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Letter: Cartoon raises question worth considering
July 24, 2006

To the editor:

The American Names Assn. takes note of Business Insurance's July 10 editorial cartoon by Roger Schillerstrom making fun of a small band of Lloyd's names who just sued the U.K. government for not transposing a 1973 European Union directive into U.K. law and applying it to Lloyd's. At issue is E.U. Directive 73/239, which says in part that E.U. member states must implement and enforce measures that ensure accounting accuracy and financial solvency of insurers operating in their respective countries. We think the names' case is foolhardy, but not for the reason in your parody.

The cartoon does raise a practical question that U.S. policyholders and cedents are well advised to consider: will the U.K. government acknowledge its failure to verify that Lloyd's was solvent and had an independent and true auditing regime since 1973 (or 1982, as some argue), and make good on any unpaid claims against Lloyd's direct policies and reinsurance contracts issued prior to 1993?

Following are questions and observations that U.S. policyholders/cedents might also ponder:

1. Is Equitas sufficiently funded to satisfy all of Lloyd's pre-1993 liabilities?

2. Is "paying cents on the dollar" synonymous with "paying claims in full" in British English or under British law? The old Department of Trade and Industry, now the Financial Services Authority, and others in the U.K. establishment have for years watched Equitas deal with U.S. policyholders' and cedents' claims under a de facto proportional payment arrangement. Are U.K. government and judiciary pronouncements about the "supremacy of policyholders' interests" statements of principle or platitudes?

3. Do the names, 10 years after the approval of Lloyd's reconstruction and renewal (and after 10 years of estate planning, bankruptcies and deaths) really have enough non-exempt, collectible assets to satisfy all claims not paid by Equitas for cover incepted at Lloyd's in 1992 and prior years? In other words, where will policyholders and cedents turn if Equitas officially goes to proportional coverage?

4. At 12 minutes to midnight GMT on the eve of Equitas' authorization by U.S. and U.K. officials in early September 1996, Lloyd's Chairman David Rowland agreed that the ongoing Lloyd's market would indemnify Equitas (pay all unsatisfied claims) in the event it ever ran short of funds. This was an absolute condition required by the superintendent of the New York State Insurance Department prior to granting his approval of R&R and permitting the transfer of billions from Lloyd's American Trust Fund into the Equitas American Trust Fund.

5. Less than two years after the acceptance of R&R and the inception of Equitas, the NYSID—under a new superintendent—made the ongoing Lloyd's market's indemnification of Equitas disappear. Although we have spoken with numerous witnesses to the agreement, when senior NYSID officials are asked about it, they respond with evasive answers and pretend it never existed (and, in our experience, have done everything possible to avoid testifying under oath on this subject).

6. In the mid-1990s, after a mix of decisions by lower courts, most courts of appeal in the United States ultimately sent names' fraud cases to England for adjudication. In a related case, Allen vs. Lloyd's, the 4th U.S. Circuit Court of Appeals reversed a district court order that U.S. names and policyholders were entitled to more complete and unqualified disclosures before Lloyd's 1996 reorganization could go forward.

Appellate court records are replete with assurances by Lloyd's, the U.K. government and former California Insurance Commissioner Chuck Quackenbush that it would be beneficial to insureds and reinsureds. But denying names access to U.S. law and full disclosure set a dangerous precedent for U.S. claimants. The momentum of the "save Lloyd's at any cost" PR and lobbying campaign carried over to affect U.S. coverage cases as well.

7. In the aftermath of R&R, Equitas argued it did not conduct business in the United States, had not assumed names' liabilities as in typical Lloyd's reinsurance-to-close transactions and therefore did not have to defend and indemnify claims against Lloyd's pre-1993 policies. Although some U.S. courts ruled that Equitas stands in the shoes of its reinsured names, many found against insureds/reinsureds by holding that Equitas operates outside U.S. jurisdiction and law. Those courts ruled that only when a coverage case against Lloyd's underwriters at interest concludes-- and if money remains-- does Equitas have to pay claims.

The paradox is that all Lloyd's 1992 and prior syndicates reinsured by Equitas transferred their underwriting names' deposits, premium reserves and authority to adjust claims to Equitas before closing their doors. Who, if not Equitas, has been directing and paying attorneys to represent these old syndicates and their underwriters in coverage disputes in U.S. jurisdiction?

Lloyd's names, direct policyholders and ceding insurers have more in common than they could have ever imagined 10 years ago-- mainly that they are equal targets of Lloyd's duplicity. When it comes time for the British government to pay for its culpability in Lloyd's auditing and solvency failures, however, those funds should go to satisfy unpaid claims of policyholders and cedents.

Jack Shettle Sr.
Chairman
American Names Assn.
Rancho Santa Fe, Calif.

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