to names has also been substantially improved. Better accounting and auditing arrangements have increased the competition between agents. An ombudsman has been appointed to investigate complaints by names against their agents or the corporation.A names' interests committee keeps the complaints procedures under review.
The regulatory arrangements at Lloyd's have undergone constant evolution since 1982. In 1986 the Government set up a committee of inquiry into the regulatory requirements chaired by Sir Patrick Neill, QC.The inquiry was prompted by the wish to give names protection comparable with that proposed for other investors under the Financial Services Act. As my noble friend Lord Lucas of Chilworth pointed out, the Neill Report made 70 recommendations which the Government asked the council to implement. The council did that and all the recommendations have been acted upon. The Neill committee of inquiry did not consider that external regulation would be any better.
One of the key recommendations was to increase the number of nominated members of the Council of Lloyd's. Theappointment of those members, who have no other connection with the Lloyd's market, is subject to confirmation by the Governor of the Bank of England. The noble Lord, Lord Peston, asked who those people are. They are chosen for their independence of thought and experience of regulation; for example, the chairman of the Securities and Investment Board is a nominated member and I am in no doubt that those members play a major role in securing a strong independent input into self-regulation.
Combined with the external members who represent the names, they form a majority of the members of the council. To emphasise the point, independent and non-practicing members make up the majority of the council.
Lloyd's has not left self-regulation with the Neill recommendations. In November 1990 the council appointed a task force chaired by Mr. David Rowland, then the chairman of Sedgwick, to review the workings of the market. Thetask force report published in January 1993 recommended reform of the market's governance through the separation of market development and regulatory tasks at council level by the setting up of separate market and regulatory boards. The task force also recommended the strengthening of names' rights. These included: the right to ongoing participation in a syndicate; the right to request the council to replace the managing agent of a syndicate; the right to approve major syndicate transactions; right of access to syndicate information and a right to regular meetings of names on a syndicate.
Sir Jeremy Morse, a nominated member of the council, was asked to chair a working party to carry forward the governance recommendations. It reported in June last year. He recommended slimming down the Council of Lloyd's to reflect its reduced role without affecting the majority nominated and external members had over insiders.The regulatory board comprises four insiders, four external and four nominated members together with the head of regulation and the solicitor to the corporation, neither of whom may be names. Sir Jeremy's recommendations were implemented on 1st January this year.
The Lloyd's business plan published in April this year, which many noble Lords mentioned and mostly with approval, advocates yet further moves to make regulation at Lloyd's more overtly independent. The regulatory board is developing plans for reshaping regulation at Lloyd's. The council's aim is to create a structure that replicates the operation of external regulation as closely as possible. That will be achieved by stripping out administrative functions undertaken by regulatory departments, to achieve greater clarity of purpose, and more intensive training of regulatory staff and adoption of new regulatory principles. There is a firm conviction of the need to tackle the problems.
Despite these extensive changes, names who have lost heavily are understandably suspicious of the circumstances of their losses. Lloyd's have responded to their grievances in a number of ways. They have used their by-law powers to create a system of independent loss reviews which investigate the causes of losses by individual syndicates and provide a report for the names on those syndicates. Each loss review has been led by a senior figure, typically a senior partner of a large accountancy practice or some other figure commanding authority. I believe that many names have welcomed that approach and found the reviews objective in their reporting.
Many names suffering losses on so-called LMX syndicates sought investigation into these alleging fraud. Lloyd's asked Sir David Walker, then chairman of the Securities and Investment Board, and a nominated member of the Council of Lloyd's, to investigate the allegations. No evidence of fraud was brought before Sir David's inquiry.
However, Sir David did find inadequate standards of professionalism care and diligence on the part of a number of members and managing agents. He also noted regulatory weaknesses at least with the benefit of hindsight. In particular, he was surprised that some managing agents had failed to monitor their aggregate risk exposure and that capital adequacy rules contained no element of risk weighting. The regulatory board has either implemented his recommendations or is working on those which are outstanding.
Sir David also analysed the complaint which was mentioned by several speakers today that insiders fare better than external names. He did not find any systematic or large-scale preference for working names. He also observed that, providing it was not immodest, a better performance of the investment of insiders was to be expected.
My department has a role to play in the regulation of Lloyd's, but it is directed at policyholder protection. It is concerned with general oversight of the market and with solvency.The Council of Lloyd's deposits annually with the Secretary of State a statutory statement of business done by members in the previous year. It must, and always does, demonstrate that members of Lloyd's both individually and taken together are solvent as defined in UK and European law. The purpose of those requirements is to ensure that Lloyd's can pay all valid claims from policyholders. It is not the Government's responsibility to become involved in the day-to-day administration of Lloyd's, or to intervene in individual disputes.
We have to be clear on what regulation can and cannot do. Several of the reinsurance contracts between Lloyd's syndicates have resulted in disputes between those who wrote them and their names and those who wrote the original business. Unfortunately, regulation cannot prevent losses arising from adverse developments in the market or from poor underwriting. The emergence of losses does not mean that there has beenfraud or negligence; but, if there is a suspicion of that, evidence should be provided and passed to the relevant authorities.
I shall try briefly to reply to some of the specific points that noble Lord have raised during the course of the debate. I should like to say to my noble friend Lord Harrowby that 1, for one, hope that he will not hesitate to let us hear him speak in future and that he will join us more regularly in debate. We benefited greatly from his contribution He raised a point that was also mentioned by my noble friend Lord Marlesford.The Government are active in representing the interests of the British insurance industry in Washington both in opinion forming and in the legislative process.
The noble Lord, Lord Peston, raised the matter of introduction of corporate capital. The rules for introducing corporate capital are still being developed. They will seek to strike the proper balance between the interests of new capital providers and the mechanisms such as the central guarantee fund which ensure the solvency of names and the payment of all valid claims.The Government are working with regulators at Lloyd's to ensure that corporate capital providers are not subject to double regulation by both the DTI and Lloyd's. The Inland Revenue and Lloyd's are working on the appropriate tax regime for corporate capital.
While doubting the value that the DTI may bring to the issue - for which remarks I forgive him - my noble friend Lord Chilworth pointed out thatregulatory shortcomings, as the reforms have shown, do not necessarily add up to regulatory failure. The noble Lord, Lord Peston, also asked me what aspects of the matter were being looked into. I believe that he referred to it as a "worst case scenario". My officials, in conjunction with those at Lloyd's, monitor its financial position regularly in the manner to be expected of prudential regulators.
I would say in reply to my noble friend Lord Alexander of Tunis that the events to which he referred occurred before the Neill committee of inquiry took place. That inquiry found no grounds for bringing self-regulation to an end. I do not believe that changing the legislation would do anything to help the present management of Lloyd's secure effective regulation in the meantime. What we have seen at Lloyd's is a decade and more of perpetual improvement. I was pleased that most noble Lords seemed to agree, particularly my noble friend Lord Renwick, that what is now needed is a period of stability. Those who call for new legislation to make regulation statutorily independent need to take a view on how long they believe this would take and what they think the impact of uncertainty caused by planning legislation would be on those currently charged with implementing the reforms recently recommended.
I am sure it will be felt that the contributions of your Lordships this afternoon have made a worthwhile input to the debate, which has certainly continued elsewhere for some time. I am sure that this is a subject to which we shall return. As my noble friend Lord Marlesford said, the new management at Lloyd's and I am sure all others involved - will read Hansard with interest, and I would suggest it will be of value to them.
(Debate started at 3.40 p.m. on Friday. House adjourned at twenty-four minutes before six o'clock.)
17 Aug 93
Independent: Lloyd's has large share of deficit
Lloyd's of London,was responsible for nearly £650m of Britain's £8.6bn current account deficit last year, according to figures on City earnings published yesterday by British Invisibles, writes Robert Chote.
Overseas claimson Lloyd's underwriters exceeded premium payments by £645m in 1992. This was the third successive year in which Lloyd's underwriting activities has been a drain on the current account, bringing the total outflow to £1.24bn. In the peak years of 1986 and 1987, Lloyd's was responsible for a £2.75bn inflow.
Overall,City institutions generated a net £7.1bn inflow of service income, up more than 18 per cent on 1991. The net inflow of income on investments handled by City institutions rose more than 20 per cent to £11.7bn.
Thebanks were the biggest source of net service income from abroad contributing £3.99bn last year. Despite the Lloyd's losses, the insurance industry generated a net inflow of £622m in service income, down 18 per cent on 1991 but up on 1990. Securities dealers generated a £1.19bn inflow, up from £757m in 1991.
.Banks and the insurance industry accounted for most of the inflow of investment Income, generating £7.37bn between them. Lloyds had a net inflow of investment income of £912m.
17 Aug 93
Ropes & Gray: report to Underwriters at Interest C/- London Market Claims Services Ltd Re:
Center for Claims Resolution Asbestos Settlement – Declaratory Judgment Action – Alternative Dispute Resolution Proceedings
In connection with the market's consideration of annual reports on asbestos-related bodily injury and property damage claims, we submit this further report on (a) the current status of the proceeding seeking approval of theCCR class action settlement of "future" asbestos-related bodily injury claims; (b) the ADR against Wellington signatory insurers, including certain London underwriters, in connection with the same; and (c) the related declaratory judgment action against non-Wellington signatory insurers. In summary, the class settlement proceedings are moving forward, with hearings on the fairness of the settlement (as a preliminary, pre-notice matter) and the content, distribution, and timing of class notice to occur within the next month. By contrast, progress in both the ADR and the insurance declaratory judgment proceeding has been slow, and both remain at the very early stages. For a discussion of the recent background of these proceedings, we refer underwriters to our report of May 17, 1993.
I. The "Future" Settlement Proceeding.
A. In The District Court.
As underwriters are aware, settlement of a class action in the federal courts of the United States requires a judicial finding that the settlement is fair to the class, after notice and the opportunity for a hearing. The Manual On Complex Litigation, which is guiding the court's actions, contemplates that, before a public notice of settlement is distributed in a large and complex class action case, there should be a "preliminary fairness" determination by the court. The idea is that if the proposed settlement is unfair on its face, the expense and disruption of the notice may be avoided.
The judge responsible for deciding issues of notice to the class and determining whether the settlement is fairdenied numerous requests for discovery made by objectors to the settlement. He did, however, require that the CCR and class counsel file lengthy "proffers" (i.e., statements of evidence that will eventually be offered) on the issues of fairness and possible collusion. This has been done.
Next, the court required briefs and argument on the preliminary fairness issue and certain jurisdictional matters, to be followed by briefs and argument on the notice issue. The former argument will be heldAugust 23, 1993; the latter, September 14, 1993.
Given this schedule, it is obvious that notice to class members cannot begin until approximately October 1, 1993, at the earliest. For reasons given below, the date may be even later. And it is likely that the notice period itself will be at least 90 days. The earliest time at which a hearing can be held and a decision reached on the ultimate fairness of the settlement, therefore, is after January 1, 1994.
Underwriters should be aware that thenotice proposed is perhaps the most extensive ever given in a United States class action. It will involve direct mailings, publication, and use of the media. The current estimate is that the cost will exceed $6 million. The CCR intends to bill the cost to insurers as an allocated expense.
B. In The Court Of Appeals.
There are both presently pending and threatened proceedings in the court of appeals.
Presently pending and under advisement following oral argument (on July 27, 1993) are the appeals from the district court's denial of certain objectors' motions to intervene, and from the district court's granting of an injunction against certain of those objectors proceeding with a competing class action in a West Virginia state court. The first of these issues was probably moot from the beginning and is certainly rapidly becoming so: the objectors are allowed to participate fully in all proceedings in the district court without anyone paying very much attention to what label is affixed to them. The second issue --the injunction of the West Virginia proceeding -- is crucial to the success of the settlement: it will not be a very attractive or effective settlement unless it can preclude other lawsuits. The CCR's counsel, however, has expressed confidence that the injunction will be upheld.
As to threatened proceedings in the court of appeals, several objectors have argued strenuously in the district court that no notice should be sent until all preliminary issues have been resolved not only by the district court but at the appellate level as well. It is, therefore, highly likely that one or more objectors will attempt an immediate appeal of any district court decision to allow notice to proceed. Any such appeal could, in turn, significantly delay implementation of the settlement and, if successful, would of course preclude the settlement altogether.
C. Objections To The Settlement.
The objectors advance two broad grounds for their opposition to the settlement at this point.First, they assert that, for a variety of reasons, there can be no settlement with a class of future claimants. Second, they argue that the class lawyers are tainted by collusion with the defendants and by having made, more or less contemporaneously, other settlements of presently pending and future cases. Objectors also urge a variety of grounds going to the adequacy of the settlement -- lack of separate compensation for loss of consortium, for example. These will not be definitely resolved at this point in the proceeding. These objections have been advanced by certain plaintiffs' tort lawyers, by non-CCR member asbestos producers, and by non-Wellington signatory insurers. Class counsel and the CCR have vigorously defended the proposed settlement.
While no prediction can be made as to the outcome on these objections, we note thatin Agent Orange and other very large multiple tort cases class settlements have been approved where the class included future claimants. The CCR takes the position that unless such a class is possible, there will be no practical way to end asbestos bodily injury litigation in United States courts. As to the claims of collusion, certain aspects will be rejected, we think. These are the accusations that rest, at bottom, on the existence of an agreement between the CCR and class counsel; but of course a settlement is an agreement -- one cannot have a settlement without an agreement. More serious are the allegations that class counsel reached other agreements for settlement of other future cases or presently pending cases, and these agreements improperly tainted the class action settlement itself. The CCR and class counsel admit the agreements but deny the taint. This matter the court must resolve.
D. Next Steps.
After hearing on preliminary fairness and notice, and assuming the district court rejects objectors' various challenges, objectors will attempt an interim appeal. If they are successful, they may achieve deferral of the notice until the appeal is concluded. If they are unsuccessful, the notice will proceed and recipients will have a stated time (probably, though not certainly, 90 days) within which to "opt out" or to appear and object. Following the end of the notice period, the CCR has the right, unilaterally, to withdraw from the settlement agreement if there have been, in its view, too many "opt-outs." If the CCR adheres to the settlement, the district court will then have a full-dress "fairness" hearing. This hearing might be preceded by discovery; it will certainly be accompanied by legal argument on a monumental scale. Then, if the district court finds the settlement to be fair to the class, the settlement will be approved.
Approval of the settlement by the district court will not end the process -- for two reasons. First, the objectors may then appeal as of right, and will certainly do so.Second, as underwriters will recall, effectiveness of the settlement is expressly conditioned on resolution of the insurance ADR and declaratory judgment actions satisfactory to the CCR. To these two companion proceedings, therefore, we now turn.
II. The ADR.
Since our May 17, 1993, report progress in the ADR has been slow, although some headway has been made.All Lloyd's syndicates and most London market companies have chosen to participate in the ADR, rather than in the declaratory judgment action, and amended declaratory judgment pleadings are to be filed reflecting this fact. Further, we have made progress with producers' counsel in identifying the policies actually at issue. In due course, we expect that amended pleadings will be filed accurately reflecting the actual state of affairs. In addition, John Feerick, the Dean of Fordham University Law School, has agreed to serve as the Neutral for the negotiation phase of the ADR. We have had one meeting and two telephone conferences with Dean Feerick, who appears to be a man of common sense, interested in effecting the economical resolution of disputes.
More difficult has been the process of information exchange. Although counsel for the producers has offered full information with respect to the settlement,the parties have encountered unexpected difficulties in working out a protective order to preserve the confidentiality of that information. To a significant extent, our ability to analyse the settlement and to prepare a defence in the ADR is still handicapped by this lack of information. Eventually, of course, the producers will be required to make disclosure, but in the meanwhile progress in the ADR is notably slowed.
We should add that although substantial information is still to be obtained from producers, the work done thus far on the market's behalf in preparing for the ADR leads us to think that there are significant defences available to the market in the ADR. Should these defences prevail there, the settlement would not become effective.
III. The Declaratory Judgment Proceeding.
In the declaratory judgment proceeding, counsel for the producers has been willing to agree to a form of protective order like that sought by insurers in the ADR. Thus far, however, the court has failed to enter the protective order. Nor has the court entered a pre-trial order notwithstanding that all the parties, except only CNA, have agreed to it. The declaratory judgment proceeding, is, therefore, no farther advanced than the ADR.
While it is theoretically possible that the proposed "future" settlement could collapse during the remainder of 1993 because of an adverse judicial determination, there is virtually no chance that it could be approved and become effective by the end of this calendar year. In all likelihood, the life or death of the proposed settlement will be conclusively determined during calendar 1994.
19 Aug 93
Sherwood Computer hit by turmoil at Lloyd's
TURMOIL IN the Lloyd's insurance market hurt Sherwood Computer Services, the USM-listed software specialist. Pre-tax profits fell from £l-7m to £541,000 in the first half of the year, in line with market expectations following a profits warning at the beginning of this month, writes John Murray.
Thewarning wiped out a third of Sherwood's stock market value. The shares rose just a penny to 145p yesterday, despite assurances from the company that the second half would be better than the first.
Richard Guy, executive chairman, said that Sherwood was making progress again after the problems in the first six months. ‘What hit us in the first half was the fact that wehad no licence sales to Lloyd's. The reorganisation of Sturge and the closing of a number of syndicates left the market very uncertain. People have delayed decisions on new systems, but we are beginning to see that business return as Lloyd's is restructured."
Lloyd's, whereSherwood is market leader in the provision of computer services, traditionally accounts for about 40 per cent of the company's turnover.
The group also suffered from a decline in orders from its local authority and housing association customers. Mr Guy said the local government reorganisation and the introduction of the council tax had made progress difficult in that market.
The interim dividend is maintained at l-75p on earnings per share of 3-4p (16-7p). Mr Guy said the decision reflected the company's confidence for the second half.
22 Aug 93
Sunday Telegraph: LUI bill rockets to £4bn
A £4 billion hole at London United Investments, the collapsed insurance group where Prince Michael of Kent is a director, is set to be revealed this week by its provisional liquidators.
Part of the hole will be filled by British insurance customers in higher premiums to rebuild compensation funds under the Policy holders' Protection Act.
Ian Bond and Chris Hughes ofCoopers & Lybrand will warn of potential losses of £4.5 billion when publishing their scheme of arrangement for LUI. This is £1.5 billion worse than previously feared. LUI has £500 million in cash.
Insurershave already paid the first £118 million of a levy previously estimated to be for £250 million to the Policyholders' Protection Board to pay claims. That levy could ultimately top £1 billion.
They could bepaying for years as claims keep coming on pollution, professional indemnity and other classically risky policies written by LUI's subsidiaries. Bond and Hughes will meet creditors on November 15 to see whether the required 75 per cent will accept their scheme of arrangement which envisages a series of payments over several years.
TheHouse of Lords has ruled that the Policyholders' Protection Act covers overseas individual claimants with valid United Kingdom insurance policies. But the Lords still has to decide whether the many corporate partnerships, such as lawyers and accountants qualify as claimants. Under the Policyholders' Protection Act, British insurers can have up to 1 per cent of their previous year's UK premiums levied in any one year to meet 90 per cent of an individual policyholder's claim when an insurer defaults.
Thelevy for 1993 will be worked out next March, but analysts say the maximum hit to the composites could range from £10.5 million for Guardian Royal exchange to £20 million for Sun Alliance.
Some insurers are indignant. "The Policyholders' Protection Board was set up to reimburse ordinary members of the British public," said one. "Why should UK premiums rise to pay for Californian architects?" Insurers say they had nothing to do with any of the policies that brought down LUI. Yet insurance brokers, such as Minet, which placed professional indemnity cover with LUI, do not pay the levy.
The first results are expected later this year from lawsuits in the United States against theauditors of collapsed savings and loans companies. All the big accountants are being sued for sums ramps g front $10 million to $250 million. Observers say this one class could cost $400 million to $500 million.
In addition, there areUS doctors, architects, the Los Angeles Bar Association and other professional groups facing malpractice or negligence suits. But the long-term threat comes from American pollution claims, which could go on for years. "Hardly any claims are yet settled," said one company source. "We are in roulette country here."
Since LUI collapsed and its chairman Ronnie Driver departed, only two directors, Prince Michael and Colin Forsyth, have remained.LUI has been investigated by the Department of Trade and Industry and the Serious Fraud Office.
Lloyd's syndicatesthat reinsured LUI policies also face claims. They include syndicate 190, formerly run by former Lloyd's deputy chairman Richard Hazell.
24 Aug 93
Lord, Bissell & Brook and Mendes & Mount market report: to Underwriters at Interest C/- London Market Claims Services Ltd. Re: 1993 Year-End Reserves Asbestos Bodily Injury Claims
We submit our annual report to the London Market highlighting the significant developments which have occurred over the past year in the asbestos-related bodily injury litigation. A separate Market letter is being circulated regarding the major developments in the asbestos-related building claims.
