What Every Insurance Regulator Needs to Know about Equitas, Part IV

A White Paper presented by
The American Names Association
May 2001

You won’t find Equitas listed under the insurance section of the Yellow Pages. Nor will you be able to find anyone, world wide, who has ever purchased an insurance policy from Equitas. Yet, uncounted thousands of American citizens, commercial enterprises and insurance companies are unwittingly "insured" by Equitas as a result of a scheme implemented by Lloyd’s of London in 1996 called Reconstruction and Renewal ("R&R"). This scheme was designed to create the appearance that the obligations of Lloyd’s underwriters under policies they issued prior to 1993 were off-loaded onto a third party reinsurer.

The result of this high stakes game of "hot potato" was the formation of Equitas, an enterprise over which United States insurance regulators have virtually no authority to effectively enforce their state solvency standards or fair business and claims settlement practice statutes in regard to Lloyd’s policies issued in the U.S. prior to 1993. The question is, how could this happen in an industry that is one of the most highly regulated in America?

A Brief Look at the History of Lloyd’s

To understand the genesis of Equitas, we need to take a brief look at the history of Lloyd’s.

When asked what they know about Lloyd’s, most American’s will tell you that Lloyd’s is an insurance company. In fact, it is a complex market place that enables a constellation of specialized insurance enterprises to operate as a collective group, using a common brand name and licenses. To the insurance community, Lloyd’s is a place where insurance brokers can conveniently procure a wide variety of standard and exotic types of insurance protection on behalf of their clients.

Since its beginning over 300 years ago, and until 1993 when corporations were allowed to join Lloyd’s, insurance policies purchased through Lloyd’s were backed by the personal wealth of individuals known as Underwriting Members or Names. At its peak in 1988, Lloyd’s had over 32,400 such members. Today it has less than 3,000 individual members, with most of its financial backing now provided by limited liability institutional investors.

Until recently, individual membership in Lloyd’s was limited to individuals who were able to pass a financial means test administered by Lloyd’s. Although for marketing and administrative purposes the Names combined their resources into groups known as syndicates, they severally, not jointly, provided the capital that collectively supported the underwriting capacity of the Lloyd’s market. The individual Names exposed their personal wealth to unlimited liability for the payment of claims incurred through their underwriting activities.

To facilitate the orderly disbursement of profits or settlement of losses to its investors, Lloyd’s devised a special form of reinsurance that allowed them to close underwriting accounts on an annual basis. If Names wanted, they could even withdraw from membership at the end of any calendar year, provided the managers of their syndicates could close out all outstanding policyholder obligations by purchasing reinsurance to cover all outstanding claims.

Events leading to the creation of Equitas revealed that prior to 1996 few Names really understood the implications of the reinsurance to close (RITC) transaction. While Names understood their syndicate managers could purchase an RITC contract to transfer the risks assumed under policies written in a previous year, many who assumed the RITC liabilities did so unwittingly. They did not realize until long after the fact that they had pledged their wealth to pay claims asserted under policies issued many, many years prior to the time they had become members.

After enjoying generations of profitability, the tides began to turn in the late 1980s. By 1991, Lloyd’s Names found themselves treading water, neck deep in an ocean of red ink, buffeted by waves of natural disasters and other catastrophic losses. They were being dragged under by mounting asbestos and pollution liability claims asserted under policies issued as far back as the 1930s.

Drowning in losses and driven by overwhelming evidence that they had been defrauded by Lloyd’s and its agents, the Names formed approximately 65 offensive Action Groups, including the American Names Association and the United Names Organization, to scrutinize Lloyd's business practices. As a result of their findings, over 22,500 Names withdrew from the market between 1992 and 1997.

The exodus of Names severely diminished Lloyd’s underwriting capacity when it was most needed. While individual members faced financial disaster, Lloyd’s itself fought to survive as the world’s oldest insurance market place. It was in this climate that Lloyd’s opened its doors to limited liability investment from corporations in 1993 and forever changed the capital structure of Lloyd’s.

