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Insurer Drains New Mexico Investors
Front Page, Sunday Edition
Sunday, September 15, 2002
By: Colleen Heild
At the age of 86, Elizabeth Bencsics no longer wakes up at night worrying about how she will pay Lloyd's of London.
Now, she says, there's nothing left to give.
It's been 18 years since the now-retired legal secretary committed to backing Lloyd's insurance policies in what she says was touted as a secure "money maker" with virtually no risk.
Bencsics received $10,000 one year and $12,000 another year but says that promised profits of $35,000 a year never materialized. Instead, Lloyd's sent bills demanding more and more cash to cover massive losses in the insurance market.
At one point, she says she paid $80,000. Lloyd's also took her deposit of more than $70,000.
In 1993, Bencsics tried to resign her membership in the 300-year-old organization.
"But they've never let me out," she said last week. "I don't think they ever will."
In March, Lloyd's went to federal court in Albuquerque with an English court judgment demanding an additional $402,000 from Bencsics. A federal magistrate could rule any day, lawyers on both sides say.
Five other New Mexicans - mostly retirees - are being asked to pay a total of about $2.8 million. Up to now, the six have paid a total of $4.2 million to Lloyd's.
As an investor, Bencsics pledged her personal wealth to underwrite insurance policies.
Bencsics and her husband, Joe, a retired electrician, had a $200,000 nest egg when they joined Lloyd's in 1984. Now the Rio Rancho couple relies on Social Security to make ends meet.
"I only hope we don't lose the house," she says.
Bencsics has lived with the financial nightmare so long, worry has turned to resignation.
"It'll always be there," she said. "I'll die first."
"Lloyd's promised safe, conservative investments but instead delivered guaranteed losses," says Albuquerque attorney Pat Rogers.
Richard A. Reinhart, one of the six New Mexicans now being sued, received profit checks of $39,024 over a nine-year period, according to one court document, and lost more than $327,000. Now Lloyd's wants another $382,384.
Since the early 1970s, about 3,400 American investors have been asked to pay a total of $1.5 billion to cover their share of losses, said Jeffrey Peterson, executive director of an organization representing a group of American Lloyd's investors.
"These people in New Mexico went into something they thought was routine," Peterson said. "They weren't high rollers. They were trying to go with an old line company and get a reasonable steady return. And they mistakenly got caught in a bear trap."
In the late 1980s and early 1990s, investors in the Lloyd's market incurred total underwriting losses of more than $12 billion.
Lloyd's officials have denied any misrepresentation or fraud. Lloyd's attorney Barry D. Williams of Albuquerque said last week he doesn't comment on pending litigation.
In court documents, however, Lloyd's says investors knew the risks involved, consented to the terms, and now must make good on their obligations.
Lloyd's says each investor agreed to "unlimited personal liability" in joining the organization.
But attorneys for investors say Lloyd's representatives made light of that clause or minimized the risks when meeting with prospective investors.
Lloyd's insiders and older members are alleged to have avoided devastating losses from asbestos claims by passing their liability on to newer, unsuspecting investors, like Bencsics.
"They not only let them (the insiders) off the hook, but paid them profits," Rogers said.
Investors have had little luck suing Lloyd's.
U.S. federal courts have sent lawsuits alleging fraud to England for resolution. No court there has found Lloyd's liable.
In 2000, one English judge called investors "innocent victims" and said the "catalog of failings and incompetence in the 1980s (by Lloyd's representatives) ... is staggering." But that judge found Lloyd's not guilty of fraud.
This summer, an English appellate court upheld that ruling but noted the different standard for proving fraud in the United States. In America, failing to disclose material facts involving an investment would constitute fraud.
Attorneys for investors hope the U.S. collection action by Lloyd's will provide a forum in which they can make their case for fraud and contest the debts.
Michael Vargon, the deputy director of the New Mexico Securities Division, said in a July 19 court document that information his agency collected "strongly suggests" that Lloyd's committed fraud and misrepresentation by inducing investors to join and advising them to continue investing without telling them about liability problems.
Securities regulators in New Mexico and at least nine other states have concluded that Lloyd's offered and sold securities that weren't registered and were sold by unlicensed agents.
Therefore, Vargon said, the contracts investors signed years ago "should be considered void under New Mexico securities law."
Vargon said enforcing the English judgments against the New Mexico investors "would violate fundamental due process and New Mexico's policy against exploitive investment schemes."
Lloyd's has denied that the investments had to be registered. Company officials say the policy holders with valid claims for injuries or other damage need to be paid.
Word of mouth
Stephanie Poor Davis was a mother of seven with a seriously ill husband. Her husband, Rick Davis, had lost several toes and a leg to diabetes and wasn't expected to live very long. He was concerned about providing for his family when he was gone.
Reinhart was a former bank vice president and owned a business. Vaun Floyd was working as a senior vice president for medical staff affairs for the St. Joseph Hospital system.
Court documents say that none of them had knowledge of or experience in the insurance industry.
But through friends or financial advisers, they were invited to meet with representatives from Lloyd's, beginning in 1984.
"I thought (growing up) there wasn't anything better than Lloyd's of London," said Benscics, who first read about Lloyd's as a student at Albuquerque High School.
Membership in Lloyd's was at one time restricted to English males whose net worth was at least $1 million, Peterson said. But Lloyd's relaxed that criteria in deciding to recruit American clients.
According to court documents, Murray recalled asking a Lloyd's recruiter who traveled to New Mexico about the unlimited liability provision.
"My dear lady," the recruiter said, "in over 300 years, Lloyd's has made fortunes for its (members) ... The only way you could lose money would be if every bridge in the world fell down on the same day," Murray quoted him as saying.
Vaun Floyd's wife, Mary Floyd, now 81, recalled, "I particularly remember Lloyd's emphasis on 'integrity, integrity, and integrity.' ''
New members say they had no choice in deciding which insurance groups to back. That was the responsibility of Lloyd's agents.
Lawyers for the Albuquerque defendants allege that many investors were assigned to insurance policies that sustained some of the heavier losses.
Neither Benscics, Murray nor any of the other four New Mexico investors recall any mention of asbestos claims when they signed up.
Nor, Murray said in her statement, was she told about "the possibility that we might be liable for claims or damages in years before our membership even began."
Murray and her husband took out a second mortgage on their home to provide security for the letters of credit required by Lloyd's for membership. After she received a $12,000 check the first year, and about $6,000 the second year, a Lloyd's recruiter told Murray that the next years would be better.
In January 1989, Murray received a bill for $18,000 and had to borrow money to make the payment. She and her husband had to refinance their home. Even though she resigned in late 1990, Lloyd's has obtained an English court judgment seeking $419,000 from Murray, who lives in Santa Fe.
Lloyd's is seeking a total of more than $1.5 million against Vaun and Mary Floyd. Lloyd's says Davis, now a widow, owes $356,339.
"I don't have the money," she said in a court document. "The entire experience with Lloyd's has caused unbelievable hardship, distress and suffering."
A way out
About 95 percent of investors took the deal, but Benscics and the five other New Mexicans now being sued were among the 246 Americans who refused.
They said they didn't have the money, and some questioned the terms, which Rogers said called for releasing Lloyd's from liability for fraud lawsuits even though the investors weren't fully released from future liability.
Those who refused to settle say they later discovered that, without their consent, a Lloyd's agent signed them to a new contract that limited their ability to sue in English court.
Under those terms, they say, they are prohibited even from challenging the accuracy of the amounts owed.
"We feel we were proselytized by the biggest con artists in the world," said Floyd, "with the stipulation that Lloyd's was a venerable institution."
Copyright 2002, Albuquerque Journal
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