The current status of the nation-wide asbestos litigation and the resulting reserving implications for year-end 1993 were the subject of theannual asbestos reserve meeting between representatives of the London Market and their U.S. counsel. In attendance were Lord, Bissell & Brook; Mendes & Mount; Ropes & Gray; Hancock, Rothert & Bunshoft; the Chairman of the Asbestos Working Party; members of the London Market Direct and Reinsurance Claims Committees; and representatives from London Market Claims Services. The claims experience of the major defendants in the asbestos litigation and the reserve recommendations for these assureds were discussed at length at the meeting. The recommendations made at the meeting and contained in this report have been agreed by the Asbestos Working Party.
Regrettably, we must report that there has been anincrease in the rate of new claim filings over the past year and we have now reached the point where the number of asbestos bodily injury claims totals 218,361. We report herein on the recent claims experience of the major defendants involved in the asbestos litigation. We also provide an update on those assureds who have been forced to file for protection in the bankruptcy courts as a consequence of the asbestos claims made against them.
A number of major asbestos manufacturers have reached or are quickly approaching the point whereall available products liability coverage has been exhausted. As a consequence, certain of these assureds have argued that they are entitled to coverage for asbestos bodily injury claims under policy terms other than the products liability limits. The arguments raised by assureds on this point are briefly discussed in this report.
The federal judiciary's attempt to deal with the massive number of pending asbestos bodily injury claims through consolidation in the Multidistrict Litigation continues. Underwriters may recall that on July 29, 1991 anOrder was signed by the Judicial Panel on Multidistrict Litigation which transferred all asbestos bodily injury and wrongful death cases pending in the federal courts into one forum. We report on the challenges faced by Judge Weiner in this consolidated litigation over the past year. There have also been a number of important state court consolidations, including the Mississippi consolidated action where a trial of nine representative claims was recently concluded. These consolidated actions are described more fully later in this report.
Significant coverage decisions at both the state and federal court level have been rendered since our last report. These decisions as they relate to asbestos bodily injury issues are discussed herein.
Finally, we discuss certain reinsurance implications raised by the asbestos litigation.
I. CLAIMS EXPERIENCE OF THE CENTER FOR CLAIMS RESOLUTION
The Center for Claims Resolution (CCR) has in the past year settledalmost as many claims as it did in its prior four and one-half year history. 59,948 asbestos BI claims had been settled by the CCR from its inception in October of 1988 through May 30, 1992. This compares to an additional 58,634 settlements agreed to by the CCR between May 31, 1992 to May 31, 1993. 9,793 of these claims arise out of GAF's post-verdict settlement of the Baltimore City Consolidated Asbestos Litigation. It will be recalled that all other CCR members had settled out of this litigation prior to trial. Of the remaining settlements by the CCR in the past year, 15,910 claims have been fully paid and 32,931 claims have been agreed but will be paid out in the future.
The CCR will ultimately pay$918,778,277 to settle the 58,634 claims for an average per claim settlement during the May 31, 1992 to May 31, 1993 period of $15,670. This represents an increase over the average indemnity payment of $14,000 per claim for the preceding one year period. This increase is explained in part by GAF's $88 million settlement in the Baltimore City, Maryland litigation. Nevertheless it is fair to say that the trend is for higher settlements by the CCR as compared to those obtained in the past.
There has also been anincrease in the rate of new claim filings over the past year. The monthly rate of new claim filings over the past twelve months ending May 31, 1993 averages 2,498 as compared to an average of 2,003 per month for the prior year. This trend is expected to continue and thus the projected new claim filings for the June to December, 1993 period is 2,500 claims per month.
We have now reached the point where the total number of asbestos bodily injury claims filed against the CCR membersexceeds the 200,000 mark. As of May 31, 1993 52,818 claims remain pending. When we add to this currently pending figure another 44,245 claims involving settlements which have been agreed to but not yet funded and further add the estimated new filings through year-end 1993 of 12,646, our reserve population of open claims at year-end 1993 reaches 109,709. Estimated new filings are calculated at 2,500 per month less 4,854 unfiled claims included in agreed-to group settlements reached with certain plaintiff lawyers. The unfiled claims consist of matters where a plaintiff's attorney had been retained but the attorney had not filed a lawsuit for the claim before the settlement was reached.
The CCR continues to achieve its goal of reducing the ratio of expense costs to indemnity. In last year's Market report, we noted that the CCR's current indemnity/defence ratio was77% indemnity and 23% defence. For the first six months of 1993 the ratio dropped to 88.5% indemnity and 11.5% defence. The CCR currently projects that it will incur about $200 million over the next four years for costs associated with the defence of the asbestos claims. Thus, the projection is that 89.2% of all CCR payments will go toward indemnity and only 10.8% allocated for defence costs.
II. CCR RESERVE RECOMMENDATIONS FOR YEAR-END 1993
The year-end 1993 claims universe includes 31,418 more claims than the universe at year-end 1992. The universe of claims projected at December 31, 1993 has been agreed at 218,361. This total has been computed as follows:
Changes in the current figures as compared to last year for pre-Facility and Facility claims are due to the ongoing data review undertaken by the CCR to ensure an accurate claims count and to correct any past errors or omissions.
The universe figure does not include 13,272 inactive claims. These inactive claims are comprised of 3,028 claims where there has been no activity from 1984 forward and therefore are deemed time-barred; 3,999 claims which have been dismissed without prejudice; 1,984 claimants who received Green Cards; and 4,261 claimants who filed under the Pleural Registry systems established by various state courts. Underwriters may recall that Green Cards and Pleural Registries were adopted as methods to deal with cases where a claimant's condition arguably does not yet constitute a compensable injury but the claimant wishes to preserve his right to return his claim to active status on a court's calendar if his condition deteriorates.The Statute of Limitations is tolled for the Green Card and Pleural Registry cases and therefore these claims cannot be considered closed. Nevertheless because of the absence of injury these claims do not have any recognised indemnity value. Historically very few of these claims have been reactivated and therefore these claims continue to be excluded from the pending claims count.
Lastly, we emphasise that the universe of claims only includes those claims filed or projected to be filed at December 31, 1993. As in the past,the reserve recommendations are based only upon the known claims data and do not include an IBNR factor beyond December 31, 1993.
Reserving for claims at year-end 1993 is calculated through an analysis of the historical settlement averages subcategorised by state, disease and occupation. Where this statistical information is unavailable because of an absence of settlement history, the national average for disease and occupation or, as a second option, the national average for occupation is used. An exception to the rule that historical settlement values are determinative has been carved out for four states: California, New York, Pennsylvania and Texas. The CCR doubts that it will be able to continue to settle claims in these states at the same figures it was able to achieve in the past. To address this problem, per claim reserves were adjusted upwards which results in anoverall increase of approximately $121,500,000 in pending reserves, only in respect of these states.
The 44,245 claims for which settlements are agreed but not yet funded are being reserved at the actual settlement sums. Thus the total recommended indemnity reserves for pending claims, agreed settlements and new filings for year-end 1993 are as follows:
We have not seen a significant change in the occupational source of the pending claim mix. The occupations which have traditionally given rise to asbestos claims, such asshipyard workers, construction workers and insulators, account for roughly 87% of the open claims. The remaining claims involve occupations such as rubber and steel workers and occupational sources which have been characterised by the CCR as a "special claims category." The determination of whether a special claims category is appropriate is made by independent special counsel to the CCR. Since our last Market report, a new special claims category has been created involving 38 workers at the LaClede Steel mill.
As in the past, the historical payments for claimants who were exposed at work sites which have traditionally given rise to asbestos injuries are generally higher than the payments for non-traditional or special category claims. The following chart reflects the number of claims falling in each occupational category and the recommended reserve for that occupation:
The methodology used for year-end 1993 is consistent with that employed in years past but it produces recommended indemnity reserves at year-end 1993 whichare $657.7 million higher than last year-end. The increase is due primarily to new claim filings and an under-estimation of future filings last year for the period between June 1992 and December 1992. In addition, reserves have increased $170 million due to the recommended increase in per claim reserve averages. Despite some under-projections at last year-end, the reserves recommended to the Market were only five percent less than the actual payments made by the CCR. On this basis, we remain confident that the reserving methodology being employed by the Market produces reasonably accurate results.
III. CCR "FUTURES" SETTLEMENT PROJECTIONS
The Market has been fully briefed on the class action and proposed settlement of future asbestos bodily injury claims against Center for Claims Resolution members which is currently pending approval in the U.S. District Court for the Eastern District of Pennsylvania. Full details regarding this class and proposed settlement have been provided to the Market in various reports from Messrs. Mendes & Mount and Ropes & Gray.
By way of brief summary, the proposed class consists of all future asbestos bodily injury claimants, which group is defined as claimants who had not initiated litigation prior to the January 15, 1993 date on which the class action was filed. Claimants will be permitted to "opt-out" of the settlement after notice of the class has been sent, but before final approval of the class.
The proposed settlement would bar future "non-impaired" claims, which are non-malignant asbestos-related disease claims where the claimant does not show minimum objective evidence of impairment. Impaired claims, as well as malignancy claims, will be paid within various dollar ranges, with the total number of claims being paid in any one year being "capped" at agreed amounts.
The proposed settlement provides that the agreement will be effective for ten years, with the CCR producers having the option to renew the agreement in the event that there are still outstanding claims to be resolved.
As insurers are aware, the class action and proposed settlement have been under heavy attack by a small group of plaintiffs' attorneys and by a small group of non-CCR producers. London Insurers are involved in an ADR with CCR members on certain aspects of the proposed settlement. It is impossible to predict at this stage whether the class and proposed settlement will be approved by the District Court, and whether such approval will ultimately survive appellate review.
Theten-year cash flow schedules, based upon the current proposed settlement ranges and cash flow and modified by certain assumptions which have been incorporated, will shortly follow the year-end reports.
We must emphasise thatthese figures are CASH FLOW PROJECTIONS ONLY and are not RESERVES. These projections include amounts for claims which have not yet been filed, and may in fact not be filed. The projections also assume that the maximum cash flow caps will be reached in each year of the proposed settlement agreement.
As previously emphasised, the attorneys do not undertake in the year-end reserve reports to make any recommendations with respect to IBNR due to the uncertainty of future filings. The attorneys' recommended reserves have always been based on claims actually filed, projected to the end of the current year only and they will continue to be submitted on that basis.
IV. NON-PRODUCTS CONSIDERATIONS
The volume of claims filed against asbestos manufacturers over the years has caused a number of assureds to exhaust their products liability coverages. In some instances assureds are now seeking coverage for asbestos claims which they characterise as non-products in an attempt to obtain additional insurance proceeds not subject to an aggregate limit. Further, claims are increasing against non-traditional assureds such as utility companies. These defendants are not alleged to have manufactured asbestos-containing products but rather are charged with operating dangerous premises where independent contractors were allegedly exposed to asbestos. In other instances the company's executive officers are alleged to have negligently permitted employees to be exposed to asbestos in the workplace. Many of these non-products claims remain factually undeveloped and there exists little case law discussing the applicability of coverage for these claims.
A more detailed discussion on the issue of non-products claims arising out of asbestos bodily injury claims will be submitted to the London Insurers in a separate report including a discussion of those assureds who have presented the London Market with notice of allegedly non-products claims.
V. DEVELOPMENTS IN ASBESTOS PRODUCERS' BANKRUPTCY FILINGS
The name ofKentile Floors, a vinyl floor tile manufacturer, must now be added to the prior list of 16 asbestos producers and manufacturers who have sought relief from the asbestos litigation through bankruptcy proceedings. Kentile Floors filed Chapter 11 proceedings on November 20, 1992 in the United States District Court for the Southern District of New York. At the time of its bankruptcy filing Kentile reported that 15,290 asbestos claims had been asserted against it including 14,657 pending claims. Kentile further advised the Bankruptcy Court that its liabilities exceed its assets by only $100,000 and that the bankruptcy proceedings should be concluded within one year.
OnMarch 17, 1993, USG Corporation, the parent holding company of United States Gypsum Company, filed a pre-packaged Plan of Reorganisation under Chapter 11 with the United States Bankruptcy Court for the District of Delaware. It is important to note that the purpose of the filing was to restructure USG Corporation's $2.7 billion debt; it has no effect with respect to United States Gypsum Company or any other subsidiaries. USG Corporation's pre-packaged plan was approved by the bankruptcy court and it emerged from Chapter 11 protection on May 6, 1993. USG Corporation has thus completed its reorganisation without protracted bankruptcy proceedings and without interrupting the operations of the assured United States Gypsum or any other subsidiaries.
Themost active of the Chapter 11 bankruptcy proceedings within the past year has been the Celotex Corporation and Carey-Canada action pending in the United States Bankruptcy Court for the Middle District of Florida in Tampa. In 1991 the debtor claimants Celotex and Carey-Canada filed a global declaratory judgment adversary complaint in the bankruptcy court against several insurers including certain Lloyd's Underwriters and London Market Companies seeking coverage for asbestos bodily injury and property damage claims and for environmental claims.
The bankruptcy judge has not yet required the debtor claimants to submit a reorganisation plan and instead has focused upon the adversary proceedings involving issues of insurance coverage within the bankruptcy. Following extensive pre-trial proceedings Phase I of the trial commenced May 17, 1992 and continued for four weeks, generally concerning coverage issues relating to asbestos building damage claims. The trial proceedings are discussed in more detail in the Market report concerning asbestos building damage claims.
National Gypsum Co.'sreorganisation plan was approved March 19, 1993 by the U.S. Bankruptcy Court in the Northern District of Texas. The 62,000 asbestos bodily injury claims pending against National Gypsum will be resolved through the Center for Claims Resolution at an estimated cost of $127 million. An estimated 150,000 to 165,000 future asbestos claims are valued at $695 million to $765 million and are expected to be funded in part by insurance proceeds.
A mediator was appointed in theEagle Picher Industries bankruptcy proceedings pending in the U.S. Bankruptcy Court in Cincinnati but the debtor still has not presented a consensual plan of reorganisation under its Chapter 11 Petition.
Raymark Industriesremains under the protection of an involuntary bankruptcy petition filed in 1989 in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania. An adversary petition is pending in the proceedings among two of the debtor's insurers regarding the availability of insurance proceeds for a disputed payment in an asbestos-related wrongful death claim. To date Raymark has not sought coverage from its very few remaining insurers for payment of at least 48,000 outstanding asbestos bodily injury claims.
The U.S. Bankruptcy Court in the Western District of Pennsylvania in Pittsburgh established a March 16, 1992 bar date for all claims againstH. K. Porter. In February, 1993 the debtor's unsecured creditors filed a petition seeking to preclude recovery by all asbestos claimants whose diseases were not diagnosed by February 15, 1991. If granted, this petition would affect an estimated 55,000 claimants but an additional 67,000 claimants would remain eligible for compensation.
Our 1992 Market letter reported that theAmerican Bankruptcy Institute had proposed a new "Chapter 14" for inclusion in 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 proposal called for the creation of a plan to dispose of all asbestos-related claims pending against the debtor and the establishment of a presumptive schedule of awards for claimants which would be funded by assets of the estate including available insurance proceeds. The proposal further suggested that all coverage litigation be resolved within the producer's bankruptcy proceedings. Since the publication of the proposed Chapter 14 in February, 1992 and initial hearings in Congress, the Judiciary Committee of the U.S. Senate has not conducted any further public evidentiary hearings. The proposal is expected to remain dormant until at least 1994.
Despite the absence of formal legislation enacting Chapter 14, at least one asbestos producer is seeking a de facto application of the terms of the proposal.Keene Corporation on May 13, 1993 filed a Complaint in the United States Bankruptcy Court for the Eastern District of New York seeking certification of a limited class action to settle all its pending asbestos bodily injury claims. Keene asserts in its petition that it has $48.7 million remaining in available insurance proceeds to satisfy an estimated 98,000 pending asbestos claims and that these proceeds constitute a limited fund which should be allocated to the asbestos claimants under court supervision. Keene argues that its asbestos litigation has cost more than $430 million to date and threatens the viability of a company which, but for its asbestos claims, is a profitable operation. On June 21, 1993 the U.S. District Court preliminarily accepted Keene's arguments and issued a temporary restraining order which bars Keene from paying asbestos claims except in instances of extreme hardship or exigent health conditions. The District Court also stayed execution of judgments pending against Keene but denied Keene's request to stay all pre-trial proceedings in the underlying asbestos claims.
VI. DEVELOPMENTS IN THE FEDERAL MULTIDISTRICT LITIGATION AND CONSOLIDATED FEDERAL AND STATE CASES
The Multidistrict Litigation pending since July 29, 1991 before Judge Charles Weiner of the U.S. District Court of the Eastern District of Pennsylvania, consolidating all cases in Federal Courts, has withstood jurisdictional attacks by claimants. On November 3, 1992 the Judicial Panel on Multidistrict Litigation denied claimants' motion to remand the consolidated cases to their original federal court dockets. The Panel determined that Judge Weiner is familiar with the complex issues presented by the large consolidation and has established the necessary foundation for expeditious settlements. The Panel rejected claimants' argument that the Multidistrict Litigation violated their constitutional rights of due process. Following denial of the remand order claimants undertook co-ordination of pre-trial discovery and agreed to pursue those defendants who have not been previously targeted in the nation-wide asbestos litigation. DefendantOwens-Corning Fiberglas also initiated discovery against 180 co-defendants. At the present time 38,460 claims have been transferred to the Multidistrict Litigation.
On December 9, 1992 the Judicial Panel refused to transfer to Judge Weiner the asbestos-related proceedings involving 13 bankrupt asbestos manufacturers. Despite Judge Weiner's support for the transfer the Panel determined that transfer would unreasonably disrupt the reorganisation plans of the bankrupt estates and interfere with the orderly distribution of the estates' assets.
The federal judiciary has conducted two additional asbestos consolidations, on a smaller scale than the Multidistrict Litigation, with mixed results. In April, 1991 the U.S. District Courts for the Eastern and Southern Districts of New York consolidated 48 claimants within the New York Powerhouse Litigation for purposes of proceeding to trial against 25 defendants. Following a four month trial the jury awarded damages in the amount of $94 million.Liability among the defendants was apportioned in a subsequent phase of trial. The verdict was appealed and on May 25, 1993 the U.S. Court of Appeals for the Second Circuit ruled that the consolidation was erroneous because common factual issues among the claims did not exist. The Court of Appeals noted that the 48 claimants had different occupations and diseases, worked at different locations and allegedly suffered different asbestos-related diseases. A new trial has been ordered.
In March, 1993 the U.S. District Court for the Eastern District of Texas entered final judgments againstPittsburgh Corning on behalf of 174 claimants involved in the 2,298 member Cimino class action. Claimants had previously been awarded a verdict for compensatory damages, pre-judgment interest and punitive damages in the amount of $77.1 million against Pittsburgh Corning and Fibreboard. Fibreboard subsequently negotiated a settlement with claimants.
State courts in the United States are also looking towards consolidation and class actions as a means of clearing their dockets of an estimated 70,000 pending asbestos claims. Of particular note is theMississippi Shipyard Asbestos Litigation involving approximately 12,000 claimants who allege exposure to asbestos-containing products during the course of their employment at shipyards along the Mississippi River near the Gulf of Mexico. The majority of the claimants were employed at the Ingalls Shipyard in Pascagoula, Mississippi. Six defendants recently proceeded to trial against 8,500 of the claimants.
In August of 1993, the claims of nine allegedly representative plaintiffs were submitted to the jury for their verdict.Defendants Westinghouse, Colonial Sugar and Dresser Industries were found liable. The jury found no liability as to Wheeler Protective, Hopeman Brothers and Uniroyal. Uniroyal remained a defendant in only one of the nine representative claims that went to the jury and had previously settled its involvement in all of the other cases.
Monetary damages were awarded to six of the claimants while defence verdicts were returned for the other three claims. The largest compensatory damage award was given to a mesothelioma victim in the amount of $5 million; compensatory damages for the other five claims averaged $1 million each.
After the compensatory damage award, the jury was asked to determine whether punitive damages should be assessed against the defendants. Wemust advise that on August 11, 1993 the jury found that punitive damages should be assessed against the three defendants equal to ten percent of the compensatory award.
It is our understanding that the jury's determination on the issue of liability against the three defendants is binding for all of the claims included in the consolidated action. However, the award is not determinative of the amount, if any, of compensatory and punitive damages which other claimants may receive in the consolidated proceedings. We will continue to follow developments in this significant litigation.
In July, 1992 the first group of 8,500 asbestos bodily injury cases proceeded to trial in theBaltimore City Asbestos Litigation against six defendants: Keene, Porter Hayden, Armstrong Contracting and Supply, MCIC, Pittsburgh Corning and GAF Corp. The jury found all six defendants guilty of negligence. GAF and Porter Hayden have subsequently settled. Mini-trials on the issue of damages have been delayed by appeals relating to the resolution of cross-claims.