Lloyd’s problems deepened in 1994, when an audit of its 1993 business conducted by the New York Department of Insurance revealed an $18.47 billion, and still-growing deficit in its global trusteed surplus reserves. Lloyd’s was already gasping for air when New York’s Superintendent of Insurance Ed Muhl demanded that Lloyd’s either increase its deposits or lose the privilege of doing business in the U.S. On May 24, 1995 Lloyd’s then Chairman, David Rowland, signed a Stipulation Agreement wherein, among other things, Lloyd’s agreed to place $500 million in trust for the benefit of Americans whose policies had been underwritten in 1992 and prior years (the "Old Years"). In 1996, Equitas was launched as the rescue vessel to reinsure the Old Years policies.

At the time then-Chairman David Rowland signed New York’s Stipulation Agreement, Lloyd’s leadership was confidently saying that the operating results for underwriting years 1993, 1994 and 1995 were solidly in the black. Lloyd’s used these optimistic projections to declare an "early release" of "profits" from these three years to build confidence in their reorganization plan and to help fund Equitas. By 1997, after actual results for syndicates from these three years of account were reported, dozens of syndicates were found to have lost money and were unable to secure RITC to finalize their operations. As a result, these syndicates were put into run-off and Names were called upon to pay additional money to replenish the reserves that were raided to deceive Names and regulators into thinking that Lloyd’s fortunes had changed, and to help capitalize Equitas.

When the leaders’ plan for Reconstruction and Renewal of Lloyd’s was implemented with the launching of Equitas in September 1996, Equitas became the ultimate RITC underwriter. R&R effectively prevented the erosion of the profits and reserves of investors in the new Lloyd’s (both corporate capital providers and Names) by using Equitas to dam the red ink flowing from Old Year claims. The Equitas RITC scheme was initially structured to absorb an estimated $6 billion of Old Year claims plus $2.85 billion in administrative costs. The amount required, however, fluctuated between the first announcements in 1994 and Equitas’ September 1996 launch date.

Lloyd’s capitalized Equitas by seizing court-awarded judgments in cases Names won against Lloyd’s Members and Managing Agents, mutualizing the Old Year Names' syndicate reserves, and placing these funds into interest bearing accounts on Equitas’ balance sheet. Names with negative account balances were called upon to settle their deficits in cash. Approximately 3,000 Names initially refused Lloyd’s "settlement" offer, setting into motion a train of litigation that is, as of this writing, far from concluding its journey through a maze of British and American courts.

The Reinsurance and Run-off Contract

The 131 page Equitas Reinsurance and Run-off Contract is at best an imperfect document fraught with ambiguities. Consider the following.

On September 3, 1996 the Council of Lloyd's finalized the terms of a "Reinsurance and Run-off Contract" that documented the powers vested in Equitas and its duties to settle pre-1993 claims. Curiously, Lloyd’s created two "Equitas" entities to handle the claims, Equitas Reinsurance Limited and Equitas Limited.

Equitas Reinsurance Limited (ERL) was organized to reinsure "all liabilities under contracts of insurance underwritten at Lloyd’s and allocated to the 1992 year or account of any prior year" other than life business. In simplified terms, ERL agreed to reinsure the liabilities of Names under policies issued prior to 1993 in return for ERL’s receipt of the assets held in Names underwriting accounts, and of the Names’ obligations to pay the premiums levied as a part of the settlement of their accounts (among other things).

Concurrent with the effective date of the contract, ERL delegated its duties and retroceded its insurance obligations to Equitas Limited (EL). As consideration for this retrocession, ERL agreed to pay EL all of the assets and premiums it received from Names under its reinsurance agreement with Underwriters, less £710,000,000 ($1.136 billion). There is no plausible explanation as to how the Names benefited from ERL’s retrocession to EL, or, given the laying off of liabilities, why ERL needed to keep over $1.1 billion. There is no justification for this arrangement in the original Equitas documentation nor in the cryptic Annual Reports sent to the Names. Regulators should know if this money is available to settle claims and if so, in what way. The financial statements published by Equitas are of no help; no accounting of these held-back funds has been provided.

Equitas’ Report and Accounts

On September 4, 1996 Equitas began its administration of the run off of Lloyd’s syndicates’ 1992 and prior liabilities. According to its Report & Accounts for the period ended September 4, 1996, Equitas reinsured 740 syndicate years of account for more than 34,000 Names with gross claims reserves of £14.757 billion ($22.136 billion @ $1.50). Anticipated recoveries from over 248,500 reinsurance policies issued by approximately 2,900 reinsurers reduced the reserves to a net of £10.5 billion ($15.75 billion).