VII. SIGNIFICANT COVERAGE DECISIONS IN ASBESTOS BODILYINJURY LITIGATION
During the past year there have been a number of important judicial decisions relating to trigger of coverage, allocation and other issues. In broad outline,it can be said that the continuous Keene-like trigger remains in wide currency, although some courts analyse the trigger separately for asbestosis and asbestos-related cancers. With respect to allocation, most of the recent decisions impose joint and several liability on each triggered policy where multiple insurers are involved and do not require the assured to share liability for uninsured or self-insured periods.
A number of the following decisions, notablyStonewall and Flintkote, also involve significant property damage coverage issues. These PD issues will be discussed in a separate report to the Market.
Trigger of Coverage. On October 14, 1992 the California Superior Court for San Francisco County held that asbestos-related bodily injury occurs continuously from the period of initial exposure through the date of diagnosis or death, whichever occurs first. In The Flintkote Company v. American Mutual Liability Insurance Company, the assured Flintkote sought a continuous trigger of coverage while Commercial Union and Continental Casualty argued for a manifestation trigger. The court considered drafting history and policy language and then examined medical evidence for both asbestosis and asbestos-related cancers. The court concluded that with respect to both asbestosis and cancer, the "injury-in-fact" occurs continuously from exposure through manifestation. The court rejected Commercial Union's argument that there is no covered injury unless and until the claimant's injury is diagnosable or compensable. Instead, the court held that asbestosis and asbestos-related cancers constitute "bodily injury" within the plain and unambiguous language of the CGL policies even during the sub-clinical phase of the disease or injury.
On October 15, 1992 a New Jersey trial court adopted a continuous trigger theory for asbestos BI claims. InIMO Industries, Inc. v. New Jersey Manufacturers Insurance Company, the Mercer County Superior Court held that the assured's primary insurer from 1935 to 1955 was obligated to defend the assured under a continuous trigger theory. The IMO decision is consistent with the more recent New Jersey appellate court decision in Owens-Illinois discussed below.
Two separate decisions on the asbestos BI trigger were reached inthe Stonewall Insurance Company v. National Gypsum Company litigation pending in the United States District Court for the Southern District of New York. The first ruling was reached by a jury on October 22, 1992 in a dispute between the assured and Commercial Union, an excess carrier from 1965 to 1977. The assured argued for a continuous trigger while Commercial Union argued for a manifestation trigger. Judge John S. Martin explained in his charge to the jury that a policy is triggered if a real injury occurs during the policy period even though the injury is not discovered until after the policy period expires. The court then asked the jury to render a special verdict by choosing between a manifestation trigger, a continuous trigger, and a hybrid exposure and manifestation trigger resembling the Illinois Zurich v. Raymark trigger. A purely exposure-based trigger was not included among the options for the jury. The court further asked the jury to render separate trigger verdicts for asbestosis and asbestos-related cancers. The jury found that whether the disease is asbestosis or cancer is not relevant because an asbestos BI claim triggers all policies in effect from exposure through manifestation.
OnDecember 22, 1992 the District Court in Stonewall decided the trigger issue a second time in a bench trial involving a dispute among Stonewall, the assured and certain of its other insurers, including American Motorists, Republic, Constitution State, American Centennial, Continental Casualty, Affiliated FM and Houston General. The court incorporated into its trial record the October jury trial record and supplemented it with additional expert testimony. Some of the carriers argued for an exposure trigger and others sought a manifestation trigger. The court held that under New York and Texas law an "injury-in-fact" occurs during each policy period from exposure through manifestation for asbestosis claims. The court held that asbestosis is presumed to continue after it is diagnosed unless the insurer demonstrates that no further progression of the injury took place. With respect to mesothelioma and lung cancer, however, the court held that "injury-in-fact" occurs only during periods of exposure and not thereafter. The court found that exposure to asbestos causes cells to become cancerous during the period of exposure and the only development during the post-exposure period is the proliferation of cancerous cells until they become diagnosable. Accordingly, the court concluded that "injury-in-fact" occurs only during periods of exposure for mesothelioma and cancer claims.
On January 26, 1993 the first asbestos BI trigger ruling in a New York State court proceeding was handed down. In the case ofIn the Matter of the Liquidation of Midland Insurance Company, Referee Maurice G. Gans recommended to the New York County Supreme Court that an "initial exposure" trigger be adopted with respect to the policies at issue. This Referee recommendation arose out of a coverage dispute between Lac D'Amiante du Quebec and its insurers, including American Home, Midland and Highlands. The assured originally brought a declaratory judgment action in the U.S. District Court in New Jersey and in 1985 that court adopted a continuous trigger for asbestos BI claims. Midland went into liquidation proceedings in New York state court prior to an entry of a final order by the District Court. The insurers appealed the District Court's decision to the U.S. Court of Appeals for the Third Circuit. All of the insurers except the insolvent Midland settled out prior to the Third Circuit's ruling. The Court of Appeals ordered the District Court to vacate its ruling and thereby permitted the trigger issue to be decided anew in the context of Midland's liquidation proceeding". The Midland 1975-1976 second excess policy at issue sat above and followed form to the first excess policy written' by American Home. The American Home policy provided that "[t]his policy applies only to occurrences happening anywhere during the policy period." The Referee noted that the trigger under this policy was driven by an "occurrence" rather than by "bodily injury" and therefore prior decisions such as Keene and American Home Products were distinguishable. The Referee observed that the American Home policy defined occurrence as "...an event, including continuous or repeated exposure to conditions, which result in Personal Injury.... All such exposure to substantially the same general conditions shall be deemed one occurrence." The Referee concluded that this language triggers coverage only if exposure occurs during the policy period. The timing of the resulting injury is irrelevant to an occurrence and therefore has no bearing on the trigger. Moreover, the Referee held that even if the American Home policy was triggered by "bodily injury" rather than "occurrence," the same exposure-only trigger would be obtained. The Referee further held that only the initial exposure triggers coverage. We do not know whether the New York County Supreme Court will adopt the Referee's recommendation of an "initial-exposure" BI trigger. We note that the Referee's recommendation is in conflict with the New York federal District Court's Stonewall decision.
On February 11, 1993 the asbestos BI trigger issue arose once again under New York law. InContinental Casualty Company v. Rapid-American Corporation, the New York Court of Appeals, the state's highest court, held that Rapid-American's 1971 - 1979 insurers were obligated to defend asbestos BI claims against the assured. The Court of Appeals did not rule directly on the proper trigger of coverage but noted that federal court decisions had predicted that New York would adopt an "injury-in-fact" trigger. The court merely held that the assured's previous tender of defence obligations to its post-1979 insurer did not bind the assured to a manifestation trigger, as the pre-1979 insurers argued. Although the court did not expressly adopt a BI trigger it observed in passing that "...the long-simmering differences in fixing the timing of an occurrence evidence ambiguity in the clause."
On April 29, 1993 the Appellate Division of the New Jersey Superior Court affirmed a 1990 ruling by the Chancery Division of the New Jersey Superior Court for Middlesex County which applied a continuous trigger to asbestos BI claims. InOwens-Illinois Inc. v. United Insurance Co., the assured Owens-Illinois sought a continuous trigger for all of its 1977-1985 policies involved in the lawsuit. The defendants included the assured's captive insurer Owens Insurance Ltd. (OIL), as well as several direct insurers of the assured and reinsurers of OIL. The Appellate Division affirmed the Chancery Division's adoption of a continuous trigger on the basis that common sense and medical reality indicate that disease begins upon exposure and continues until it is manifested. The court further criticised the "injury-in-fact" conceptual framework as unworkable and implausible since asbestos-related diseases do not occur in discrete and discernible segments. The court remanded the case to the trial court for a determination of various issues relating to the insurers' fraud and concealment defences and whether the assured's losses were "expected or intended."
Finally, in a most important decision rendered on May 27, 1993 the Pennsylvania Supreme Court affirmed the Pennsylvania Superior Court's 1990 ruling that asbestos and silica-related BI claims trigger all policies in effect from first exposure through manifestation.In J.H. France Refractories Company v. Allstate Insurance Company, the Pennsylvania court adopted a Keene-like "multiple-trigger" based on medical evidence of the continuous process of the asbestos and silica diseases. The court approved the lower court's finding that "direct" injury occurs during periods of exposure, "indirect" injury occurs during post-exposure periods, and these injurious processes culminate in a "final" injury upon manifestation.
Allocation Issues. In the Flintkote decision discussed above, the California Superior Court for San Francisco County held that each policy triggered by an asbestos BI claim "has an independent obligation to respond in full for indemnification," subject to policy limits, exclusions, deductibles and equitable rights of contribution among insurers. The fact that a portion of the claimant's injury occurred during an uninsured or self-insured period does not reduce the liability of each insurer to respond in full to the claim. The court's "joint-and-several" approach to allocating liability is consistent with the holding of Judge Ira A. Brown, Jr. of the San Francisco County Superior Court in the consolidated Asbestos Insurance Coverage Cases which are still on appeal.
InOwens-Illinois, the Appellate Division of the New Jersey Superior Court held that each triggered policy is fully liable up to its policy limits and the assured is not liable for a share of indemnity or defence costs to reflect uninsured or self-insured periods. The court reasoned that joint and several liability is proper since it is impossible to identify and quantify the specific percentage of injury actually sustained during a given policy period.
Similarly, in theJ.H. France Refractories case discussed above, the Pennsylvania Supreme Court held that each primary insurer whose policy is triggered by an asbestos or silica BI claim is fully liable for the entire indemnity payment subject to policy limits. The court reversed the Pennsylvania Superior Court's earlier ruling that the assured must bear a pro rata share of such a loss for those periods during which it was uninsured or self-insured. The Pennsylvania Supreme Court reasoned that the insurer's obligation to pay "all sums" arising out of a BI claim is not qualified or reduced by the fact that the claimant's injury occurred only in part during a particular policy period. With respect to the duty to defend a BI claim which triggers multiple policies written by multiple carriers, the court held that it is the insurers' decision to apportion the defence obligation. If the insurers are unable to agree on the defence the assured may select an insurer to undertake its defence.
By contrast, the U.S. District Court for the Southern District of New York held in the Stonewall case that coverage should be allocated pro rata among all triggered policy periods and that the assured must bear a portion of the indemnity and defence costs for uninsured or self-insured periods or for periods in which the insurer is insolvent. Judge Martin reasoned in his order of June 22, 1992 that a policy which provides coverage for an occurrence resulting in injury during the policy period necessarily excludes coverage for injury occurring outside the policy period. Moreover, heobserved that there is no warrant in social policy to rewrite contracts in such a manner as to shift onto the insurers the burden of the assured's decision to forego insurance or to purchase insurance from an insurer who becomes insolvent.
Asbestosis Exclusion. In the Owens-Illinois case discussed above, the Appellate Division of the New Jersey Superior Court held that an exclusion in General Reinsurance's certificate of reinsurance for "claims arising from or due to asbestosis" was applicable only to asbestosis and not to other asbestos-related diseases. The court found that the term "asbestosis" refers unambiguously to the specific disease asbestosis, and that even if the term was found to be ambiguous it would be construed against the reinsurer.
Pollution Exclusion. In the Rapid-American decision discussed earlier, the New York Court of Appeals ,rejected CNA's argument that the pollution exclusion in its 1971-1979 CGL policies barred coverage for asbestos BI claims. The court conceded that asbestos could constitute an "irritant, contaminant or pollutant" within the terms of the pollution exclusion. However, the court held that the clause is ambiguous with respect to whether asbestos fibres inhaled by BI claimants were discharged into the "atmosphere" within the meaning of the exclusion. Moreover, the court noted that CNA had failed to foreclose the possibility that the asbestos BI claimants were exposed to the assured's asbestos through direct contact or some other means not involving contamination of the air. Accordingly, the court concluded that the pollution exclusion did not absolve CNA from its duty to defend the assured against asbestos BI claims.
VIII. INWARD REINSURANCE CONSIDERATIONS
TheLondon Market is currently involved in 14 reinsurance disputes pending in litigation or in arbitration. Since last year the London Reinsurers have concluded four arbitrations. Confidentiality agreements prevent a discussion in this report of the specific matters involved in the arbitrations. Full reports on these arbitrations, as well as other significant issues discussed in this report which have reinsurance implications will be submitted individually to reinsurers on risk.
One of the key issues in a reinsurance dispute is whether the dispute should be arbitrated or litigated before a court. This question arises most often in those instances where a single reinsurance contract contains both an arbitration clause and a service of suit clause. In certain circumstances, however, the threshold inquiry is whether a state court or a federal court is the proper forum for determining whether a reinsurance dispute should be arbitrated or litigated. In the past year there have been two decisions considering the preliminary question of state or federal jurisdiction and one decision addressing the implications of the arbitration clause and service of suit clause in a single treaty reinsurance agreement.
TheLondon Market Reinsurers were named as defendants in a reinsurance dispute filed in a New York State court. The defendant reinsurers sought to remove the dispute to federal court and obtain an order compelling arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In January, 1993 the U.S. District Court for the Southern District of New York remanded the dispute to the New York State court and the remand order was recently affirmed by the U.S. Court of Appeals. The federal court ruled in part that the service of suit clause in the reinsurers' contracts waived their right of removal from state court to federal court. The court noted further that the presence of an arbitration clause in the reinsurance contract does not override the service of suit clause for removal purposes.
The U.S. District Court in Massachusetts recently refused to exercise federal jurisdiction to compel arbitration in a dispute between the London Market Reinsurers and the estate of an insolvent reinsured. The defendant reinsurers in this case sought to remove the dispute from the state court to the federal court underthe Convention on the Recognition and Enforcement of Foreign Arbitral Awards and sought an order compelling arbitration. In an order remanding the dispute to the state court, the Massachusetts federal court reasoned that the state court was the appropriate forum to decide whether the reinsurance dispute should be arbitrated or litigated. The Massachusetts federal court determined that the state court has a compelling interest in overseeing an orderly distribution of the insolvent reinsured's estate. The federal court's ruling has been appealed. If the Court of Appeals affirms the lower court's decision then the defendant reinsurers' Motion to Compel arbitration may be raised before the Massachusetts state court.
In April, 1993 the U.S. District Court for the Northern District of California considered the implications of the service of suit clause and the arbitration clause in a single reinsurance contract. The reinsured in this case did not dispute the federal court venue but asserted that the service of suit clause precluded the London Market Reinsurers from compelling arbitration of the underlying reinsurance coverage issues. The U.S. District Court sustained the London Reinsurers' arguments and ruled that the service of suit clause is compatible with the arbitration clause in a single reinsurance contract. The Court held that the purpose of the service of suit clause is an enforcement mechanism in the event a defendant refuses to pay an arbitration award.
Another significant reinsurance consideration concerns the reimbursement of declaratory judgment costs under a reinsurance contract. The recoverability of declaratory judgment expenses will depend in large degree upon the wordings of individual contracts. However, we anticipate that many reinsureds will seek reinsurance recovery for these expenses as the number of coverage disputes grows and the amount of litigation expenses increases.
A recent trial court decision offers some measure of guidance concerning the recoverability of coverage-related litigation expenses. In the case ofAffiliated FM v. Constitution Re, Affiliated issued three umbrella policies to its assured Campbell Soup. A portion of Affiliated's policies were facultatively reinsured. by Constitution Re. Campbell Soup sought coverage under its Affiliated policies for an employment discrimination claim but Affiliated denied coverage. Campbell filed a declaratory judgment action against Affiliated in New Jersey and the New Jersey Supreme Court ruled that Affiliated's policies did not provide coverage for Campbell Soup's employment discrimination lawsuit. Affiliated sought reinsurance reimbursement from Constitution Re for its litigation expenses incurred in defence of the coverage action with Campbell Soup. Constitution Re declined to satisfy its cedant's Proofs of Loss.
Affiliated thereafter filed a Declaratory Judgment action against Constitution Re in the Superior Court of Massachusetts. On September 1, 1992 the Superior Court issued an Order of Summary Judgment in favour of Constitution Re and held that only payments which would be covered under the original Affiliated policies were covered by Constitution Re's reinsurance contracts. TheSuperior Court noted that Affiliated's declaratory judgment expenses were not covered under its original policies issued to Campbell Soup and thus were not reimbursable expenses under the reinsurance contracts. The Superior Court appears to have construed together two separate contract provisions to reach its conclusion that the reinsurer's liability including coverage expenses is subject in all respects to the terms of the original policy.
Affiliated filed a direct appeal to the Supreme Court of Massachusetts and appellate briefs have been submitted. It should be noted that Constitution Re's appellate brief does not attempt to support the Superior Court's interpretation of the reinsurance contracts as providing coverage only for expenses included within the original policies issued to Campbell Soup. The Reinsurer argues instead that declaratory judgment expenses are extra-contractual payments and not subject to reinsurance reimbursement.
Although additional case law is slowly developing regarding reinsurance issues, many of the key issues remain unresolved in the U.S. courts. In the absence of persuasive historical or legal precedents to guide the parties in determining what if any reinsurance obligation exists for certain payments, it appears inevitable that reinsureds and reinsurers will be unable to resolve all disputes without in some instances resorting to alternative procedures.
The volume of asbestos reinsurance reports to be submitted for year-end 1993 is again expected to be substantial. For1992, 774 reinsurance reserve reports were circulated to the Market. Additionally, the number of Proofs of Loss submitted by Reinsureds continues to increase. Every effort will be made to ensure that payment recommendations and reserve reports continue to be submitted and circulated in a timely fashion for year-end 1993.
We trust this summary of developments in the asbestos bodily injury litigation over the past year and explanation of the basis of our 1993 year-end reserve recommendations has been of assistance. Your attorneys will continue to advise the Market of all significant developments.
24 Aug 93
Lord, Bissell & Brook and Mendes & Mount market report: to Underwriters at Interest C/- London Market Claims Services Ltd. Re: 1993 Year-End Reserves Asbestos Building Claims
We submit for the Market's consideration our annual report regarding asbestos-related building claims for 1993. As in past years, we continue to provide separate reports for bodily injury and for property damage in view of the complexities of the issues which arise in developing reserve methodologies for these claims.
We continue to report that the reserving philosophy for asbestos building claims is the result of discussions held at the annual year-end reserve meeting, which was attended by Mendes & Mount, Lord, Bissell & Brook, Hancock, Rothert & Bunshoft, the Chairman of the Working Party, members of the London Market Direct and Reinsurance Claims Committees, as well as representatives of London Market Claims Services.
The Asbestos Working Party has been briefed on the reserving philosophy and the recommendations contained in this report, and the Working Party has concurred in these recommendations.
As in past years, we can report that there have been a number of significant developments, both in the underlying cases and in the coverage litigation. The results of trials in the underlying cases continue to be somewhat mixed, with a number of cases resulting in defence verdicts and with only one substantial plaintiff's verdict being rendered. The major defendants continue to report significant settlements in the underlying cases.
Therate of new filings appears to have increased somewhat, at least with respect to the most significant London Market assured, W.R. Grace. Grace reported a total of 16 new filings during the past 12 months, an increase from 10 filings in the prior year.
The Market continues to be actively involved in declaratory litigation in a number of cases, including W.R. Grace, U.S. Gypsum, National Gypsum, Fibreboard, Armstrong, Flintkote and Celotex/Dana, in which the first phase of a lengthy trial was recently completed. We will report on developments in these litigated cases briefly in this Market Report, and in more detail in the individual assured reports which will be circulated to the Market.
We are for the third year continuing to use the new methodology for projecting reserves for U.S. Gypsum and W.R. Grace, a methodology which is also used in part for reserving for Celotex/ Dana. As National Gypsum's liability for asbestos building claims has been fixed by the Bankruptcy Court at $137.5 million, we are no longer using the new methodology for said account.
As in past years, this Market Report is somewhat lengthy, however, we provide the following brief index of the contents:
I. GENERAL OVERVIEW OF ASBESTOS BUILDING CLAIMS
According to the 1992 survey of state asbestos programs by the National Conference of State Legislatures, 36 states require inspection for asbestos-containing material ("ACM") in state-owned buildings, but only four states require inspections for ACM in public and commercial buildings.
Federal standards regarding asbestos abatement are being adopted by most states. Specifically, 43 states have adopted the federal National Emission Standards for Hazardous Air Pollutants ("NESHAP") for asbestos abatement and have received enforcement authority from the EPA, and 24 states enforce Occupational Safety and Health Administration (IIOSHAN) worker protection standards.
According to the survey, 25 states reported that a majority of their schools have undergone re-inspection pursuant to the EPA's Asbestos Containing Materials in Schools rule. A total of 12 states require inspections for ACM in schools as a matter of state law, and an additional four states inspect schools for ACM as a matter of policy.
Congress has increased the budget for EPA's loans and grants program for school asbestos abatement by $20 million for Fiscal Year 1993. The program will receive a total of $77 million in FY 1993, up from $57 million in FY 1992.
In FY 1993, only $5.775 million of the $77 million will go for grants; the remainder will fund no-interest loans. The program is administered under the Asbestos in Schools Hazards Abatement Act. The grant money will help public and non-profit private schools abate asbestos hazards and fund asbestos training and accreditation programs.
b.Settlement an NESRAP Revisions
On March 10, 1993, the EPA closed the period for commenting on its proposed settlement agreement, which revised the asbestos standard in NESHAP, reached with three industry groups composing the Safe Buildings Alliance ("SBA").
The SBA had filed a petition on January 18, 1992, in the Court of Appeals for the District of Columbia Circuit, to review the Clean Air Act's NESHAP. The SBA had claimed that an earlier NESHAP rule had led to unwarranted asbestos removal. In the settlement agreement, the EPA clarified its position on asbestos removal with regard to NESHAP, stating:
"The presence or absence of ACM should not be used as the basis for deciding whether or not to demolish a building or whether or not materials need to be removed during renovation. Rather, the Asbestos NESHAP mandates work practice and notification requirements when threshold amount of [regulated] ACM are stripped, removed, dislodged, cut, drilled or similarly disturbed as a result of a building owner's independent decision to initiate renovation activities. Moreover, removal of ACM during a renovation may not be necessary, even if the renovation is major in character ….." Removing ACM is "not always a building owner's best course of action to reduce asbestos exposure."
Almost half the state attorneys general have strenuously objected to the proposed EPA-SBA settlement agreement, and they have requested the EPA to withdraw the agreement. The state attorneys general argue that the agreement is improper and inconsistent with the requirements of the Clean Air Act. Further, they contend that the agreement would allow building owners to postpone needed asbestos removal.
The EPA is considering the comments received, and additional negotiations, to last for a protracted period, are scheduled.
C.ACSH Study Regarding Asbestos Removal
In November, 1992, The American Council on Science and Health, Inc. ("ACSH"), a non-profit consumer education and public health organisation directed by 200 American physicians and scientists, issued a report which reinforced the current EPA policy of leaving alone undamaged asbestos-containing materials in buildings.
The report concluded that "when asbestos is in place and in good condition, it does not pose a threat to health." According to ACSH, the occupational groups which should be monitored for risk of developing asbestos-related diseases are fire fighters, custodians, maintenance workers and asbestos abatement contract workers. "Massive efforts to remove all asbestos from office buildings, schools and homes, even when it is in good repair, can result in the introduction of additional fibers to the ambient air. Such misguided ‘public health' measures may actually cause more harm than good."
On November 3, 1992, The Occupational Safety and Health Administration (OSHA) reopened the record on proposed revisions to its asbestos standards, and extended to January 4, 1993, the period in which to comment on options for informing approximately two million building service and maintenance workers of potential asbestos exposure. The proposed revisions could Potentially affect 3.3 million public and commercial buildings, 450,000 of which have damaged asbestos-containing materials.
OSHA specifically sought comments on proposed revisions that would automatically designate certain high-risk materials in accessible areas of a building as presumptive asbestos-containing materials. However, the proposed revisions would permit the demonstration, through sampling and analysis, or through specific information related to construction specifications, that a material did not contain asbestos.
By January 4, 1993, more than 60 organisations had sent comments to OSHA, and these comments were being reviewed by OSHA prior to its issuance of new regulations. The Safe Buildings Alliance's comments included a study by Dr. Robert W. Crandell of the Brookings Institution which concluded that the cost of the OSHA's proposed revisions to the asbestos standard would exceed $1 billion per theoretical cancer avoided.
3.GAO study of Federal Agencies
The General Accounting Office issued in late 1992 a report entitled "Asbestos in Federal Buildings: Federal Efforts to Protect Employees from Potential Exposure." The report claimed that federal agencies have not taken action to ensure that their work sites have asbestos management programs that meet the requirements of OSHA regulations and the principal recommendations Bet out in EPA guidance material. The GAO report recommended that OSHA officials clarify for federal agencies the conditions under which they must establish asbestos maintenance programs.
4.Proposed New Laws Michigan
A bill regulating asbestos levels in schools and regulating when asbestos should be removed is pending in Michigan's House Committee on Labor. The legislation provides for removal of asbestos only if mandated by the Federal Clean Air Act; if required by the Asbestos Hazard Emergency Response Act; if the asbestos fibers exposure level during periods of normal building occupancy exceeds federal standards; if the cost of an asbestos maintenance plan exceeds the cost of removing the substance; or if the removal is part of normal maintenance or repair.
Legislation to extend the statute of limitations for civil causes of action involving asbestos removal from schools, and to declare an emergency, is pending in Ohio's Senate Judiciary Committee.
According to this bill, a party may file suit seeking a judgment for the removal of asbestos from a building, for correcting any problems associated with asbestos in a building, or for reimbursement for removal costs.
Additionally, the legislation would extend or revive any cause of action filed on behalf of a school board "that otherwise would be barred prior to two years after the effective date of this section as a result of expiration of the applicable statute of limitations..." Any suits extended or revived under this bill would have to be commenced no later than two years after the effective date of this legislation.
B.New Property Damage Lawsuits
W. R. Grace, one of the target defendants in asbestos-in-buildings litigation reports the filing of 16 new actions during the past year, as compared to 10 new filings during the prior 12 months. Geographically, 11 states are represented, with one new case having been filed in Canada, so there does not appear to be any consistent pattern.
Significantly, for the second year in a row, there have been no new filings against Grace by school districts. It would therefore appear that school districts have either already filed independent actions or are a part of the National Class Action pending in Philadelphia, Pennsylvania.
Most of the new suits involve commercial building owners, with 2 very recent large-scale suits having been filed in Texas. A number of governmental entities have also filed suit, including the states of Utah and Idaho and the County of Union, New Jersey.
The most significant new suit filed in the past 12 months is theAnderson Memorial Hospital case, which purports to be a national class of all buildings in the United States which contain surface asbestos materials such as acoustical plaster or structural fireproofing. This action was filed by Attorney Daniel Speights in state court in South Carolina. We will discuss this action below under the heading of "Class Actions".
Wedo not receive detailed information regarding new filings from U.S. Gypsum in view of the pending coverage litigation, and the other two major building claims defendants, National Gypsum and Celotex are in bankruptcy proceedings and thus protected from new filings.
While we do receive information regarding filings against certain of the less-exposed "pipe and boiler" manufacturers, we note no significant increase in filings against these defendants.
C.Future Potential Claims.
While the number of new filings has somewhat stabilised over the past few years, it continues to be most difficult to predict the rate at which future filings will take place. We would note, as discussed above, that there have been no new school filings for the past 2 years, which indicates that we may not see any more of these claims in the future. As EPA regulations regarding testing of asbestos in schools became effective in approximately 1980, we would anticipate that most school districts have by now determined whether they have asbestos in their buildings, and they have elected either to be part of the National Class or to file their own independent actions.
We do believe that future filings by governmental and municipal entities are likely, as are filings by commercial building owners. As will be discussed, the major defendants have had increasing success in asserting the Statute of Limitations defence, both with respect to governmental and commercial building owners.
1.National School Class Action
The class action filed on behalf of all primary and secondary schools in the United States, which could involve as many as 30,000 school districts, remains pending in the U.S. District Court for the Eastern District of Pennsylvania. In our 199:2 Market Report, we advised that the U.S. Court of Appeals for the Third Circuit had taken under advisement whether the assigned Judge, Judge Kelly, should be recused due to his attendance at an asbestos-in-buildings seminar sponsored by plaintiffs' counsel, with his expenses paid by said counsel.
The Third Circuit found that this situation created at least the appearance of an impropriety, and ordered that Judge Kelly be removed from the litigation. The case has now been reassigned to Judge James Giles, who has indicated that he will not follow Judge Kelly's plan to conduct a preliminary trial limited to conspiracy issues. Judge Giles has held a number of meetings with the defendants, and he has been quite aggressive in attempting to compel settlements. He has indicated to the defendants that trial is imminent if the case is not settled in the very near future.
Judge Giles has recently issued a favourable ruling, finding that Dana Corporation is not liable as a corporate successor to Smith & Kanzler, which manufactured a spray-on asbestos fireproofing. The Judge found that Dana was merely the shareholder of Smith & Kanzler, and did not exercise the type of control over its operations to result in a piercing of the corporate veil. This is obviously a favourable development for Dana (and its insurers) which will be more fully discussed in the Dana year-end report.
2.Colleges and Universities-Central Wesleyan College.
This class, pending in the U.S. District Court for the District of South Carolina, consists of approximately 3,000 colleges and universities in the United States. The class has been certified, on a conditional basis, as a proper class action. This certification has been appealed, and the appeal is currently pending before the U.S. Court of Appeals for the Fourth Circuit. Certain of the London Market insureds, including Grace, U.S. Gypsum, Pfizer, and Kaiser are aggressively pursuing the appeal of this class certification.
3.Buildings Leased to the Federal Government-Prince George Center
This class was certified in May of 1992 in the Court of Common Pleas in Philadelphia, Pennsylvania. The class consists of owners of buildings which are leased to the Federal Government, many for uses such as post offices, and consists of approximately 2,600 buildings.
A motion for reconsideration of the class certification was denied in April of 1993. Approximately 15 defendants have reached nuisance value settlements for relatively modest amounts, however, the case continues against target defendants such as Grace.
4.All Building's With Surface Asbestos-Anderson Memorial Hospital
As noted above, Attorney Speights has filed a National Class action of all buildings which contain friable acoustical plaster and/or spray-on fireproofing, as long as the buildings are not included in any other class listed above. The action, which names as defendants W.R. Grace, U.S. Gypsum, U.S. Mineral, Dana, Asbestospray, and Turner & Newall, was filed in State Court in South Carolina.. The number of buildings involved in this purported class is not listed, but could potentially be several hundred thousand buildings according to EPA estimates.
The Complaint contains specific allegations against U.S. Gypsum, contending that the corporate restructuring of U.S.G. was a fraudulent conveyance, aimed at depriving asbestos victims from access to U.S.G. corporate assets.
The defendants removed the action to the U.S. District Court in South Carolina, however, plaintiffs' motion to remand was recently granted.
We can again advise that there have been no major bankruptcy filings by asbestos producers during the past year. The major building product producers which continue in Chapter 11 are National Gypsum, Celotex/Carey Canada and Eagle Picher.
During the past year, U.S.G., the parent corporation of U.S. Gypsum, successfully completed a "pre-packaged" bankruptcy filing, which was a restructuring of its debt with the prior approval of the lenders. The restructuring reportedly will have no impact on U.S. Gypsum with respect to outstanding asbestos bodily injury or building claims.
It is quite possible that the coming months may see efforts by the plaintiffs or others to have Keene Corporation placed into bankruptcy. Keene has recently filed a "limited fund" class action proceeding in the U.S. District Court for the Eastern District of New York before Judge Weinstein, who is charged with the restructuring of the Manville Trust. After a preliminary hearing, Weinstein issued an order temporarily restraining the further payment of asbestos claims by Keene. This approach is similar to the strategy initially adopted by Eagle Picher, and we would anticipate that the more aggressive plaintiffs' counsel will seek to have Keene placed into bankruptcy, and either re-organised or liquidated.
National Gypsum Corporation has just recently emerged from bankruptcy proceedings in Dallas, Texas. The trial judge has given approval to a plan which would create a trust fund for asbestos bodily injury claims, which would consist of the proceeds of National Gypsum's remaining liability insurance for bodily injury, as well as the assets of a National Gypsum subsidiary, the Astin Company. After hearing expert testimony, the Judge concluded that an amount in the area of $600 million would be required for National Gypsum's outstanding bodily injury liabilities, and the insurance proceeds plus the subsidiary are expected to produce funds in this amount. Property damage claims have been capped under the plan at $137.5 million. The insurance coverage situation is quite complex as a result of conflicting trigger decisions, which will be discussed in another section of this letter.
Our 1992 Market Letter had reported legislative proposals to create a new chapter to the Bankruptcy Code, to be known as Chapter 14. The proposed legislation would permit a company, otherwise solvent, but which faced mass tort liabilities in excess of $1 million, to seek the protection of the Bankruptcy Code. We can report that no further developments have taken place regarding these proposals, and there is currently no such legislation pending before the United States Congress. The topic continues to be discussed by various bankruptcy committees, and some legislation in the future remains possible.
We can continue to report that the effect of bankruptcies on solvent defendants in asbestos building claims remains minimal. While joint tort-feasors are in almost all jurisdictions jointly and severally liable, most of the building cases continue to proceed against a limited number of defendants. As we have reported in the past, asbestos-containing materials in buildings are generally identifiable as belonging to a specific defendant, and the damages resulting from the removal or remediation of said asbestos can generally be allocated to specific defendants.
Thus, unlike the bodily injury claims, where the harm caused by asbestos products can generally not be allocated to a specific manufacturer, the insolvency of certain defendants in the building cases would appear to present less of an exposure to the solvent manufacturers.
During the past 12 months, since our last Market Letter, we are aware of 10 cases which have proceeded through a full trial through jury verdict. As in the past, the results have been mixed. We provide the following brief summary of these trials:
1.MDU Resources-North Dakota.
Trial in this case involved the plaintiff Montana Dakota Utilities, which filed suit against W.R. Grace. Grace was successful in obtaining a defence verdict, however, the case is currently on appeal.
2.H&H Cerritos-Los Angeles, California.
The plaintiff, the owner of a shopping center in California, obtained a $14-5 million verdict solely against U.S. Mineral in Superior Court, Los Angeles County. The verdict represented the largest single asbestos building verdict in the past 12 months, and we understand that the verdict is currently on appeal.
This case has been tried twice in the past year, by the owner of a commercial building against U.S. Gypsum and W.R. Grace. In the most recent trial, the jury found in favour of the plaintiff ~ liability, however, the judge overturned the jury verdict and entered judgment in favour of the defendants on the basis of the running of the Statute of Limitations.
4.New Hampshire-Vermont Health Services/Blue Cross-New Hampshire
The plaintiff obtained a verdict in the amount of $3-9 million solely against U.S. Mineral, and we understand that this verdict is also on appeal.
5.Prudential Insurance Company-Massachusetts.
In a significant case which involved a very large potential damage exposure, Turner & Newall obtained a defence verdict on the basis of a Statute of Limitations defence. We also understand that this case is under appeal.
6.General Conference Corporation Seventh Day Adventists-Maryland.
The trial of this case resulted in a $4-5 million verdict solely against W.R. Grace, the only damage verdict against Grace in the past year. We anticipate that an appeal will be filed in this case as well.
7.State of West Virginia
This case involved a trial lasting approximately 4 months against Grace, Pfizer, Keene and Asbestospray. At the conclusion of the evidence, the judge charged the jury that the asbestos products of the defendants were defective as a matter of law. Thus, the only real issue for consideration by the jury was the amount of damages. Much to the surprise of all parties, the jury returned a finding of no damages. Post-trial motions have been filed, with the State arguing that the jury verdict should be set aside and damages awarded, and the defendants arguing in support of the jury verdict.
8.State Farm Insurance Company-Illinois.
State Farm had filed suit against Grace seeking damages for removal of asbestos material from three of its larger office buildings, with alleged damages in the tens of millions of dollars. The trial was bifurcated, with the jury finding Grace 70% responsible, and State Farm 30% responsible. Trial on the damage issue is underway.
Trizec Properties owns a number of buildings countrywide, and this suit involved 4 of the more significant buildings, with United States Gypsum, United States Mineral and W.R. Grace being the named defendants. The jury initially returned a complete verdict in favour of U.S. Gypsum and U.S. Mineral on all buildings on the basis of the Statute of Limitations, and in favour of Grace on only one building. On motion by Grace, the trial judge directed a verdict in favour of Grace on all buildings, finding that the Statute of Limitations started to run when the plaintiff discovered the presence of asbestos in the first building. In view of the substantial amounts involved, an appeal is certain.
10.Mayor and City Council of Baltimore-Maryland
In the second phase of trial, the jury returned a verdictof $4-9 million against Keene Corporation and Owens Corning Fiberglas. This is a quite significant verdict, as it is the first multi-million dollar verdict solely against pipe and boiler manufacturers. The jury in a separate phase awarded punitive damages of $2.6 million against OCF and $225,000 against Keene. As we had reported in our 1992 Market Letter, the same plaintiff had obtained a $23-8 million verdict for fireproofing and acoustical plaster against United States Gypsum, Asbestospray and Hampshire Industries. The original verdict has been appealed, and we would anticipate that this recent pipe and boiler verdict will also be appealed.
III.DECLARATORY JUDGMENT DECISIONS
We summarise the recent declaratory judgment decisions which have been handed down by various courts in the past year.
In a significant decision, as it involves an appellate level ruling, the New Jersey Appellate Division affirmed a 1990 trial court decision which adopted a triple trigger, joint and several liability coverage approach for both asbestos bodily injury and building claims. Heavily relying on the Keene decision, the Appellate Division found that a continuous trigger for both bodily injury and property damage "...best accommodates the competing interests of insurers and insureds". The Appellate Division relied on medical evidence to find that asbestos bodily injury is a continuous disease process, and found that property damage is also an ongoing process.
The Appellate Division found that there were factual issues on a number of collateral issues, and the case will likely be returned to the trial court for resolution of these issues before attempts are made to appeal to the New Jersey Supreme Court. This case represents the first appellate level decision adopting a triple trigger for asbestos building claims, and will thus no doubt be heavily cited by policyholders in the pending coverage actions.
In addition to this case, there have been two trial court decisions which found for a triple trigger for asbestos building claims:
B.University of South Carolina.
In this action, the insured Asbestospray settled with the University of South Carolina, and assigned policy rights against Royal Insurance, Great American, North River and U.S. Fire. The trial judge, applying New Jersey law, adopted a triple trigger for asbestos building claims. The Court found that the policies of certain carriers would be controlled by New York law, and he deferred ruling on the New York insurers pending a decision by the Second Circuit in the W.R. Grace matter.
The trial judge ruled against the insurers on the defences of known loss/loss in process, expected or intended, "as damages" and on the issue of whether asbestos in buildings constitutes property damage. The exclusions raised by the insurers by way of defence were also found not to be applicable.
These two separate cases are Minnesota trial court decisions, which involved substantially identical fact patterns. In both cases, the policyholder (Grace in the Independent School District case and Royal in the Board of Regents case) settled with the underlying plaintiffs and assigned policy proceeds to the plaintiffs. The plaintiffs ‘then filed garnishment actions against the insurers, seeking to recover against the insurance policies.
In both cases, on motions for summary judgment, the two separate judges rejected the exclusions, including owned product, sistership, loss of use and pollution. In both cases, the courts adopted triple trigger decisions, holding that policies in effect during the period of time that the asbestos was in the buildings are triggered.
TheBoard of Regents case was the first to be decided, and was immediately appealed by the insurers. In a somewhat surprising decision, the Appellate Court addressed only two issues, choice of law and pollution exclusion.
The Appellate Court found that Minnesota law was applicable in view of the fact that buildings owned by Minnesota plaintiffs were at issue, rejecting arguments that Minnesota did not have the most significant interest in the outcome.
In the surprising part of its Opinion, the Court of Appeals found that the pollution exclusion was unambiguous, that the term "sudden" in the exception has a temporal meaning, and that the exclusion was therefore applicable to the release of asbestos fibers on the interior of a building.
The Court found that asbestos, when it became loose from the asbestos-containing material and contaminated the interior of the building, was clearly a "pollutant". The Court rejected the argument, which had been accepted by the New York Court of Appeals in theRapid-American case that the term "atmosphere" in the pollution exclusion does not include the interior section of a building.
We believe that this result came as a surprise to the parties, and we can anticipate motions for reconsideration filed by motions for a leave to appeal to the Minnesota Supreme Court.
Although the property damage trial is essentially still in progress, we can report some significant summary judgment rulings rendered prior to the commencement of trial. On March 3, 1993, the Court substantially granted the Insurers' Motion for Partial Summary Judgment regarding plaintiffs' burden of proof. The plaintiffs will be required to prove by actual facts that property damage, as defined by the policies, occurred during the policy period. The Court rejected plaintiffs' argument that they need present only hypothetical scenarios of general application regarding the underlying claims.
The Court also ruled in favour of the insurers on our Partial Summary Judgment Motion regarding the scope of "ultimate net loss" excess policy provisions. The Court held that the plain language of the policies obligates excess insurers to reimburse only those defence costs paid as a consequence of any covered occurrence. The Court reasoned that if the assured were not liable in the underlying claim, there necessarily would be no occurrence covered under the policy and thus the excess insurers would be under no obligation to indemnify the assured for anything, including defence costs associated with that underlying claim.