During the early stages of R&R, Lloyd’s claimed that £5.9 billion ($8.85 billion) would be required to fund Equitas. Based upon the Ridley Report dated November 1995, however, between Spring and November of 1995, Lloyd’s statement of the total amount needed increased to £11.4 billion ($17.1 billion).

According to Lloyd's "Reconstruction and Renewal Towards the Settlement" report dated May 1996, Lloyd’s "markedly" lowered the amount required from the Names to capitalize Equitas. The "additional premium" due from Names was reduced from Lloyd’s original estimate of £1.9 billion ($2.85 billion) to £1 billion ($1.5 billion). Lloyd’s professed that the reduction resulted from its discovery that claims for some lines of business had been over reserved and that reinsurance protection was more substantial than expected. The reduction was looked upon by dissenting Names as a ploy to entice them to accept R&R.

By November 1996, soon after R&R had been adopted, the total premium was £11.2 billion ($16.8 billion). During the fiscal year ended March 31, 1998 it increased to £11.812 billion ($17.718 billion). As of December 31, 1996 approximately 5% of the premium, or £56 million ($84 million), had not been collected. The uncollected balance stood at £30 million ($45 million) on March 31, 2000.

The American Names Association obtained a copy of an analysis of the Report & Accounts statements published by Equitas that was prepared by the editors of equiTalk Publishing, to determine whether the statements provided information in a format comprehensible to Names, insurance regulators, insurance executives and attorneys. The editors’ efforts to measure Equitas’ operating efficiency, quantify its operating expenses and track its claims were frustrated by the lack of pertinent details. The following tables provide a summary of Equitas’ cumulative operating results, extrapolated from the data presented in its initial Report & Accounts of September 4, 1996 and each subsequent fiscal year end report through March 31, 2000.

£m $m
Gross Written & Earned Premium 11,812 17,718
Less Outward Reinsurance Premium _____4 _____6
Net Written & Earned Premium 11,808 17,712
Investment Income 2,080 3,120
Other Income __122 __183
Total Income 14,010 21,015
- -
Non-technical Account 100 150
Taxes 100 150
Total Charges 200 300



(1) Although Equitas has not provided an accounting of its expenses on a line item basis, a bar chart presented in the March 31, 2000 statement, indicates that Equitas’ operating expenses totaled approximately £765 million ($1,148 million). It is assumed the difference between the total operating expenses and the non-technical account charges of £100 million ($150 million) reported in the statements, or £665 million ($998 million), is attributed to the settlement of claims.

Employee salaries and perquisites totaling £137 million ($206 million) accounted for approximately 18% of total operating expenses. Over £8.76 million ($13.14 million) has been paid to Equitas’ 11 executive and non-executive directors in the form of salaries, bonuses, pension contributions and fees. The non-executive directors do not have service agreements or pension arrangements and their salaries have not increased over the past three years. However, the compensation paid to executive directors increased more than 20% between 1999 and 2000. They were scheduled to receive additional awards of £464,548 in 2000 with an additional £632,100 to be paid during 2001, for a total of $1,644,972.

Equitas’ method of reporting claims development leaves much to be desired. Clearly, the reporting format falls far short of meeting the convention statement requirements of the NAIC and would likely be rejected by state regulators. It only presents a juxtaposition of current year and prior year claims data, instead of using the traditional Schedule P triangle format that provides a capsulized perspective of the year-by-year development of claims by number and amounts paid and unpaid.

Opening Reserves -- Gross 14,757 22,136

Less Paid Claims -- Gross

9,162 13,743
Gross Reserve Balance 5,595 8,393

Plus Claims Development

7,617 11,426
Closing Reserves – Gross 13,212 19,818
Opening Reserves 4,285 6,428

Less Recoveries

3,344 5,016
Reinsurance Reserve Balance 941 1,412

Plus Development

1,969 2,954
Closing Reserves 2,910 4,366
Net Opening Reserves 10,472 15,708
Less Net Claims Paid 5,818 8,727
Plus Net Claims Development 5,648 8,472
Closing Net Reserves 10,302 15,453

As of September 4, 1996, Equitas reported that its Retained Surplus stood at £588 million ($882 million) after reserving for gross claims totaling £14,757 million ($22,136 million) reduced by £4,285 million ($6,428 million) in reinsurance recoveries to a net of £10,472 million ($15,708 million). Significantly, the reserves were not discounted for present value.