Perhaps the most significant ruling came on January 26, 1993, when the Court granted Insurers' Partial Summary Judgment Motion seeking a declaration that asbestos-in-building claims, if covered at all, fall exclusively within the policies' products hazard aggregate limit. Celotex had filed a Cross-motion for Summary Judgment contending that virtually every underlying claim could be classified as a "non-products" claim and thus not subject to products aggregate limits. This became a very significant issue inasmuch as plaintiffs were seeking what essentially were new limits on policies which had exhausted their products' coverage pursuant to the Wellington Agreement. The Court rejected plaintiffs' theory and stated that to allow coverage under both the products hazard and general liability provisions of the policies would produce a windfall of coverage and was not contemplated by the parties when the insurance contracts were executed.
Following the Court's ruling on products coverage, we were successful in dismissing from the property damage phase of the trial 13 London Market policies which had exhausted their products limits pursuant to the Wellington Agreement.
The "interpretation" phase of trial of this asbestos coverage action took place in 1991. London insurers are involved in the building claims portion of the action. Judge Gyemant issued tentative Statements of Decision in December of 1991 for certain defence issues and in October of 1992 for remaining defence and indemnification issues. The October 1992, 124 page Proposed Statement of Decision ("PSOD") addressed a myriad of coverage issues including the existence of property damage, trigger, scope of coverage, notice, the prior insurance clause, expected and intended, policy exclusions and "drop down" over insolvent carriers.
In addressing the trigger issue, the Court held that the policies, if ambiguous, should be construed against the insurer. However, the court did not find any terms in the London policies ambiguous and was able to interpret the terms based on the "plain meaning" of the wordings. The court considered extrinsic evidence offered by Flintkote but did not find it helpful in determining the meaning of policy terms.
The court next addressed the trigger issue, holding that the trigger for bodily injury is continuous, from first asbestos exposure to date of death or claim, whichever comes first. This was the same holding as Judge Brown in the Co-ordinated Cases. In regard to property damage, the court adopted a trigger similar to Judge Brown's, but somewhat more restrictive. The court expressly rejected Flintkote's "continuous" trigger theory. Rather, the court held that policies in effect at the time of installation are triggered if diminution in the value of the property is shown to result from the incorporation of asbestos products. The court further held that policies in effect at the time of release and re-entrainment of asbestos particles are triggered. Judge Gyemant stated that once a policy is triggered, the insurer must pay for all liability flowing from that occurrence, even damage occurring after the policy period.
The court also addressed the loss of use of property, holding that it was recoverable as consequential damages of property damage in the policies containing wordings similar to the pre-1973 ISO wordings, and as property damage in the 1973 ISO wordings if it results from an occurrence in the policy period.
The court generally held all but one of the business risk exclusions (a form of the design defect exclusion that did not appear in London policies) inapplicable. The court also held that although it found the sistership clause generally inapplicable, damages sought by Flintkote for preventative costs taken for fear asbestos may cause future harm are not covered.
The court also held that the issue of coverage for different theories of liability in the underlying cases must be addressed by examining whether the terms of the policy cover specific factual situations. However, the court did hold that policies that defined products hazard as arising out of the "named insured's products" did not cover damage that was not proven to arise from the insured' 5 products.
The court also ruled on several other issues, including the issue that the court would receive evidence in phase II as to what a reasonable aggregate limit would be for certain Commercial Union policies that contain per occurrence limits, but did not contain aggregate limits. She also found the Prior Insurance and Non-Cumulation Clause found in London policies to be unambiguous, although she reserved its application for Phase II Finally, Judge Gyemant held that excess insurers do not have an obligation to drop down over insolvent insurers.
The parties filed objections and responses to objections to the PSODs in December 1992, and January 1993. In May 1993, the Court advised that it is considering significant changes to the "expected and intended" portion of its PSOD to conform to the plain meaning analysis of the Shell Oil Co. v. Winterthur decision. This is likely to be favourable to insurers because the Shell decision finds the "expected and intended" wording more limiting than the Flintkote PSOD. The Court requested that the parties brief their positions on this issue. Briefing was completed on 16 June 1993.
The Court is expected to issue a final statement of decision regarding interpretation issues sometime this summer. The next phase of trial is application of the Court's interpretation of the policies to the facts in the underlying cases. This phase should commence some time after the final statement of decision for Phase I is issued. Remaining phases include issues of allocation and bad faith.
On July 28, 1993, Judge Gyemant issued revisions to and added .some new holdings to certain portions of her October 15, 1992 Proposed Statement of Decision ("PSOD"), namely: "property damage/trigger", "accident", drop down/step down" and "stub polices." These sections were revised or added in response to the parties' objections to her PSOD.
Judge Gyemant did not substantively change her holding on property damage/trigger, but did add two new rulings in favour of insurers as well as responding to most of Defendants' objections by making clarifications and addressing certain California cases that the insurers had objected were overlooked. The Court's new rulings were: 1) holding that prophylactic measures were not covered by the policies; and 2) overruling Flintkote's objection that the burden of proof of proving property damage should be shifted from Flintkote to its insurers.
Judge Gyemant also added two other new rulings to the PSOD. First, she added a new section ruling on the "accident, including" occurrence definition, adopting the Shell court holding that under policies with this definition, both the act and the injury must be unexpected and unintended for coverage. Additionally, Judge Gyemant ruled that Flintkote bears the burden of proving the event causing the damage alleged in the underlying complaints was unforeseeable at the time Flintkote manufactured or sold the product.
Judge Gyemant also added a new section to her pro-insurer drop-down ruling. Her original ruling held that under the policies at issue, insurers had no duty to "drop-down" to pay defence costs where the primary insurer had become insolvent. Judge Gyemant extended this holding to rule that whether underlying insurers are insolvent or they choose voluntarily not to pay, the excess insurers have no obligation to drop down to either defend or reimburse defence costs.
In regard to stub policies, Judge Gyemant ruled that Commercial Union is not obligated for a full policy limit on the one policy which had been extended for a one-month period. The Court's revised ruling did not alter the prior Statement of Decision with respect to American Reinsurance, which had a six-month stub policy, or as to Continental Casualty, which had a similar issue.
F.California Supreme Court Reviewing Major Coverage Cases
Two important California Court of Appeal coverage decisions, Montrose v. Admiral Ins. Co. ("Montrose I") and Stonewall Ins. Co. v. City of Palos Verdes, are currently pending review by the California Supreme Court. The Courts of Appeal in these cases held a "continuous trigger" of coverage. These two cases present the Supreme Court for the first time with trigger and scope of coverage and fortuity issues in the context of a liability policy involving pollution (Montrose I) and a landslide (Stonewall)
Two related cases, Montrose v. Superior Court (Montrose II) and Montrose v. American Motorists ("Montrose III") are also pending before the California Supreme Court. These two cases involve complicated procedural issues involved in coverage litigation relating to defence duties in the underlying litigation. Both cases held that insurers had an immediate duty to defend. Montrose additionally held that insurers cannot litigate coverage defence issues such as the pollution exclusion in the coverage case before the underlying cases are resolved. The Montrose decision was cited by the Co-ordinated Asbestos cases Court of Appeal when it asked for supplemental briefing on the issue of whether the Co-ordinated Asbestos cases should proceed before the underlying cases are resolved. The Supreme Court's grant of review of this case should be helpful to insurers' position in the Co-ordinated Asbestos cases that the case is ripe for declaratory relief.
Also in the past year, the Court refused to decertify (i.e., left standing as good law) a third case, Pines of La Jolla v. Industrial Indemnity, which applied a single date of loss of manifestation of damage in a construction defects case under a liability policy.
2.Fibreboard v. Hartford Ins. Co.
In this California Court of Appeal case, decided in May 1993, Fibreboard appealed from a summary judgment in favour of Hartford Insurance Company in which the trial court held that underlying asbestos building claims were not personal injury or non-products claims. Hartford's products aggregates were exhausted due to combined single limits in some policy years and an asbestos exclusion applied to products claims in other policy years. Fibreboard argued that certain claims in the underlying case such as market share liability claims, were not covered under the products hazard coverage because the claims did not arise out of Fibreboard's products as required under the products hazard, but rather fell under premises/operations liability coverage. Fibreboard also argued that other claims such as trespass, were covered under the personal injury coverage and were not excluded by the asbestos exclusion.
The Court of Appeal disagreed, and affirmed Judge Chesney's rulings, concluding that
"all the underlying claims, if covered at all, are embraced within the "products hazard" coverage [and]... the general operations and personal injury provisions do not apply to the underlying claims."
In its analysis, the Court first held that the products hazard clause was unambiguous and that if the collective liability claims are covered at all, they are covered under the products hazard coverage. The Court also held that trespass and other claims are not covered under the definition of personal injury set forth in Hartford's policies. The decision was limited to personal injury definitions that center on a "right to privacy" rather than a "right to private occupancy." Finally, the Court of Appeal held that the torts of conspiracy do not allege damage caused by an "occurrence" because these torts require intent and thus can not happen by accident.
3.Other Cases that May Affect California Asbestos Cases
There are a number of other cases of interest that were decided this year under California law. In Chemstar v Liberty Mutual, a United States District Court applying California law found a single date of loss/manifestation of damage trigger in a case involving cosmetic damage to walls in homes due to a defective plaster. The Chemstar court also held that the damage all arose out of a single occurrence, the failure to warn users how to correctly use the product.
G.Pending Declaratory Actions
The Market continues to be named in declaratory judgment actions filed by various policyholders seeking coverage for asbestos-related building claims. These cases range from cases which are extremely active in a number of jurisdictions, such as W.R. Grace, to cases which are effectively stayed, such as GAF. The pending actions against the Market are as follows:
1. W.R. Grace
2. U.S. Gypsum
3. National Gypsum
4. Co-ordinated Cases/Armstrong
7. Celotex/Carey Canada (including Dana policies)
6. ASARCO/Lac D'Amiante du Quebec
9. Kaiser Gypsum/Kaiser Cement
We provide a brief description of each of these actions, and additional details will be provided in the assured-specific reports which will be circulated to the Market.
1. W.R. Grace
The Market continues to be actively engaged in resisting declaratory actions filed by W.R. Grace in a number of jurisdictions. These actions are as follows:
a.New York Excess Action.
We continue to await rulings from the U.S. Court of Appeals for the Second Circuit on appeals from rulings in the Grace primary case on jurisdiction and on trigger of coverage. Briefs on these issues were exchanged and oral argument was heard by the Court in September of 1992, and a decision is expected in the very near future.
The jurisdictional issue involves whether the parties to the action, which was filed by Maryland Casualty against Grace and other insurers, should be re-aligned, which could potentially defeat the jurisdiction of the Court. The trial court had ruled that re-alignment was not required, and we expect that this ruling will be affirmed by the Second Circuit.
The trial court in the primary action had issued a "date of discovery" trigger ruling, which is also the subject of the pending appeal.
While awaiting these decisions, discovery has been most active, and a substantial number of documents have been produced and depositions taken. A discovery cut-off date of November 1, 1993 has been set, and the parties are working to meet this deadline. A number of London Market depositions have been concluded in connection with this action and other Grace actions.
This action continues to be the most comprehensive action, in which the parties seek a declaration of coverage with respect to all of Grace's asbestos bodily injury and property damage claims, to the extent said claims are not within the scope of other actions.
b.State of Mississippi.
The Mississippi action has become inactive, as the case has been reassigned following the death of the original judge, Judge Lockard. The newly-assigned judge, Judge Jackson, has been quite busy with the massive consolidated asbestos bodily injury trial, and has yet to turn her attention to the building claims litigation. Summary judgment motions against Commercial Union and Home remain pending, as does the appeal to the Mississippi Supreme Court of summary judgment motions in favour of Grace against Maryland Casualty and Commercial Union on the issues of trigger of coverage and the joint and several liability of the insurers.
We reported above on the coverage decision issued by Judge Carey, which adopted a triple trigger for building claims. Judge Carey did find that factual issues existed as to whether the settlement between Grace and the school districts was the result of collusion, whether Grace "expected or intended" the property damage and whether Grace had obtained coverage through misrepresentation or non-disclosure. A trial on these factual issues is set to commence on October 12, 1993.
In the interim, there has been a substantial amount of discovery on these issues, however, Judge Carey has issued discovery rulings which are significantly more restrictive than those which the insurers were able to obtain in the New York litigation.
A second garnishment action, similar to that filed by the five school districts, has now been filed before Judge Carey. In a garnishment action, the plaintiff seeks to attach assets (i.e., the insurance policies) which &re the property of the debtor (Grace). This action was filed by five plaintiffs, including the County of Hennepin, who had settled underlying cases with Grace and had accepted assignments of, insurance proceeds in the total amount of approximately $10-6 million.
Efforts continue in the New York action to enjoin Grace and the Minnesota plaintiffs from prosecuting the County of Hennepin action.
d.Harris County Texas.
In our prior Market Letter, we had advised that Grace had filed a declaratory action against its excess insurers in connection with the underlying claim filed by the Cullen Center. The declaratory action had been dismissed in view of the fact that Grace had not yet been found liable to the underlying plaintiff, motions for reconsideration were filed and denied, and Grace filed a Notice of Appeal. This appeal was subsequently withdrawn. In the interim, Grace settled the Cullen Center matter for a significant sum, and could therefore re-file in a Texas state court.
e.Dayton II-Beaumont. Texas.
Since our 1992 Market Letter, this case was most active because of pre-trial discovery which was accelerated due to a scheduled trial date of April, 1993. Preparation involved significant discovery, both on the coverage issues and in the underlying cases, retention of experts, and heavy motion practice.
During this time, the Market filed a motion with the trial judge, Judge Fisher, requesting that he reconsider his denial of the insurers' motion to stay or transfer the case in view of the prior more comprehensive New York action. When Judge Fisher declined to rule on this motion, the Market filed a mandamus petition to the U.S. Court of appeals for the Fifth Circuit, seeking an order compelling Judge Fisher to dismiss, Stay, or transfer the Beaumont action. The Fifth Circuit accepted this petition for review, and Judge Fisher accordingly has ordered a stay of all discovery and a postponement of the trial. We await a ruling from the Fifth Circuit on the merits of the mandamus petition.
2.United States Gypsum.
The appeal is still pending on the "first discovery" trigger ruling entered by the Circuit Court of Cook County, Illinois in January, 1991. It will be recalled that the trial court rejected the Assured's argument for a continuing trigger and found that only those policies in effect on the date a claimant first discovered the presence of an asbestos hazard in its buildings would be required to respond to the claim. However, the Court agreed with the assured in finding that the 8 representative underlying building claims did involve "property damage" caused by an "occurrence" within the meaning of the policies issued to U.S. Gypsum by London Insurers and various co-defendant insurers.
In the 1992 Market Report we advised that both sides had filed extensive briefs with the Illinois Appellate Court. U.S. Gypsum is appealing the Court's ruling on trigger and the London insurers and other co-defendant have appealed the Court's decision regarding "property damage" and the exclusion issues. We can now report that oral argument was heard by the Court of Appeals in March, 1993. The Court asked numerous questions of both sides, focusing on the trigger of coverage issue and the nature of the evidence presented by U.S. Gypsum at trial as proof that the underlying claims involved property damage as a matter of actual fact.
The Court's decision could be rendered at any time. It is always difficult to predict the outcome of the appeal; however, we were encouraged by the Court's questioning and attentiveness at oral argument that it will give the London Insurers' arguments fair consideration.
Our 1992 report discussed the rulings by Judge Martin in this matter, including the "installation date" trigger of coverage for building claims. As Judge Martin had yet to rule on bodily injury issues, the property damage decision was not a final judgment and thus not appealable.
Judge Martin has now concluded trial of the bodily injury matters, and he has certified his rulings in both the property damage and bodily injury cases as being appropriate for appeal. Certain of the insurers are opposing this certification for appeal, as they wish to have all other outstanding issues resolved before the appeal. It is thus unclear at the present time whether the case will proceed to appeal to the U.S. Court of Appeals for the Second Circuit (which currently has before it the "discovery date" trigger decision in Grace), or whether the case will remain with Judge Martin for future proceedings.
Judge Brown's San Francisco Superior Court decision in the Co-ordinated Cases regarding coverage of asbestos bodily injury and building claims is currently in the process of being appealed to the California Court of Appeal. London insurers are involved only in the building claims portion of the case. The building claims portion of the appeal involves a great number of insurance issues including trigger of coverage, whether property damage has occurred, and the interpretation of several policy exclusions including design defect, sistership, and own-product exclusions. Appellate briefing was completed in December, 1991.
On February 17, 1993 the Court of Appeal requested supplemental briefing from the parties involved in the asbestos building group appeal about whether declaratory relief is available to determine the insurers' duty to indemnify before the underlying building cases are resolved. Many of the building cases underlying the Co-ordinated Cases coverage dispute have not yet been resolved. Most of the insurers and Armstrong filed briefs answering this question in the affirmative, asserting that the case was appropriate for declaratory relief and for an appellate review of Judge Brown's decision. One insurer, U.S. Fire, responded that Judge Brown's opinion was only "advisory" to the extent that it went beyond a statement for declaratory relief.
On June 11, 1993 the Court of Appealheard arguments in regard to missing policy issues, and on July 16, 1993 the Court of Appeal heard arguments in regard to asbestos bodily injury trigger and scope of coverage issues. London insurers are not involved in either of those issues. The Court has set August 10 for oral argument on the remaining Issue Group II matters involved in the asbestos bodily injury appeal. The remaining issues to be heard on August 10 are: pre-merger coverage, expected and intended, number of occurrences and various issues raised by CNA. We anticipate that the Court will set a hearing date for Issue Group III matters pertaining to asbestos building issues for September or October.
The Court has set a hearing date for Issue Group III matters pertaining to asbestos building issues for August 27, 1993. After the August 27 hearing on asbestos building issues, oral argument should be concluded and the case submitted. Under California procedure, the Court should rule by December 1 on the various issue groups in a formal written opinion.
London insurers in Fibreboard v. Continental have 6 policies remaining at issue in regard to coverage of underlying asbestos building claims. This coverage action in San Francisco Superior Court was originally set for trial in October 199l. The trial date has been continued numerous times and is now tentatively set for September 13, 1993. This trial date will probably be continued as well because Judge Chesney has indicated that the case should be stayed pending the resolution of the Montrose v. Admiral Ins. Co. and Stonewall v. City of Palos Verdes coverage cases that are before the California Supreme Court, as well as the Co-ordinated Asbestos Cases pending before the California Court of Appeal.
In November of 1992 Hartford Insurance Company obtained summary judgment that the underlying building claims were not personal injury or non-products claims. Because its products aggregates were exhausted due to combined single limits in some policy years and an asbestos exclusion applied t~ products claims in other policy years, Hartford was dismissed from the action. London insurers filed a similar summary adjudication motion in which the Market successfully argued that the Court's ruling in Fibreboard as to the Hartford policies' personal injury and non-products coverage should apply to the London 1978 policy as well.
Fibreboard appealed the court's decision as to Hartford. Fibreboard did not appeal from the ruling on the London policies because summary adjudication motions only eliminate an issue from the case and so are not immediately appealable as was the summary judgment motion that Hartford won. The Court of Appeal affirmed Judge Chesney's rulings, holding that "if covered at all", the building claims fell under products coverage. The decision was limited to personal injury definitions that center on a "right to privacy" rather than a "right to private occupancy." The Fibreboard v. Hartford ruling by the Court of Appeal is consistent with our successful motion, and is the first time a California Appellate Court has addressed these issues. We provide a more detailed analysis of this case in the "California Law Update" section.
All primary insurers have now settled with Fibreboard, except Fidelity and Casualty, which has a stub policy period issue pending.Fireman's Fund, which is a signatory to Wellington for bodily injury claims settled for a cash buy-out of defence obligations for property damage claims. Pacific Indemnity and Continental Casualty, which are not signatories to Wellington, settled with Fibreboard on both asbestos bodily injury and asbestos building issues through complex agreements conditioned on the outcome of the Co-ordinated Asbestos cases appeal.
Recent activity in Flintkote has been summarised above in Section III-E regarding declaratory judgment decisions.
7.Celotex/Carey Canada (including Dana Policies).
This global declaratory judgment action remains pending before a United States Bankruptcy Judge in Tampa, Florida. Last year, the judge divided the case into four phases and announced that he would try them in the following order: 1) asbestos property damage; 2) asbestos bodily injury; 3) environmental claims; and 4) "policy-specific" issues. After initially setting the asbestos property damage phase of the trial to take place in the final two weeks of 1992, Judge Baynes postponed the trial on the eve of the commencement of proceedings to a five-week period beginning on May 17, 1993.
Celotex and Carey Canada were unable to finish presenting their case-in-chief in this period and as a consequence Phase I of the trial will resume on November 29 and continue through December 22, 1993. Currently, we expect Plaintiffs to use a significant portion, if not all, of that allotted time for the presentation of their case-in-chief. We will have to be prepared to commence the defence presentation of the case, but we would not expect to be able to complete the defence evidence during this session. It is therefore likely that an additional trial segment beyond December 1993 will be required to complete the property damage phase of this proceeding.
Pursuant to the Court's March 3, 1993 order requiring plaintiffs to prove their case based upon the "actual facts" of the underlying cases, plaintiffs chose eight underlying cases as representative of the more than 200 underlying cases which were filed against them. We, along with other lead counsel, have challenged whether these are indeed "representative." Four of the cases chosen unsurprisingly are the four largest settlements in the underlying litigation. Not included were claims which were settled for little or no payment or those where debtor prevailed.
8.ASARCO/Lac D'Amiante du Quebec.
This matter remains inactive in the U.S. District Court for the Southern District of New York. There is in effect a standstill agreement between ASARCO and its excess insurers, as ASARCO considers that it has sufficient coverage in its umbrella layer policies with American Home to respond to the outstanding property damage claims. All parties have reserved their rights to proceed with litigation in the event that claims exceed the coverage available under the umbrella layers.
9. Kaiser Gypsum/Kaiser Cement.
During the past year, Kaiser Cement/Kaiser Gypsum and their primary insurer Truck Insurance Exchange effected service against the Market of a previously-filed complaint in state court in San Francisco, California. In this action, Truck seeks contribution for past and future defence costs against the London Market primary policies which date back to the 1940s.
The action has been the subject of extensive discovery and motion practice, most related to the proof of missing policies and the establishment of subscribing markets for said policies. Truck and the Kaiser entities have taken a number of depositions of broker representatives from J.H. Minet, and a deposition of the Market's representative has also been taken. There has also been substantial document discovery during the past year.
Despite all this activity, there has been no movement towards a litigated resolution of the substantive coverage issues.
The GAF action also remains stayed in the Superior Court for Los Angeles County. While GAF's primary has been expending substantial sums in defence costs under its separate property damage limit, it is anticipated that most excess coverage, which is on a combined single limit basis, will exhaust through the payment of bodily injury claims before being called upon to respond to property damage claims.
IV.1993 RESERVING METHODOLOGY
For the 1991 and 1992 year-end reserving, we retained Peterson Consulting to assist with an analysis of building claims in the United States in an effort to develop a more fact-based methodology. This methodology is based on a building-by-building analysis where sufficient data is available, and on average projected values for multi-building cases where sufficient facts on each building are not available.
Any such methodology is dependent upon the quality of the data available for analysis. As the Market is engaged in litigation with all four of the major producers involved in this analysis, W.R. Grace, U.S. Gypsum, National Gypsum and Celotex/Dana, it has in the past been difficult to obtain accurate data. This situation is further complicated by the fact thattwo of these assureds, National Gypsum and Celotex, are currently in Chapter 11 Bankruptcy proceedings.
We believe that we now have much better data from W.R. Grace, and we are obtaining some additional information from U.S. Gypsum, so that the factual basis for the reserving methodology should be better than the past two years.
We continue to believe that the methodology represents a logical and reasoned approach to the problem of analysing removal costs. The process is based on an analysis of the total square footage of asbestos-containing material in a building, the per-unit cost of removing the material, and analysis of which defendant .Ls likely to be responsible for the removal costs. These are objective factors, and we continue to believe that the methodology functions quite well in analysing such factors.
However, we have in the past year noted some discrepancies between the projected case values and the amounts for which the cases were settled or resolved. We believe that these dismissals or settlements for amounts less than projected costs are based on subjective factors which are significantly more difficult to analyse. These factors include the jurisdiction, the identity c)f the plaintiffs' counsel, the strength of defence such as Statutes of Limitations or Repose, lack of product identification, or the "no hazard" defence. As the Market's attorneys are not involved in the actual defence of these cases, it is much more difficult to attempt to quantify these subjective factors. We continue to track these factors, and, we are optimistic that we will be better able to analyse these factors as more data becomes available as more underlying cases are settled or resolved.
The following is a brief summary and overview of the methodology, which we will continue to utilise for 1993 year-end reserving purposes:
1.Building Square Footage.
We continue to utilise this methodology mainly for commercial buildings. The methodology is based on an effort to calculate, on a building-by-building basis, the total square footage of asbestos product in the building, the type of asbestos product, the location of the product, and the removal cost.
Six different calculations are utilised, ranging from the most specific, where actual remediation costs are known, to the least specific, where it is necessary to estimate both the number of buildings involved in the case as well as the square footage of the buildings. Within these calculations, a percentage factor, known as the location factor (meaning the location within the building), is used to convert the total building square footage to an estimated square footage of asbestos-containing material, either acoustical plaster or structural fireproofing. Allocations are then made to the three assureds for whom this methodology is used, W.R. Grace, U.S. Gypsum and Celotex/Dana, based upon their estimated market shares for each product type.
We continue to use the same estimates for square footage removal costs as in our 1992 report, which are as follows:
2.Number of Building's/Model Building Method.
As opposed to the building-by-building method used for commercial buildings, a different methodology is used for schools, municipal buildings, and colleges and universities. As most of these cases are multi-building cases, where even the number of buildings is often not known, it is necessary to use a model building or average building method to attempt to project removal costs.
The methodology continues to be based on the assumption that there is likely to be only minimal variations with respect to size and asbestos product content between individual school buildings or individual municipal buildings. This assumption is the opposite of the assumption used for commercial buildings, where each commercial building is generally a unique entity in terms of size.
For this methodology, there are seven calculation types, which again range from the most specific, where abatement costs are known, to the least specific, where even the number of buildings is not known, and there has been no effort in the underlying case to develop product identification information.
This methodology assumes that in a given multi-building action, a fixed percentage of schools, municipal buildings, or colleges and universities will contain either acoustical plaster or structural fireproof mg manufactured by one of the three defendants. The methodology further assumes that there will be an average amount of product in the buildings which do contain asbestos, and that each defendant will have a relatively fixed market share. Finally, we are utilising lower per-square foot removal figures for these buildings, as experience shows that it is more cost efficient to remove asbestos from schools, which are closed for a large portion of the year, and from municipal buildings, where workers can generally be readily moved to other spaces. In addition, most of the buildings in this category have rather large open spaces, which minimises the need for rip-out or removal of walls.
For certain of the larger cases, we are using amounts which are estimates and which contain a significant degree of subjective estimation. In these cases, there is no clear indication of either the number of buildings, or the number of buildings in which any specific defendant may potentially be identified. These buildings include the National Schools Class, the Prince George Center Class, the Anderson Memorial Hospital Class and the Central Wesleyan Class. These class actions have been described previously in this Market Letter.
In addition, we include in this category a number of other cases where sufficient details are not available to rely on the methodology.
B.Comparison of Actual Results With Projected Results.
We have now used the above methodology, with minor modifications, for two years. while we have begun to accumulate some confidential data, particularly with respect to the W.R. Grace account, we are still dealing with a relatively limited universe of approximately 40 cases which have been dismissed, settled, or which have proceeded through verdict.
The overall two-year figures show an accuracy rate of approximately 75% for the W.R. Grace account, when the model calculations are discounted by the 30% figure which we are utilising as a discount for the potential of successful defence by the assured in these cases.
In addition to analysing the data by building type, we have also attempted to analyse the results on a state-by-state basis. However, due to the very limited number of cases which have been resolved, we detect no significant trends.
As noted above, we continue to believe that the objective factors in the methodology are proper factors in analysing removal costs, such as building size, square footage, product location, product type, defendant share, and cost per square foot. However, as we are not involved in the handling of the underlying cases in view of the pending declaratory litigation, we are less able to analyse the subjective factors which have been outlined previously in this Letter.
We have recommended to the Working Party that we continue to utilise this methodology for W.R. Grace, U.S. Gypsum and Celotex/Dana. We find it no longer necessary to use the methodology for National Gypsum, as a cap of $137.5 million has been placed on said defendant's liabilities by the Bankruptcy Court.
We will as at 1992 year-end continue to make additional adjustments to the Celotex/Dana reserving in view of unique aspects of that account.
C.Discount for Potential Successful Defences.
As previously advised, the figures calculated on the basis of the methodology are 100% figures, which reflect full estimated costs of removal or abatement of the asbestos-containing materials. while plaintiffs continue to claim damages in addition to abatement costs, such as loss of use, lost rents, etc., these damages have rarely been awarded, and we continue to believe that the best overall estimate of potential damages is abatement or removal costs
However, as the statistics over the past two years indicate, the defendants, particularly W.R Grace, are able to achieve significant discounts in cases that are settled, and a number of the cases have in fact been dismissed with no damages.
For the past two years, we have been using a 30% discount factor to reflect the potential for successful defence or reduced settlement in these cases. While we have given consideration to increasing this percentage discount in view of the 1992 results, we are at this stage reluctant to recommend a higher discount. We will continue to closely monitor activity over the coming year, and we continue to recommend that the 30% discount be applied to full remediation costs.
By way of background, when we first commenced using the methodology, we utilised an 80% defence cost loading for W.R. Grace and for U.S. Gypsum.As National Gypsum was in bankruptcy, we did not apply any loading, as all litigation was stayed.
This analysis was based on prior expenditures, most of which were paid by primary carriers and most of which reflected the significant start-up costs, including document productions, development of a defence counsel network, computerisation, and formation of an overall defence strategy, all of which were costly endeavours.
We noted that, as we have seen in the bodily injury cases, when an assured moves from a costs-in-addition to a costs-inclusive policy, defence costs are generally reduced significantly. In addition, many of the cases currently being defended are cases of very significant exposure, such as the National School Class Actions. While these cases will no doubt be expensive to defend, we did not believe that the prior ratio was likely to continue.
Accordingly, for 1992 purposes, we reduced the defence loading to 50%.
We continue to believe that this is a reasonable assessment of future defence costs, and we are continuing to recommend a 50% loading for W.R. Grace and U.S. Gypsum, with no loading for National Gypsum in view of the approval of the Bankruptcy Plan.
We have again given consideration to the reserving for non-methodology assureds, which are primarily manufacturers of pipe and boiler products, cement products, floor tile or other construction materials. We have for the past few years been recommending an overall $4 billion universe for all defendants, calculated at $2 billion for schools and $2 billion for commercial and municipal. These figures were based on studies conducted by the Environmental Protection Agency, which attempted to quantify the number of buildings in the United States which contained asbestos materials.
As advised in our 1992 Market Letter, there have been only a very limited number of relatively small verdicts against floor tile manufacturers, and, one of these cases, the Adams Arapahoe case, which resulted in a judgment against GAF, was reversed by the U.S. Court of Appeals for the Tenth Circuit due to the lack of any proof of property damage.
While pipe and boiler defendants had settled a number of cases for relatively modest amounts, and while there had been a number of small verdicts against pipe and boiler manufacturers, we can report that there has now been a fairly significant verdict against Owens Corning and Keene based on pipe and boiler products. As discussed previously in this Letter, these defendants were found liable in a jury verdict, with the jury assessing compensatory damages of approximately $4.9 million and punitive damages of $2.62 million in litigation brought by the City of Baltimore, Maryland.
We continue to maintain this overall $4 billion universe, recognising that only a small percentage of this amount impacts London Market policies, due to exhaustion from other claims such as bodily injury claims, or overall lack of coverage.
We continue to make minor adjustments in these amounts for certain defendants, and we continue to utilise a tiered approach. The amounts allocated to the specific assureds will be discussed in the reports which will be generated by servicing counsel for each account.
F.Allocation to Policy Years.
For the past two years, we have recommended that reserves be allocated to W.R. Grace, U.S. Gypsum and National Gypsum on the basis of first discovery, which remains consistent with trial level decisions in U.S. Gypsum and W.R. Grace. Both of these discovery date decisions are on appeal, and rulings by the Appellate Courts are expected in the near future.
We had also previously reported that Judge Martin had adopted an installation date trigger in the National Gypsum litigation, which is pending in the same court, the U.S. District Court for the Southern District of New York, as the W.R. Grace case. We anticipate that Judge Martin's decision will be conformed to whatever decision is reached by the Second Circuit in the Grace litigation. As we continue to believe that this is likely to be some form of a discovery trigger, we are continuing to recommend reserves for these three assureds on the basis of first discovery of the presence of asbestos with the knowledge that testing, maintenance or remediation may be required.
As discussed previously in this Market Letter, there have been three decisions in the past year, one an appellate level decision in New Jersey in the Owens-Illinois litigation, which have all adopted triple triggers for asbestos building claims. Accordingly, we continue to provide alternative figures for the Market for W.R. Grace, U.S. Gypsum and National Gypsum on what we refer to as a modified comprehensive trigger basis. This basis involves an allocation of 10% of the overall liabilities to the years 1950 to 1960, 30% to the years 1960 to 1972 and 60% to the years 1972 to 1985, or the earliest date of a full asbestos exclusion.
We continue to have unique exceptions for the Celotex/Dana reserves and for certain of the California cases, including Armstrong, Flintkote and Kaiser Cement/Kaiser Gypsum. The basis of these reserves will be fully discussed in the assured-specific reports.
As in the past, the difficulty with utilising the date of discovery as the basis for a trigger allocation is the almost complete lack of information on discovery dates. This information is developed in the underlying litigation very late in the discovery process, and, as we do not have access to the underlying files due to declaratory litigation, we do not have accurate information.
For 1991 purposes, we had, using judgmental factors, developed a bell curve of percentages, separately for schools and for commercial buildings which we believed would replicate discovery dates for these buildings. As no new schools cases were filed in 1992, we used the same percentages for 1992 reserving for schools, although we did adjust the commercial percentages due to continued filings.
For 1993 purposes, we again note that there have been no schools cases filed in the past 12 months, and we continue to use the same percentages as in 1991 and 1992 which are as follows:
As commercial cases continue to be filed, we have again suggested minor adjustments, which would move the percentages forward in time to reflect what we believe would be current discovery dates. The percentages being utilised for 1993 reserving purposes are as follows:
GApplication of " Spillover".
We continue to report that "spillover", the amount by which reserves assigned to a given policy year cannot be applied to said year due to exhaustion of aggregate limits for bodily injury or other products, will not be a factor in 1992 reserving. The major target defendants, W.R. Grace, U.S. Gypsum and National Gypsum are reserved on a discovery date basis, which is a single date of loss, so that spillover, to the extent it exists, is allocated back to the assured. The only assured for which we had applied spillover in the past was GAF in view of its status as a major target defendant. However, as GAF's policies are all now fully reserved for bodily injury, we are not applying spillover for this account.
The above represents an overview of significant developments in both the underlying cases, coverage litigation, and in our reserving methodology. Any unique aspects applicable to individual assureds will be discussed separately in the reports prepared on each account by servicing counsel.
We will continue to keep the Market closely advised of developments, and we will provide our individual reports on each assured over the course of the next few weeks.
Chronological Summary of Significant Decisions
1. I n the first verdict of its kind involving a large number of municipal buildings, a state court jury on June 5, 1992, in Mayor and City Council of Baltimore v. Keene Corp. et al., Baltimore City Cir. Ct., awarded the City of Baltimore$17-8 million in compensatory damages and $6 million in punitive damages in its lawsuit to recover the costs of removing asbestos-containing products in 25 municipal buildings. The actual damages amounted to $8-8 million against U.S. Gypsum, $8-3 million against Asbestospray Corp., and $718,000 against Hampshire Industries. Punitive damages were $4 million against U.S. Gypsum and $2 million against Asbestospray. The defendants had disputed product identification in the buildings at issue, which were primarily schools. Defendants had also argued that asbestos removal was unnecessary, because low-level exposure to their products was not hazardous.
This trial was Phase I of Baltimore's case and dealt with surface treatments in municipal buildings. Phase II (pipes and boilers) and Phase III (floor tile products) will follow.
2. In Bunker Hill Towers Condominium Association v. Prudential Insurance Co. of America. et al, Calif. Super. Ct., Los Angeles Co., a jury on June 9, 1992, awarded a condominium association $6 million in an asbestos property damage case against W.R. Grace & Co. This was the first asbestos-in-building verdict in the country in favour of the owners of condominiums. Grace had presented a no hazard defence. In October, 1991, the plaintiff had settled out of court with Prudential, the building's prior owner, for $1-5 million.
3. Chief Justice A.M. Keith of the Minnesota Supreme Court ruled on June 26, 1992, in 80 South Eighth Street Limited Partnership. et al. v. W.R. Grace & Co.---Conn., Minn. Sup. Ct., that the economic loss doctrine did not bar building owners from suing manufacturers of asbestos-containing materials for abatement costs under theories of strict liability and negligence. The U.S. District Court of Minnesota had previously certified the question to the Minnesota Supreme Court.
Judge Keith wrote that the plaintiff ".. is not seeking enforcement of the benefit of their bargain regarding the fire-proofing performance of the Monokote. In seeking the costs of maintenance, removal and replacement, 80 South Eighth seeks the costs of eliminating the risks of injury and of making the building safe for all those who use and occupy this property."
4. The Third Circuit Court of Appeals on June 30, 1992, affirmed a lower court's ruling which barred the Akron City School District from intervening in the national school class action (In Re: School Asbestos Litigation, School District of Lancaster, et al v. Lake Asbestos of Quebec. Ltd., et al, Akron City School Board Appellant, 3rd Cir.). Judge Edward R. Becker noted the importance of "..the retarding effect that this and similar petitions might have on the progress of this massive litigation to trial.."
5. In Prudential Insurance Co. v. T&N PLC. et al, D. Mass, the jury on July 1, 1992, returned a defence verdict for AC&S and T&N PLC, finding that Prudential Insurance Co. knew of asbestos damage in its buildings too many years before filing its $85 million suit. The jury based its decision solely on the statute of limitations. This was one of the two largest asbestos building claims faced by Turner & Newell, among 130 claims filed against Turner & Newell to date.
6. A jury on July 1, 1992, in H&H Cerritos v. U.S. Mineral Products, Calif. Super. Ct., Los Angeles, awarded the owners of a California shopping mall $14.15 million in compensatory damages for abatement costs.
7. In MDU Resources Corp. Inc. d/b/a Montana-Dakota Utilities Co. v. W.R. Grace & Co. and W.R. Grace & Co.--Conn., D.N.D., S.W. Div., a jury found on July 8, 1992, that a six-year statute of
limitations barred the Montana-Dakota Utilities Co. from obtaining $5-3 million in asbestos property damage from W.R. Grace & Co.
8. Rejecting U.S. Gypsum Co.'s arguments on the doctrine of nullum tempus, the Supreme Court of North Carolina on July 17, 1992, upheld a $1.8 million verdict for the Rowan County Board of Education (Rowan County Board of Education v. U.S. Gypsum Co., N.C. Sup. Ct.). Justice Willis P. Whichard held that nullum tempus "applies to exempt the State and its political subdivisions from the running of time limitations unless the pertinent statute expressly includes the State."
9. In Forsyth Memorial Hospital Inc., et al. v. Armstrong World Industries Inc., N.C. App. Ct., on July 21, 1992, Judge Sidney S. Eagles, Jr., found that the hospital's asbestos floor-tile claims were time-barred, and affirmed the earlier dismissal of Armstrong.
10. On August 12, 1992, a Pennsylvania Common Pleas Court judge ruled that the doctrine of nullum tempus did not protect the City of Erie from the statute of limitations. In City of Erie v. Celotex Corp - et al., Pa. Comm. Pls. Ct, Erie Co., Judge Michael T. Joyce granted defence motions for summary judgment and dismissal for improper joinder in the action. Judge Joyce wrote: "The City of Erie's causes of action do not arise from any uniquely governmental activity but instead are claims of the type which could be brought by private and public parties alike... Moreover, this suit is not brought to enforce strictly public rights.. The Defendants' involvement with the Plaintiff.. .was pursuant to an agreement voluntarily entered into by Defendants and not the result of an obligation imposed by law."
11. On August 27, 1992, U.S. District Judge James McGirr Kelly gave final approval to a $225,000 settlement with C. Tennant & Co. of New York and a $1-2 million settlement with Flintkote in the national school class action (In Re: Asbestos School Litigation, ED. Pa.).
12. In Columbus Board of Education v. Armstrong' World Industries Inc. et al., Ohio Comm. P15. Ct., Franklin Co., Judge William T. Gillie on August 31, 1992, ruled that the Columbus Board of Education's claims were time-barred and granted summary judgment for Basic, Inc., and Pfizer, Inc.