Equitas cannot by any standards be considered a going concern. It must rely heavily on the income earned on its investment of loss reserves to pay its wind-down expenses. Its investment income dropped drastically by 75%!from £714 million ($1,071 million) during fiscal 1998-1999 to £178 million ($267 million) in fiscal year 1999-2000. That income can also be expected to decrease further as invested loss reserves are reduced by settlements.

Loss Reserve Discounting

Some analysts question the motive behind the decision to discount reserves. The reason seems obvious. If the reserves were not discounted, Equitas’ balance sheet would show a deficit of £2,534 million ($3,801 million) instead of a Retained Surplus of £784 million ($1,776 million)!

As of March 31, 2000 Equitas discounted its gross reserves of £13,212 million ($19,818 million) by £4,182 million ($6,273 million) and reported £9,030 million ($13,545 million) in liabilities for outstanding claims on its balance sheet. It also discounted £2,910 million ($4,365 million) of reinsurance receivables by £864 million ($1,296 million) thereby reducing its reserves for reinsurance recoveries by £2,046 million ($3,069 million). For some unexplained reason, this number does not track with the £1,663 million ($2,495 million) carried as a receivable on Equitas’ balance sheet. The following table puts the effect of the discounts into perspective.

Gross Claims

Less Discount

Adjusted Gross

Gross Reinsurance


Less Discount


Adjusted Reinsurance


Adjusted Net Claims


Had Equitas maintained the accounting methodology used in its inaugural Accounts & Reports statement, and not applied the discounts, here’s how the Retained Surplus account would look.

Retained Surplus @ 9-4-96

Retained Surplus @ 3-31-00


Less Net Discounts


Adjusted Retained Surplus


Needless to say, relatively small upward adjustments in gross loss reserves or downward adjustments in discounts will have a profound affect upon Equitas’ ability to pay policyholder claims and the Names’ exposure to future calls for funds.

Reserve Warning

During Equitas’ annual meeting of reinsured Names held in early September 2000, its chairman Hugh Stevenson issued a warning that external factors beyond the control of the company – such as increasing asbestos claims, legal developments, judicial decisions and social trends, especially in the US – could have a profound impact on Equitas’ reserves. As seen above, Equitas’ annual report shows that during its fiscal year ended March 31, 2000 it increased its loss reserves by £711 million ($1.0665 billion @ $1.50) to over £9 billion ($13.5 billion).

On November 30, 2000 Stevenson sent a report of financial information for the six month period ended September 30, 2000 to reinsured Names, in which he stated: "During the first half of this year, the rate of new asbestos filings has again increased, substantially exceeding our revised expectations." He warned "It is therefore probable that we will further strengthen asbestos reserves at the end of this year following the comprehensive actuarial review." Stevenson said Equitas cannot provide a complete financial summary because it only undertakes a comprehensive actuarial review of its loss reserves and reinsurance recoveries once a year. It is anticipated that Equitas’ 2001 Report and Accounts will be published in early July. Regulators are encouraged to obtain a copy.

No Finality for Old Year Names

Equitas does not provide finality for Names’ Old Year underwriting obligations. The New York Department of Insurance made it clear it did not want to let the Names off the hook when it included a provision in the 1995 Stipulation Agreement that states "...in the event Equitas is ultimately unable to satisfy all claims, such claims shall continue to be enforceable against the underwriting members who subscribed the original Old Years policies issued to American Policyholders..." This stipulation is in effect reiterated in paragraph J of the opening recitals of the Equitas Contract that states, "This Agreement is to take effect as a contract of reinsurance and shall have no effect on the liability of any Name or Closed Year Name under any original contract of insurance entered into by such Name or Closed Year Name. The liability of the relevant Names or Closed Year Names under all contracts of insurance underwritten by them shall remain several and not joint."

Lloyd’s fully anticipated that Equitas might not be able to pay all Old Year policy claims in full. The Contract includes a Proportionate Cover provision that sets forth a formula for the partial payment of liabilities in the event Equitas runs out of money. Should this happen, it follows that the Names will be called upon to make up the shortfall.