13. Holding that North Dakota's six-year statute of limitations was not tolled by a school district's participation in the national schools class action, Judge Bruce M. Van Sickle on September 2, 1992, dismissed as time-barred a lawsuit by Adams Public School District (Adams Public School District v. ASARCO. et al., D.N.D., N.E. Div.).
14. On September 30, 1972, the Ninth Circuit Court of Appeals ruled that a tenant who pays for the cleanup of asbestos contamination in a leased building does not have a cause of action under CERCLA to recover the costs from the owner (People of the State of California. et al. v. Arthur Blech. et al., 9th Cir.) The Court ruled that the cleanup of released asbestos was not actionable under CERCLA because none of the contamination spread outside the building.
15. A federal jury concluded on October 7, 1992 that a property damage complaint brought by two San Francisco building owners against W.R. Grace & Co. and U.S. Gypsum Co. was timely filed (California Sansome Co. and Polk Market Co. v. U.S. Gypsum Co et al., N.D. Calif.) Plaintiffs had filed suit in April, 1989; the suit was bifurcated; and a statute of limitations trial in February, 1991, resulted in a plaintiff verdict. District Judge Eugene F. Lynch had vacated the judgment for plaintiffs and ordered a new trial, which began in September, 1992. On October 7, 1992, the second jury returned a plaintiff verdict on all issues.
On April 19, 1993, Judge Lynch granted U.S. Gypsum Co. and W.R. Grace & Co. judgment notwithstanding the verdict, holding that claims brought by the two building owners were time-barred and that no reasonable jury could have concluded otherwise.
16. On October 8, 1992, Judge Edward R. Becker, of the Third Circuit Court of Appeals, ordered District Judge James McGirr Kelly to recuse himself from the national school class action litigation (Pfizer Inc v The Honourable James McGirr Kelly and Barnwell School District No. 45. et al., 3rd Cir.) The Court held that Judge Kelly's attendance at a plaintiff-funded asbestos conference "created an appearance of partiality." District Judge James T. Giles was appointed to replace. Kelly. The Circuit Court concluded that none of Judge Kelly's previous orders should be vacated. The Court authorised, but did not require, Judge Giles to reconsider earlier rulings at his discretion.
17. Judge James T. Giles urged counsel present at an October 22, 1992, hearing to "find a way" to settle the nearly 10-year old national school class action (In Re: Asbestos School Litigation, E.D. Pa.). Judge Giles said that all rulings issued by Judge Kelly were subject to reconsideration and that the issue of whether the case is manageable as a class action would also be revisited.
On May 5, 1993, a submission was filed, before the District court, which specified the status of the class action defendants. At that time, 25 defendants had settled with plaintiffs, and only twelve of the more than 50 original defendants remained for trial.
Judge Giles was expected to rule on all outstanding motions and on the class manageability issue by the end of July, 1933.
18. In Fibreboard, Corp. v. Puritan Insurance Co., Calif. 1st App. Dist., a California appeals board panel on October 26, 1992, affirmed a trial court ruling that Puritan Insurance Co. did not have to contribute $10 million in excess coverage toward Fibreboard Corp.'s asbestos-related liabilities because it was not told that more than 900 lawsuits were pending against Fibreboard when the insurance policy was purchased.
19. In a November 17, 1992, decision, the Michigan Court of Appeals struck the Detroit Board of Education's remaining claims and affirmed summary judgment for defendants in Detroit Board of Education. et al. v. Celotex Corp - et al., Mich. App. Ct. In its decision, the Court affirmed summary judgment for defendants on the statute of limitations and reversed the trial court on the Board's remaining tort theory, holding that a products liability action may not be characterised as a nuisance action. The Court rejected the Board's equitable restitution and civil conspiracy claims. The Court held that the Board's arguments regarding alternative liability and market share liability and defendant's argument with regard to concert of action were moot. The Court remanded the case for further proceedings with regard to the other school districts involved.
20. On December 15, 1992, Judge Patrick J. Duggan granted defendant U.S. Gypsum summary judgement on the basis of the statute of limitations in Roseville Plaza Limited Partnership v. U.S. Gypsum Co.. et al., E.D. Mich., S. Div. In this case, U.S. Gypsum had renewed its motion for dismissal based on the economic loss doctrine; however, Judge Duggan concluded that the plaintiff's "proper remedy lies in tort, not contract or the UCC."
21. In New Hampshire-Vermont Health Service Corp. d/b/a Blue Cross and Blue Shield of New Hampshire v. U.S. Mineral Products ~, D.N.H., a jury on October 30, 1992 awarded the plaintiff $3.9 million in a retrial on damages. On January 12, 1993, Judge Martin F. Loughlin ordered Blue Cross and Blue Shield to remit $886,872 of the $3.9 million verdict or accept another trial on damages. In his January 12 order, the Judge noted that there was evidence that the cost of repair/restoration would be $1.9 million in direct removal costs plus $1.4 million for restoring the building to its present condition. Blue Cross subsequently agreed to remit $886,872.
22. In Independent School District No. 622 v. Keene Corp. - et al., Minn. App. Ct., on January 25, 1993, the Minnesota Court of Appeals upheld a $820,750 compensatory damages verdict against Keene but cut the $2.5 million punitive damages award in half. The Court held that the school district's tort claims were not barred by the economic loss doctrine and that the trial court had properly granted summary judgment on the issue of product identification.
23. A state court jury on January 29, 1993, in General Conference Corporation of Seventh-day Adventists v. W.R. Grace & Co.--Conn., Md. Cir. Ct., Montgomery Co., returned a $4.5 million verdict against Grace in an action involving costs of asbestos removal in the former headquarters building of the plaintiff church group. Grace unsuccessfully raised a no hazard defence and disputed product identification. On May 19, 1993, the Court denied Grace's motion for judgment notwithstanding the verdict or for a new trial.
24. Based on the statute of limitations, Judge James E. Mies on February 10, 1993, in County of Wayne v. A.P. Green. et al., Mich. Cir. Ct., Wayne Co., granted defendants summary judgment, finding that Wayne County officials knew of the dangers associated with friable asbestos-containing materials in their buildings more than three years before suit was filed.
25. Judge John M. Meagher in early 1993 ruled that the statute of limitations barred plaintiff's recovery in NCR Corp. v. U.S. Mineral Products Co., Ohio Comm. Pls. Ct., Montgomery Co. In this case, U.S. Mineral had argued that NCR's claims accrued more than four years prior to the filing of the action and were therefore barred by the four-year limitations statute.
26. In East Prairie R-2 School District v. U.S. Gypsum Co. et al. E.D. MO, Judge Stephen N. Limbaugh on February 16, 1993, held that W.R. Grace & Co. was not liable for actions of its predecessor, Zonolite Co., because the School District's cause of action did not accrue at the time of Grace's assumption of Zonolite's liabilities. Grace purchased Zonolite's assets in 1963, at which time East Prairie was unaware of its asbestos property damage. Judge Limbaugh held that for a cause of action in tort for asbestos contamination to accrue, release of toxic asbestos fibers into the environment was necessary together with the ability to ascertain a substantial risk of harm from the release of the fibers
On March 4, 1993, Judge Limbaugh dismissed East Prairie's asbestos-in-buildings claims against U.S. Gypsum Co., because of lack of product identification.
27. Finding all claims under state ~ barred by both the statute of repose and the statute of limitations, Judge Richard H. Kyle on February 26, 1993, granted W.R. Grace's motion of partial summary judgment in Appletree Square 1 Limited Partnership. et al v. W.R. Grace & Co. et al., D.Minn. 3rd Div. Minnesota's asbestos revival statute applies to actions that began before July 1, 1990. Judge Kyle noted that plaintiffs filed their complaint on June 29, 1990, but did not serve Grace until July 3, 1990. Under Minnesota state law, an action is commenced when the summons is served on the defendant, but under federal law an action is commenced when the complaint is filed. Therefore, the only remaining claim in the action is a federal RICO claim.
28. After a six-month trial, on March 17, 1993, a state jury returned zero damages against W.R. Grace & Co.., Asbestospray, Inc., Keene Corp. and Pfizer, Inc. (In Re: State of West Virginia Public Building Asbestos Litigation, Cir. Ct. of Monongalia County, WV, Div. No. 1). The State of West Virginia had sought $25 million in compensatory damages plus punitive damages related to the costs of removing asbestos in 36 state buildings. Judge Larry Starcher had ruled that the doctrine of nullum tempus protected the state from the statutes of limitation and repose. The manufacturer defendants had argued their products posed no hazard and had also raised product identification defences. Judge Starcher in his jury charge had determined that the asbestos building products in the case were defective as a matter of law. On March 26, 1993, the State of West Virginia filed a motion for judgment notwithstanding the verdict or for a new trial.
29. On March 31, 1993, U.S. District Judge Vincent L. Broderick approved and adopted Magistrate Kathleen A. Roberts' December 9, 1992, report and recommendation, granting summary judgment for the 17 defendants involved in two consolidated New York City asbestos-in-buildings cases (210 East 86th Street Corp. v. Combustion Engineering Inc - et al., S.D.N.Y., and Park Comcar Associates at al. v. Combustion Engineering Inc., et al., S.D.N.Y.). Holding that plaintiffs may not rely on alternative theories of liability in the absence of proof concerning product identification, Magistrate Judge Roberts had recommended that defendants' motions for summary judgment be granted. In an analysis of bulk samples of each of the products at issue, a firm retained by the plaintiffs had found that none of the defendants' product formulas could be matched with any of the plaintiffs' samples. The plaintiffs had argued that even if defendants' products were not in their buildings, they were entitled to recover against those defendants, "who were active and substantial participants in the asbestos industry," based upon alternative theories of liability, such as concert of action, joint enterprise and market share.
30. In State Farm Mutual Automobile Insurance Co. v. W.R. Grace & Co., C.D. IL, Springfield Div., a federal court jury on May 11, 1993, returned a negligence verdict against W.R. Grace & Co. for the sale of Monokote for use in buildings owned by State Farm Mutual Automobile Insurance Co. The jury assessed 30% comparative fault against State Farm, making Grace responsible for 70% of the damages which State Farm proves in Phase II of the trial, scheduled to begin on June 1.
31. On May 13, 1993, in Sheldon H. Solow. et al. v. W.R. Grace & Co., NY Sup. Ct., App. Div., 1st Dept., the New York Supreme Court Appellate Division reversed a lower court order and granted a motion to disqualify a law firm from representing owners of a commercial building, in light of the law firm's representation of W.R. Grace & Co. in a previous action. Stroock, Stroock & Lavan had previously represented Grace in City of Enterprise v. Grace in Alabama State Court. The lower court had concluded that disqualification of Stroock, Stroock & Lavan was unnecessary because no attorney remaining at the firm was privy to Grace's confidences. However, the Appellate Division reversed, holding that "the distinct possibility that confidences may be shared cannot be discounted. N
32. A state court jury concluded on May 14, 1993, in Trizec Properties Inc. et al. v. U.S. Gypsum Co. et al. Calif. Super. Ct., Los Angeles Co., that claims for removal costs relating to three buildings were barred by the three-year statute of limitations, leaving another three buildings--and the majority of plaintiffs' claims for damages--for a second phase trial, scheduled to begin June 7, 1993. Only W.R. Grace remained as a defendant in the second phase trial, as the jury found all claims against U.S. Gypsum and U.S. Mineral Products to be time-barred.
33. On May 25, 1993, the Missouri Supreme Court in Kansas City v. Keene Corp., Mo. Sup. Ct., affirmed a trial court's judgment in favour of Kansas City on an $8 million compensatory damages verdict but denied punitive damages of $6.25. million against Keene. The Court found the city's claims of asbestos damage at the Kansas City International Airport terminal building were not barred by the five-year statute of limitations. The Court held that the City's cause of action accrued when damage resulting from the release of asbestos fibers "is sustained and is capable of ascertainment."
Review of Property Damage Litigation by Subject
1. Mayor and City Council of Baltimore v. Keene Corp. et al. Baltimore City Cir. Ct. See p. 5, No. 1.
2. Independent School District No. 622 v. Keene Corp. et al. Minn. App. Ct. See p. 9, No. 22.
3. General Conference Corporation of Seventh-day Adventists v. W.R. Grace & Co.--Conn., Md. Cir. Ct., Montgomery Co. See p. 9, No. 23.
4. East Prairie R-2 School District v. U.S. Gypsum Co. et al E.D. MO. See p. 9, No. 26.
5. In Re: State of West Virginia Public Building Asbestos Litigation, Cir. Ct. of Monongalia County, WV, Div. No. 1. See p. 10, No. 28.
6. 210 East 86th Street Corp. v. Combustion Engineering Inc., et al., and Park Comcar Associates at al. v. Combustion Engineering Inc. et al., S.D.N.Y. See p. 10, No. 29.
1. 80 South Eighth Street Limited Partnership, et al v. W.R. Grace & Co. --Conn., Minn. Sup. Ct. See page 5, No. 3.
2. Roseville Plaza Limited Partnership v. U.S. Gypsum Co., et al., E.D. Mich., S. Div. See p. 8, No. 20.
3. Independent School District No. 622 v. Keene Corp., et al., Minn. App. Ct. See p. 9, No. 22.
III.No Risk/No Hazard
1. Mayor and City Council of Baltimore v. Keene Corp., et al., Baltimore City Cir. Ct. See p. 5, No. 1.
2 Bunker Hill Towers Condominium Association v. Prudential Insurance Co. of America. et al, Calif. Super. Ct., Los Angeles Co. See p. 5, No. 2.
3. General Conference Corporation of Seventh-day Adventists v. W.R. Grace & Co.—Conn., Md. Cir. Ct., Montgomery Co. See p. 9, No. 23.
4. In Re: State of West Virginia Public Building Asbestos Litigation, Cir. Ct. of Monongalia County, WV, Div. No. 1. See p. 10, No 28.
IV.Statutes of Limitations/Repose
1. Prudential Insurance Co. v. T&N PLC. et al, D. Mass. See p. 6, No. 5.
2. MDU Resources Corp. Inc. d/b/a Montana-Dakota Utilities Co. v. W.R Grace & Co. and W.R. Grace & Co.--Conn. D.N.D., S.W. Div. See p. 6, No. 7.
3. Rowan County Board of Education v. U.S. Gypsum Co., N.C. Sup. Ct. See p. 6, No. 8.
4. Forsyth Memorial Hospital Inc. et al v. Armstrong World Industries Inc., N.C. App. Ct. See p. 6, No. 9.
5. City of Erie v. Celotex Corp. et al., Pa. Comm. Pls. Ct, Erie Co. See p. 6, No. 10.
6. Columbus Board of Education v. Armstrong World Industries Inc. et al, Ohio Comm. Pls. Ct., Franklin Co. See p. 7, No. 12.
7. Adams Public School District v. ASARCO. et al., D.N.D., N.E. Div. See p. 7, No. 13.
8. California Sansome Co. and Polk Market Co. v. U.S. Gypsum Co., et al., N.D. Calif. See p. 7, No. 15.
9. Detroit Board of Education v. Celotex Corp., et al., Mich. App. Ct. See p. 8, No. 19.
10. Roseville Plaza Limited Partnership v. U.S. Gypsum Co - et al., E.D. Mich., S. Div. See p. 8, No. 20.
11. County of Wayne v. A.P. Green et al., Mich. Cir. Ct., Wayne Co. See p. 9, No. 24.
12. NCR Corp. v. U.S. Mineral Products Co., Ohio Comm. Pls Ct., Montgomery Co. See p. 9, No. 25.
13. Appletree Square 1 Limited Partnership. et al. v. W.R. Grace & Co., et al., D.Minn. 3rd Div. See p. 10, No. 27.
14. In Re: State of West Virginia Public Building Asbestos Litigation, Cir. Ct. of Monongalia County, WV, Div. No. 1). See p. 10, No. 28.
15. California Sansome Co. et al v. U.S. Gypsum Co., et al. N.D. Calif. See p. 11, No. 30.
16. Trizec Properties Inc., et al. v. U.S. Gypsum Co., et al., Calif. Super. Ct., Los Angeles Co. See p. 11, No. 32.
17. Kansas City v. Keene Corp., Mo. Ct. See p. 11, No. 33.
V.National School Class Action
1. In Re: School Asbestos Litigation School District of Lancaster. et al. v. Lake Asbestos of Quebec. Ltd., et pl., Akron City School Board Appellant, 3rd Cir. See p. 5, No. 4.
26 Aug 93
London Market Claims Services Limited: Letter to Underwriters at Interest
I am pleased to be able to enclose copies of the 1993 year-end general reports for BI and PD approved by the Asbestos Working party and produced by the combined efforts of the representative lawyers on asbestos related matters, Mendes & Mount, and, Lord, Bissell & Brook and Hancock, Rothert & Bunshoft.
As in prior years, whilst the reports are necessarily lengthy, I urge all syndicates and Companies to give these reports the widest circulation at management, Underwriting and claims levels within your organisation.
Also included for interested subscribers is a report from Ropes & Gray updating the market on the ADR and DJ proceeding:; in respect of theCCR proposed futures settlement.
It is anticipated that a separate general report on non-products claims issues will be issued in the next two weeks which will provide further information on this increasingly significant subject.
While the reports clearly speak for themselves, I would highlight the warnings of the increasing trend in non-major insureds being targeted in litigation. You will alsonote that the number of new claims being made continue at an unattractively high rate and also that it has been necessary to make some amendments to the per capita reserve recommendations on bodily injury claims.
In order to maintain at or below historical average settlements on multi-claimant negotiations with plaintiffs' lawyers around the country, the CCR have been unable to, in addition, gain much consideration or relief on extended payouts. Their settlement of a substantial number of the pending cases has resulted in major cash flow changes for the London market. As a result, the previously distributed 10 year CCR account cash flow projections necessarily need to be amended. It is our intention to provide these figures as a complete package across all the CCR accounts by individual insurer, as we did earlier in the year, towards the end of October. In addition, we are attempting to supply in the much shorter term by account, by insurer, accurate 18 month projection numbers for the CCR accounts, as we believe that it is within this time period that the most significant cash flow changes and burden will occur
Turning to administration matters, we expect the volume of individual account year end reports to increase yet again with some150 direct and at least 850 reinsurance reports to be channelled to the market.
The Committees, Leaders andLMCS have already done a significant amount of work, both with regard to procedures and the review of the reports themselves and we hope that we will be able to circulate the reports to the market earlier than in previous years. As you know a significant improvement was achieved last year and everything humanly possible will be done to see that particularly those reports with significant reserve changes are received by the market as early as possible.
You will be aware from prior LMCS circulars, that many accounts for both asbestos related and environmental matters,have been targeted for electronic diskette download of policy and financial information this year-end, which will run in tandem with the traditional "brown envelopes" manual reporting. A report providing further detail on procedures and timing for this effort will be provided to the market in the very near term.
0 Sep 93
Financial Times: Former LUI directors may face disqualification moves
THEDEPARTMENT of Trade and Industry is considering disqualification actions against former directors of London United Investments, the insolvent insurance group, following a highly critical inspectors' report.
Thereport, published yesterday, says that between 1970 and 1989 about £40m in commissions was "wrongfully diverted" through H.S. Weavers, an underwriting subsidiary of LUI, and C.R. Driver, an underwriter which did business with the group, to companies in Germany and Liechtenstein.
These companies werecontrolled by Mr. Graham Smith, an accountant since debarred from the profession, who refused to co-operate with the inspectors.
The report criticises Mr.Charles Driver, Mr. Henry Weavers, who has died, and Mr. Peter Wilson. All three were directors of LUI. It also criticises Mr. Stanley Mayhew, a director of CR. Driver. All denied the accusations.
TheDTI said it was beginning disqualification proceedings, but would not specify against which directors. Its insurance division said it was also considering action to debar any directors from taking positions with insurance companies.
The inspectors' report makes some criticisms of the procedures used byKPMG Peat Marwick auditors to LUI and Weavers, and Billsons Cullen, now part of Kingston Smith, which was auditor to Weavers until 1987.
The conclusions appear to lend support to civil and criminal action triggered by thecollapse of LUI in 1990 and of associated companies.
TheSerious Fraud Office and City of London police launched an inquiry into suspected offences of fraud at LUI and its subsidiaries after a referral from the DTI in April 1992.
TheSFO said yesterday that its investigations were continuing. Requests for assistance from the authorities in Switzerland and Liechtenstein are currently on appeal in the two countries' supreme courts.
The316-page document was written by Mr. Angus Gilroy and Mr. William Gage, who were commissioned by the DTI in October 1990 to examine the collapse of LUI. Their inquiry was extended to include C.R. Driver in January 1992. The investigation cost £2.3m.
The inspectors wereunable to trace the final destination of the money, but said they believed Mr. Driver, Mr. Weavers and Mr. Wilson had "derived some financial benefit" from the transactions.