According to reliable sources, the New York Department of Insurance went a step further in order to protect U.S. policyholders who purchased policies from Lloyd’s syndicates prior to 1993. It reportedly has a letter agreement in its files signed by David Rowland that obligates the new Lloyd’s to pay any shortfall from its U.S. Joint Asset Trust Fund. If this letter exists, it serves as an umbilical cord through which Equitas can draw financial nutrition from the "new" Lloyd’s. Given Lloyd’s present underwriting results, however, it is questionable if any funds would be available.

According to recent industry and news reports, Lloyd’s is wallowing in over $5 billion of losses accumulated over the last four underwriting years. With over 70% of its underwriting capacity provided by corporations with only limited liability, it follows that Lloyd’s capacity will be reduced if very many of them withdraw due to concerns over their individual underwriting losses. One must also wonder if Lloyd’s institutional investors are aware that they may be called upon to make up any shortfall in Equitas’ reserves. If individual Names refused to fund Equitas, it doesn’t take much of an imagination to see that corporate backers of the new Lloyd’s will fold their tents and walk away without contributing to the pot.

Lloyd’s Trust Fund Requirements

The accumulation of Lloyd’s underwriting losses in recent years ($5 billion in the post-R&R era) raises another concern. Under the 1995 Stipulation Agreement, the New York Department of Insurance required Lloyd’s to immediately deposit $500 million, to be held unconditionally for the benefit of U.S. policyholders, and to maintain not less than $100 million of joint assets in separate surplus lines and reinsurance trust accounts to cover all existing and future liabilities. In addition, as a condition of doing business on an ongoing basis as an accredited alien insurer in the U.S., the Stipulation requires each of Lloyd’s Sponsoring Syndicates to maintain 100% of their gross liabilities in separate U.S. situs reinsurance and surplus lines trust accounts. Historically, the trust accounts have been administered by CitiBank, NY.

For more than four years, Lloyd’s has been lobbying regulators to reduce the gross liability requirement significantly. Lloyd’s wants state regulators to lower the amount it agreed that sponsoring surplus lines syndicates would maintain in their U.S. trust accounts. Instead of depositing 100% of their liabilities as was required since the 1995 agreement between Muhl and Rowland, surplus lines syndicates only want to deposit $5.4 million or 30% of their gross surplus lines liabilities. Assuming outstanding liabilities exceed $4 billion, Lloyd’s would only have to post $1.2 billion. The reason for the request is transparent. The "new", current Lloyd’s investors would otherwise have to divert cash from their surplus, because liabilities exceed collected premiums. One proposed solution is to allow the Sponsoring Syndicates to obtain letters of credit from CitiBank for the 70% difference.

A similar scenario is playing out in the reinsurance regulatory arena. Lloyd’s is seeking drastic reductions in its reserving levels and the composition of funds held in its trust accounts that secure its reinsurance obligations for U.S. insureds on post-1993 policies.

Regulators are encouraged to examine the trust fund documents entered into by Lloyd’s and CitiBank before making any decisions about amending the composition of Lloyd’s trust funds. The use of letters of credit issued by CitiBank raises serious conflict of interest questions. Regardless of the amount ultimately required, the Trust documents do not require CitiBank to perform the customary duties of a trustee or to maintain control over disbursements. As written, the trust agreements make CitiBank little more than a repository of the funds that can be drawn upon by Lloyd’s at Lloyd’s discretion. Furthermore, the trust accounts have not been audited since they were established almost five years ago. No one knows with any degree of certainty whether the amounts deposited by Sponsoring Syndicates are adequate. Based upon Lloyd’s past performance, it is doubtful.

Equitas Trust Fund

Although the 1995 Stipulated Agreement also required the creation of a special trust fund for Equitas, existing state insurance statutes and regulations give regulators little to no power over the operations of Equitas or its solvency. A provision in the Agreement states that "in the event Equitas is ultimately unable to satisfy all claims, such claims shall continue to be enforceable against the underwriting members who subscribed to original Old Years policies issued to American Policyholders..." The Proportionate Cover Plans provision of the Reinsurance and Run-off Contract, however, appears to contradict that requirement. This is troubling because there is growing evidence that Equitas does not have the resources required to assure full payment of all claims that may be asserted. The Special Master for the Circuit Court of Cole County, Missouri in the Transit Casualty Company Receivership, referring to the likelihood of Transit recovering anything from its Lloyd’s reinsurance agreements, observed that the only credible evidence presented to him showed that the trust could, if Proportionate Cover were invoked, cause the trust to become "inadequate" by its own terms.