The DTI has also sent copies of the report to theInstitute of Chattered Accountants in England and Wales, and to the Lloyd's insurance market.
0 Sep 93
Financial Times: LUI brokers diverted millions to Liechtenstein accounts. ‘Mr. Fixit' refused to co-operate with DTI inspectors - Founder and director acted with ‘gross misconduct'
MILLIONS of poundsin insurance premiums were wrongfully diverted to Liechtenstein accounts by brokers at the former London United Investments, according to a report by government inspectors published yesterday.
The report into the activities ofLUI and C.R. Driver and Co., a connected but privately owned underwriter, was by inspectors from the Department of Trade and Industry. They concluded that at least three underwriters at the company were intended to benefit from the transfers, which had no insurance function whatsoever. Both companies are now in liquidation.
The underwriters concerned are Mr.Charles Driver, founder and controlling shareholder of C.R. Driver and chairman of LUI from 1982, Mr. Henry Weavers, the chief underwriter at H.S. Weavers, an underwriting firm that became a subsidiary of LUI, and Mr. Peter Wilson, a director of Driver and of LUI.
Between1970 and 1989 about £40m, allowing for exchange rate fluctuations, was diverted from Driver and Weavers to Liechtenstein and German companies. Many of these were controlled by Mr. Graham Smith, the Liechtenstein-based underwriter at the heart of the DTI investigation.
The report says that Mr.Driver, Mr. Stanley Mayhew, a director of Driver, Mr. Weavers and Mr. Wilson all dealt directly with Mr. Smith.
Mr.Smith used a series of Liechtenstein and German companies to transfer Mr. Weavers' reinsurance premiums through the bank account of a Liechtenstein anstaldt, or type of trust, in Vaduz called PAA. Reinsurance is the way that underwriters reduce exposure to potential losses by spreading the risk throughout the markets.
Mr.Smith, described in the report as a "Mr. Fixit", still lives in Liechtenstein. He refused to co-operate with the DTI inspectors.
None of the Smith companies, said the report,carried out the essential functions normally associated with the role of an insurance broker. "It is our view that the Smith companies were not genuine insurance or reinsurance brokers," the inspectors said.
They added: "We can seeno necessity or commercial reason for the use by Driver and the LUI group of the Smith companies. We believe that all such functions as the Smith companies performed could easily have been performed either by Driver or the LUI Group."
One of the first Liechtenstein companies used to remove money transfers - variously described ascommissions, brokerage, shared commissions and administration fees - was Sarita. According to one witness, Sarita - set up by Mr. Smith and Mr. Driver - was used in a project to sell US cancer insurance policies in the UK and Argentina. This money has not been traced.
The inspectors discovered aprivate account held by Mr. Driver in Bermuda, which was also used by Mr. Mayhew.
The inspectors said that Mr. Mayhew and Mr. Driver acted with "gross misconduct" in their use of the account.
Mr.Smith must have known, concluded the inspectors, that he was performing "no genuine commercial function for Driver and the LUI group". Both he and his wife, Isolde, they decided, were "knowingly parties to the wrongful diversion of funds" from Driver, LUI and the Weavers stamp companies.
"The overwhelming probability is that theyderived some financial benefit from those funds but we are unable to determine the extent," said the inspectors.
Mr.Driver, a former underwriter at Alexander Howden had 75 per cent of Driver's shares. He formed Weavers with Mr. Weavers, an underwriter, in 1963 and became a director of LUI when it took over Weavers in 1971. In 1982 he became LUI's chairman.
The inspectors said he wassuffering poor health and had difficulties in recollection. "Nevertheless," they said, "we are driven to the conclusion that on a number of essential issues he has not told us the truth."
The inspectors said that Mr.Driver, a keen polo player, was clearly "the boss" of the LUI Group and inspired awe and trepidation in employees. "In our view it is inconceivable that the events chronicled in this report could in general terms have occurred behind his back and without his knowledge or approval," the inspectors said.
Mr.Weavers, who went to live in Bermuda, was too ill to be interviewed at length by the inspectors and died this year.
Mr.Peter Wilson, who eventually became managing director of Weavers, helped conceal commission payments paid to Smith companies and Sarita, the report said.
Theboard of LUI as a whole, excluding Mr. Driver and Mr. Wilson, are exonerated from criticism by the report, which said the problem arose when the business was facing a difficult future.
Inspectors' report on London United Investments and C R Driver & Co (in liquidation). HMSO. £36.
Complex case sparks conflicts of interest
THE INVESTIGATION by DTI inspectors is just one of many inquiries spurred by one of the mostcomplex corporate collapses to affect the world of insolvency, Andrew Jack writes.
Accountants, lawyers and police have been working for up to three years on transactions linking London United Investments, its insurance subsidiaries and other connected businesses.
Potentialliabilities from the five LUI insurance subsidiaries alone could ultimately exceed $9bn (£5-8bn), and are already estimated at about $5bn.
LUIentered administration in 1990 owing creditors £40m. H.S. Weavers, an underwriting subsidiary of LUI, has since been wound up and C.R. Driver, another underwriter founded by a director of LUI, is in liquidation.
Five LUI subsidiaries, Kingscroft, Walbrook, El Paso, Lime Street and Mutual Reinsurance, known collectively as Kwelm, are now in provisional liquidation under the control of accountants at Coopers & Lybrand. A proposed scheme of arrangement with creditors was announced earlier this month .
Pay-outs to creditors will largely depend on the final size of claims against insurance policies issued by the companies before they collapsed.Claims are likely to be received for many years to come.
Some money may be generated by litigation.Proceedings have begun against the Graham Smith network of companies in Germany and Liechtenstein alleged to have received money from Driver and Weavers, as well as against the auditors and directors of LUI, and the auditors of Weavers.
Relafreezing orders for up to SFr111m (£50-6m) have been brought in connection with the money removed and these are currently on appeal in the Liechtenstein courts.
Thereare enormous potential conflicts of interest in the LIJI insolvency, because all the larger accountancy firms to which the insolvency practitioners belong are also creditors as a result of claims on professional indemnity policies they bought in the past from companies in the group.
In its conclusions, the DTI report called for theinclusion in reinsurance treaties of clauses dealing with commissions and detailing brokerage fees.
The report is not the first to consider the affairs of the group. Mr.John Dingell, a US congressman, published a report in 1990 which covered aspects of the LUI affair as part of an investigation into the collapse of several failed insurance companies in the US.
0 Sep 93
Daily Telegraph: Lords to rule on pollution liability
THELaw Lords are to adjudicate in a case that could redefine the liabilities of polluters and expose insurers to a welter of claims on old policies.
Eastern Counties Leatherbacked by its insurer General Accident, is appealing against a Court of Appeal decision last November to award Cambridge Water over £1m damages for pollution caused by the tannery to a public waterway.
The court made legal history by holding thatEastern Counties was not negligent, as the pollution was unforeseen, but it was liable in "nuisance" an older legal concept where it is not necessary to show fault.
As a result,companies may have to pay damages for inadvertent pollution years ago by practices that were within the laws of the time. Insurers are alarmed at the prospect as the ruling could prompt a wave of new claims on public liability policies written before 1970, when pollution exclusions were introduced .
Paul Taylor, a senior partner at Eastern Counties' solicitors Berrymans, said the ruling based on the 1885 case Ballard v Tomlinson was "Jurassic law: they've got this old creature up and walking."
TheLaw Lords will hear the case for six days and their judgment is expected before the year end.
The Reinsurance to Close (Restriction) Byelaw (No. 15 of 1993).
This Byelaw prohibits the 1994 or later years of account from accepting by way of a premium for the reinsurance to close the 1993 or earlier years of account which includeliabilities for a year of account earlier than 1986 either directly or through a chain of intermediate reinsurances to close.
Cambridge Water -v- Eastern Counties Leather.Case referred to the House of Lords on appeal
8 Sep 93
Agency Agreements (Amendment No. ?) Byelaw(No. 18 of 1993, 8 September 1993).
13 Sep 93
Lloyd's: The Chairman of Lloyd's, David Rowland, forwards the document entitled "A Guide to Corporate Membership" to Members.
0 Oct 93
The Review: Interpreting the small print
0 Oct 93
The Review: Legal Update - US and UK court differ over asbestos payments
11 Oct 93
Lloyd's forwards to Members the "Green Paper" entitled Names' Voting Rights and Related Matters: a Consultative Document.
2 Nov 93
Independent: Lloyd's members have case to sue - Legal documents show ruined underwriters have medium-to-strong basis to act against agency companies
FNANCIALLY ruined underwriting members of the Lloyd's of London insurance market have a medium-to-strong case to suecompanies that looked after their affairs and gain up to £2bn in compensation, according to internal legal documents circulating within the troubled insurance community. Up to 17,000 members are mounting legal action against hundreds of companies within the market that looked after their affairs. Their action concerns £5.-5bn worth of losses that have hit them in the past three years.
The documents, seen by the Independent, reveal thatlawyers for the companies have drawn up their own assessment of the strength of the members' legal case.
According to the documents,19 disputes between the members and the companies are based on medium-to-strong cases, while a further 18 are considered "weak".
Evenamong the "weak" cases, lawyers have said that members on eight affected insurance syndicates have a strong or medium case. Their case is weakened only by the amount of time that has passed since the members launched their action.
Thelegal documents have been circulated to insurers that have provided agency companies with financial protection against suits for damages brought by underwriting members over the conduct of their affairs.
According tolegal assessments within Lloyd's, some of the most notorious cases will provide the underwriting members with the biggest chance of success. In the strongest category of cases, which favour the members, are insurance syndicates 540/2 and 847, once managed by the Feltrim underwriting agency. Members who formed part of these syndicates are seeking a total of £43lm.
The members of the Feltrim syndicates have alleged thatprofessionals within the market failed to appreciate the implications of swapping risks within Lloyd's and failed to lay off enough of their liabilities with other insurers.
Similar allegationshave been launched by members of syndicates once managed by the Gooda Walker agency. The legal assessment suggests that members on Gooda Walker syndicate 298, who are seeking £232m, have a strong case. Meanwhile, those on syndicates 290 and 164, where the members are seeking £268m, have a medium-to-strong chance of success.
On the chances of the members gaining a successful court solution ontwo insurance syndicates under the management of the former deputy chairman of Lloyd's, Stephen Merrett, the case is viewed as "weak".
Members are seeking£480m in the courts from Mr. Merrett's company for alleged negligence. Legal opinion admits that the intrinsic merits of the members' complaints are strong or medium and would be defeated only by a "time bar" between the dates when the losses occurred and when the members took action.
Thelegal assessments have been made on the basis of categories set out by Sir Michael Kerr, who is chairing a legal advisory panel on behalf of Lloyd's that is evaluating claims made by members. Sir Michael and Lloyd's are trying to resolve all the disputes out of court.
Sir Michaelis believed to have made recommendations to Lloyd's about the settlements that should be made. Any recommendation will not be binding on individuals participating in the Lloyd's initiative and full details are likely to be announced at the end of this month.
Afinancial panel chaired by Sir Jeremy Morse, the former chairman of Lloyds Bank, will decide on the level of any payment that should be made to the distressed underwriting members.
Professionals at Lloyd's donot expect offers to help the members to amount to much more than 30p in the pound, unless further money is raised from companies operating at Lloyd's or from new corporate investors that are to be admitted nest year.
Theruling ends efforts by the 100 or so Americans to use US law to escape their liability for Lloyd's huge losses during the 1980s. Earlier this year, a federal judge in New York dismissed the suit without ruling on its merits, saying the group had failed to demonstrate that English law was inadequate to deter alleged fraud on Lloyd's part.
Case assessments on Lloyd's losses
2 Dec 93
Independent: Lloyd's to confound forecast with new £2bn loss
THE Lloyd's of London insurance market isset to report a further £2bn worth of losses next year, far worse than forecasts from the market's authorities eight months ago.
Thedeterioration will undermine the prospect of an out-of-court settlement designed to help 17,000 underwriting members meet £2bn worth of losses that have brought them to the brink of financial ruin.
Lloyd's isfinalising a £1bn offer it intends to make to the underwriting members in the next few days. The offer is meant to end litigation brought by thousands of Lloyd's members against companies that acted on their behalf.
However, theresults for the 1991 underwriting account, the latest for which figures are available and due to be published next year, will show that losses have hit £2bn. Lloyd's reported total losses of £5.5bn in the three previous trading accounts, which Peter Middleton, Lloyd's chief executive, confided would have driven any similar business into liquidation.
In abusiness plan published in April, the market's authorities predicted that the 1991 results could show a loss of more than £1bn.
"Theselosses will put a very substantial strain on our membership," said Lloyd's in the plan. "We will do everything in our power to mitigate the impact of these losses without compromising the security of the Society [of Lloyd's]."
But themarket deteriorated in the 1991 trading account, which is to be closed later this month.
Up to1,000 members are due to leave the market this year, reducing the total of underwriting members actively insuring business to around 18,500. Lloyd's membership was around 33,000 at its peak in the 1988 underwriting account.
New companiesallowed to invest and trade in the market with effect from next year will be dismayed at the continuing trend of losses and the unreliability of Lloyd's forecasts.
Between £600m and £900m of new capital has been committed from the companies. While they will not be affected by the losses since they do not start trading until next year, the scale of the historic losses could damage sentiment.
Already,Lloyd's professionals have reported that a price war appears to be breaking out among insurance syndicates anxious to secure business for the new companies that have invested in them.
There arefears that, far from recovering from the losses of the past, the market's losses could grow as competition becomes more cut-throat.
Thecontinuing poor trading will hamper Lloyd's chances of gaining acceptance for its £1bn offer to destitute members fighting for restitution. Unless they receive a financial guarantee from Lloyd's that their losses will not increase after any offer is taken up, they are unlikely to accept the proposed deal.
Withfarther losses looming and far worse than expected, the resistance among members to Lloyd's terms will grow. Lloyd's is due to post its offer to the members in the next few days.
Yesterday, anaction group looking after the interests of members on the troubled insurance syndicate managed by the Merrett agency at Lloyd's warned the members to treat any offer "with caution."
3 Dec 93
Independent: Insurers may put extra £100m into Lloyd's offer
ANOFFER of £1bn to help financially ruined underwriting members of the troubled Lloyd's of London insurance market may include an increased payment of £100m from insurers within the market
The authorities of the market are trying tofinalise the offer to 17,000 underwriting members hardest hit by £2bn worth of insurance losses, which have brought them to the brink of financial ruin. The members claim that the losses were due to negligence and are taking legal action. Lloyd's is making the offer in an attempt to settle legal action out of court.
In itsoriginal plans Lloyd's intended to fund an offer by a contribution of £300m from errors and omissions underwriters, the insurers that provided financial protection for the companies the members are suing; a contribution from the sued companies, the underwriting agencies which looked after the members' affairs; and a contribution from Lloyd's central fund, designed to protect the interests of policyholders.
Thecentral fund was expected to pay out £300 in to match the contribution from errors and omissions underwriters. A further £100m was expected to come from underwriting agencies as part of their individual contribution.
Now,after behind-the-scenes pressure, it is expected that errors and omissions underwriters will contribute an extra £100m, bringing their proposed contribution to £400m. That could he matched by a similar amount from Lloyd's central fund. The balance may come from companies operating in the market, such as auditors and other advisers, but this seems unlikely.
Lloyd'smay choose to make up the remainder of the contribution through loan arrangements.
Lloyd's intends to send out the200-page offer document next Tuesday to the thousands of underwriting members affected by the losses.
Resistanceto accepting any offer is mounting as members will have to give up their rights to take legal action if they accept and, as disclosed in yesterday's Independent, when they face a further £2bn of losses next year. When the results are published next year the members will have suffered losses of £7.5bn over four trading accounts.
6 Dec 93
The Chairman of Lloyd's forwards the "without prejudice" Lloyd's Settlement Offer £900m to Members.
13 Dec 93
Court of Appeal judgment
Names secured a judgment in their favour about duty of care. Lloyd's appealed. It was in the Court of Appeal that the negligence of the Lloyd's regulator was clearly exposed. No less a person thanSir Thomas Bingham, Master of the Rolls - sitting with Lord Justice Hoffman and Lord Justice Henry on 13 December 1993 - made the following statement:
31 Dec 93
Lloyd's forwards the Lloyd's Settlement Offer Supplement containing the amended personal statements to Members, the 6 December issued documentation was flawed.
31 Dec 93
The Sedgwick Group Annual report 1993discloses:-
Our aim is to win with quality. We know that to gain and retain our clients' trust we must look at each as an individual entity; have a true understanding of their businesses and their needs; use the breadth and depth of our skills and resources to provide them with well-considered and innovative solutions; and deliver those solutions expertly and cost effectively. ....
The most significant event of the year was the acquisition of Noble Lowndes. This was a major step in our aim of developing the consultancy side of our business. The resulting merger of that company with our existing employee benefits operations, to create Sedgwick Noble Lowndes, has made us one of the world's leading players in the field. 1993 was also a year of firsts for Sedgwick: we were .... the first broker to form a vehicle for limited liability investment in Lloyd's; .... "Winning with quality" is the philosophy which lies behind our corporate strategy. It also motivates our staff. I am proud of the continuity of service we enjoy from them and also their range of talents .... It demands that we work as a truly international team, exchanging knowledge and ideas for the benefit of our clients. ....
I would also like to pay particular tribute to Jim Payne, a Vice-Chairman of Sedgwick, whom we announced in January would be retiring on 31 March after 40 years service. He has made a significant contribution to the Group during an important period in its development. .... I am confident, however, that the combination of skills inherent in the Group, together with our focus on service, will enable us .... .... With a few exceptions, the Group's insurance and reinsurance operations now operate under the name Sedgwick, underlying our ability to operate as a single business throughout the world. ....
Sedgwick Global. As a leading adviser to the world's global and international businesses, we are convinced of the value of operating as one team, world-wide. In 1990, Sedgwick launched its PAM (Professional Account Management) of standards with the objective of creating a consistent quality of client service throughout its international network. ....
Our staff are regularly updated on market trends and on the insurance implications of new legislation. Their development is measured through a continual appraisal process: our performance is measured throughout the company and feed-back from clients is reviewed through our Market Intelligence Unit. Environmental protection is a truly global issue. The experience Sedgwick has gained in "regulator" countries, such as the U.S., enables it to use its skills to advise on environmental risk and insurance techniques elsewhere ....
3. Reinsurance: Sedgwick Payne companies Ltd: had a good year for new business despite difficult market conditions and the continuing world recession. Premiums increased in the marine market but, in many cases, were countered by owners raising deductibles or restricting cover. .... The number of available reinsurers declined further, despite developments in Bermuda, and there were closures and withdrawals among clients and markets. Capacity for retrocessional business continued to diminish. .... Good progress was made in developing the North American Foundation, which consolidates our US and Canadian wholesale and reinsurance operations.
4. Corporate Capital: In May, we formed a joint venture company, C L M Advisers, which pioneered the concept of offering individuals and Institutions the means of investing in Lloyd's with "Limited Liability".
5.Shareholders: Trans-America Corporation through its subsidiaries owns 21.03% of the share capital of the company.
6.Sedgwick Lloyd's Underwriting Agents Ltd: .... A subsidiary of the company, Sedgwick Lloyd's Underwriting Agents Ltd (SLUA) is a Lloyd's Members' Agency. Claims have been, and may be, made against it and others by underwriting members of Lloyd's as a result of losses incurred by them on certain underwriting syndicates at Lloyd's. SLUA is a party, or prospective party, to this litigation as a result of the contractual relationship which existed between Names and their Managing Agents up to the 1990 underwriting year. SLUA is defending, and will defend, any such claims. The eventual outcome of this litigation cannot yet be determined. In the opinion of directors, on the basis of information presently available and having regard to SLUA's insurance arrangements and provisions, none of the proceedings will have a significant effect on the financial position of the company or the Group. Two Directors and the wife of another are participants in an action against the Managing Agent at Lloyd's to which action SLUA is a defendant as a result of the contractual relationship which existed between Names and their Managing Agents up to the 1990 underwriting year. SLUA is the largest Members' Agency, provides more than 7% of the markets capacity. .... Underwriting activities results were mixed.
7.Company Underwriting: the Group's underwriting operations are
Americas Insurance Companybased in New Orleans, which writes cargo, energy and aviation business; Americas Insurance Company recorded a reduced underwriting profit.
Mendip Insurance & Reinsurance Company Ltd, the Group's specialist reinsurance subsidiary in Bermuda;
River Thames Insurance Company,the London market Insurance Company, in which the Group has a 49% interest.
The Group's wholly owned underwriting companies Americas Insurance Company and Mendip Insurance & Reinsurance Company reported a pre-tax profit of ....
Return to main Fraud page
|Home | Q & A | Regulation | Litigation | News | Fraud
Contact Truth About Lloyd's