Policyholders’ Right to Sue Equitas

Since at least the 1940's Lloyd’s policies have included a "service of suit" clause, providing that Lloyd’s syndicate underwriters will submit to the jurisdiction of any court of competent jurisdiction in the United States chosen by the insured or the reinsured, and be bound by the law and practice of such court. The "service of suit" clause has been an extremely important marketing tool for Lloyd’s over many decades, because it gave U.S. insureds and reinsureds the comfort of knowing that if a dispute over coverage developed, the insured or reinsured could seek a remedy in court without having to go to England to sue. All of that changed, however, with the creation of Equitas. Now Equitas, when defending claims on these same policies, insists it is not subject to the jurisdiction of U.S. courts.

Under the Equitas Reinsurance and Runoff Contract, Equitas assumed responsibility for both reinsuring and handling all claims against Lloyd’s non-life policies issued prior to 1993. Moreover, the funds on hand at all relevant syndicates were delivered to Equitas, all rights to reinsurance were assigned to Equitas, and all responsibility for claims handling was transferred to Equitas. Thus, after Reconstruction and Renewal Equitas had all the money, and all the decision-making power, for all Lloyd’s non-life policies issued prior to 1993.

Since the inception of Equitas, the first question the courts faced in disputes between policyholders and Equitas was whether the policyholders could sue Equitas at all, or were limited to suing "Underwriter’s at Lloyd’s" as they had done in the past.(1)

Equitas argues that a contract of reinsurance gives a policyholder no right of action against the reinsurer, citing a clause in the contract which reads "[t]his Agreement is not intended to and does not create any obligations to, or confer any rights upon, Insurance Creditors or any other persons not parties to the Agreement." Some courts have accepted this language as controlling the question.(2) In addition, Equitas has argued that it does no business in the United States and therefore it would be a violation of due process to compel it to submit to jurisdiction here and that in any event, the reinsurance it provides is not so different from ordinary reinsurance that different rules should apply to it.(3)

Policyholders have advanced three main lines of argument in favor of requiring Equitas to submit to the jurisdiction of courts in the United States. These are:

    1. Although it is well-settled that policyholders cannot sue reinsurers directly without a "cut-through" clause, the nature of the Equitas reinsurance is so different from the nature of classic reinsurance, that it is in fact an assumption by Equitas of all the responsibilities and obligations of the underwriters who subscribed to the original policies.(4)
    2. That all Insurance Codes in the United States prohibit unfair or deceptive claims-settlement practices, and that since Equitas is acting as an adjuster for the Lloyd’s policies in question, it must accept jurisdiction of courts in the United States on claims that it engages in such practices.(5)
    3. Because of the extraordinary powers which Equitas has assumed under the Reinsurance and Runoff Contract, to-wit, all power to adjust, handle, settle, compromise, accept or repudiate claims, all power to commence, conduct prosecute, settle, appeal or compromise legal proceedings, and all power to negotiate with insureds and to instruct lawyers and other consultants, without input or direction from the original insurers (i.e., the Underwriters at Lloyd’s), Equitas is, in effect "running the case," and therefore ought to submit to the jurisdiction of courts in the United States.(6)

At present, the score is even. Four and one-half years after Equitas came into being, six reported cases have held that Equitas is not subject to jurisdiction in courts in the United States,(7) while six have ruled that it is.(8) The better-reasoned opinions appear to be those which hold that Equitas is amenable to jurisdiction in the United States, based on the activities it actually undertakes. The opposite line of court decisions rely heavily on the wording of the Equitas Reinsurance and Runoff Contract, and appear to elevate form over substance to the severe detriment of policyholders, who find they are deprived of the benefit of their insurance policy terms. Having purchased a contract which included a service of suit clause, U.S. policyholders find that the only party they can sue is an empty shell; all of the money and decision-making power having been transferred to a different party, who claims to be beyond the jurisdiction of the United States courts.

Equitas Claims Settlement Practices

Because of its growing financial problems, State insurance regulators are encouraged to take a close look at how Equitas is handling claims asserted under the policies and reinsurance agreements it has assumed. As mentioned above, a disturbing trend is developing that, if allowed to go unchecked, will continue to impose significant hardship upon U.S. insureds, reinsureds and their claimants, and materially compound the significant financial damage they have already suffered.

A common thread runs through the more than one dozen separate cases in state and federal courts that involve Equitas: the assertion that policyholders and reinsureds must first perfect their claims against Lloyd’s Names before looking to Equitas for payment. This places an unfair and overwhelming burden on claimants. It also runs counter to Lloyd’s centuries old practice of forbidding Names to have any involvement in the defense, adjustment and payment of claims. Simply put, there is no precedent, mechanism or money with which Names could consider and satisfy policyholder claims.

In principle, Names are passive investors who are severally, and not jointly liable for the settlement of claims asserted under policies and reinsurance agreements they underwrote. The number of Names sharing the liability assumed under a single policy can run into the hundreds, or even thousands. They may reside in one or more of 50 different countries. Many are dead and their estates closed.

Taken together, these cases send a clear message: Equitas is deliberately attempting to avoid its liabilities and/or minimize its settlements by misrepresenting its responsibilities to those who purchased Lloyd’s policies in the U.S. prior to 1993. The deception has been advanced by arguing that policyholders and reinsureds must first find and pursue collection from the Names who backed the old-Year Lloyd’s policies before the "reinsurance" that those Names purportedly bought from Equitas will kick in. There is also evidence that Equitas is employing other methods designed to avoid or delay payment of legitimate claims.

All of the delay and deception tactics mentioned above are prohibited by fair claims practice statutes. Any US company that unjustifiably forces a policyholder to sue to collect benefits or engages in similar unethical claims handling practices can be severely disciplined. Equitas, however, falls into a regulatory crack, and there is presently little insurance regulators can do to protect their constituents under existing statutes and regulations governing fair claims practices of non-admitted insurers and reinsurers.

No Privacy of Contract

Equitas has attempted to justify its position that Lloyd’s policyholders must perfect their claims against the Names by arguing that it is a "reinsurer" and therefore no privity of contract exists between Equitas and the policyholders. The tone of the Reinsurance and Run-off Contract speaks differently. The Contract specifically states that the terms of the Agreement "will constitute reinsurance to close." In principle and in practice, the age-old reinsurance to close contracts used to close Lloyd’s syndicate years of account placed the new Names (successor syndicate) in the shoes of the old Names (predecessor syndicate). This is exactly how Lloyd’s Names who were recruited to invest in Lloyd’s in the 1970’s and ‘80s were given their asbestos liabilities! The language of the Agreement places Equitas in an identical position. Equitas became the primary insurer.

The Contract extends 20 specifically described powers to Equitas, giving it the right to control all aspects of claims defense and adjustment. Further, it has the right to delegate its powers to others. Neither the Names nor their representatives have any right to intervene in the settlement of any claim asserted under policies assumed by Equitas. Despite its assertion that it is a reinsurer, logic and the principles of equity dictate that Equitas assumed all of the obligations of a primary insurer and should not be allowed to circumvent its responsibilities as such.

Looking to the Future

A disturbing sequence of events raises serious doubts that Lloyd’s can survive as a viable and reliable market. Lloyd’s has reported, and independent ratings agencies such as Standard & Poors and Moody’s Investors Services have confirmed, that loss deterioration on Lloyd’s market syndicate years of accounts for 1997, ’98, ’99 stand at approximately $5 billion as of March 2001. Its market share is in steep decline. Because its existing capacity is not being utilized, Lloyd’s recently abandoned its long standing policy of only accepting risk submissions from a clique of "approved" Lloyd’s brokers and opened its doors to virtually all qualified insurance brokers. It is no longer an exclusive money pot from which a limited number of brokers can draw wealth with little outside competitive interference.

The "new Lloyd’s" is facing the same type of problems that caused "old Lloyd’s" to form Equitas. Underwriters are losing gigantic sums of money. The significant difference is that today’s Lloyd’s lacks incentives to prevent the limited liability corporate members that currently provide the capital that underpins Lloyd’s syndicate underwriting from leaving the market. This current group of capital providers could withdraw their capacity with almost no recourse. If they walk away, current market conditions make it highly unlikely that Lloyd’s would be able to find new underwriters willing to fill the capacity void.

The world is getting smaller and the stakes higher in an increasingly competitive global marketplace. It is questionable whether the archaic Lloyd’s market can remain viable in today’s world of e-commerce and consolidated, well-capitalized insurance and reinsurance companies. Given the abundance of sophisticated underwriters and unused capacity in the world insurance market, is there really a need for the Lloyd’s market place?

Unless regulators can find a way to regulate Lloyd’s operations and control the business practices of those operating under the Lloyd’s moniker, policyholders will find their visions of security and financial peace of mind shattered by the reality of unkept promises. The most tragic chapter in Lloyd’s history may well repeat itself. The only difference will be that no one will be willing to participate in the charade of another Equitas.


1. The earliest reported case in which this question was faced was Employers Ins. of Wausau v. Certain London Market Companies, 1997 WL 1134980, 97-C-0409-C (W.D. Wis. Oct. 27, 1997).

2. Union Pacific Railroad Co. v. Equitas, Ltd., No. 98 CA 1240 (Col Ct. App., Sep. 16, 1999); Millennium Petrochemicals, Inc. v. C. G. Jago, Inc., No. 3: 98CV-433-J (W.D. Ky. Apr. 13, 1999).

3. This view is advanced in an article published in reply to the Sylvester & Goldman article: "Equitas: Setting the Record Straight," Haarlow, John B. and Baach, Martin R., Mealey's Litigation Reports: Insurance, March 25, 1999.

4. This argument was successfully advanced in Central Vermont Public Service Corp. v. Adriatic Insurance Co., No. 1:96 CV-252 (D. Vt. Feb. 11, 1998), and was later elaborated upon by the attorneys who advance the argument in an article entitled "Suing Equitas on a Lloyd's Policy: Lifting the London Fog," Sylvester, John M. and Goldman, Stephen M., Mealey's Litigation Reports: Insurance, Oct. 13, 1998. It was rejected in two other cases: First State Ins. Co v. Minnesota Mining and Mfg. Co. No. C3-94-12780 (D. Minn. May 1, 1997) and USX Corporation v. Adriatic Ins. Co., 95-866 (W.D. Pa. Sep. 30, 1998).

5. This argument was accepted by the court in Equitas Reinsurance Ltd. v. Browning-Ferris Industries, Inc., No. 14-99-01084-CV (Ct. App. Tex., Apr. 26, 2001).

6. This argument was also accepted by the court in Equitas Reinsurance Ltd., v. Browning-Ferris Industries, supra, n. 3.

7. Employers Ins. of Wausau, supra, n. 1; Unisys Corp v. Ins. Co. of N. Am., No. L-1434-94S (N.J. Super. Dec. 7, 1999); Employers Mt. Cas. Co. v. Owens Ins., Ltd. No. MRS-C-51-96 (N.J. Super. Dec. 7, 1999) Central Maine Power Co v. Moore, No CV-93-489 (Me. Super. Kennebec Co. Jan. 11, 2000); Central Vermont Public Service Corp, supra n. 2; and Equitas Reinsurance Ltd. v. Browning-Ferris Industries, supra n.3.

8. Archdiocese of Milwaukee v. Certain Underwriters at Lloyd's, No. 96 (Cir. Ct. Milwaukee, Wis. July 13, 1999); Boeing Corp v. Certain Underwriters at Lloyd's, No. 99-2-03873 (Sup. Ct. King City, Wash. Nov. 23, 1999); B.F. Goodrich v. Commercial Union Ins. Co., No. CV 9902 0410 (Ct. Comm. Pleas, Summit City, Ohio Oct. 14, 1999); Union Pacific Railroad Co., supra n. 5; Malone v. Equitas Reinsurance, Ltd. 101 Cal. Rptr.2d 524 (Cal. Ct. App. 2000); and Millennium Petrochemicals v. C.G. Jago, supra, n.5.

| - Home - | - Fraud - | - Regulation - | - Litigation - | - News - |
| - Reports - | - Contact Truth About Lloyd's - |