PART 1: THE MAKINGS OF THE CATASTROPHE
1930s: Lloyd's underwriters start to write U.S.
general liability risks, on a broad form basis. Many policies were unlimited
with respect to both aggregate claims and exposure.
1960: Rachel Carsons published Silent Spring,
warning of environmental disasters and making specific mention of the Rocky
Mountain Arsenal pollution, for which Lloyd's was a major insurer.
Lloyd's underwriter, and later member of the Asbestos Working Party, Charles
Skey visited New York to investigate the asbestos situation.
1968 Insurance industry
analysts began to realise that asbestosis claims would lead to massive insurance
American insurers started to reserve for asbestos, pollution and health
hazard claims, for which they paid out $540 billion between 1970 and 1995.
They will pay a further $90 billion by 2004.
The members of the Lloyd's ruling Committee realised that they and the 6,000
wealthy British names may face financial ruin. The report from the resulting
Cromer Commission investigation recommended that the assets, which each
Name must show to back Lloyd's membership, be decreased. This would
allow easier recruitment of new Names and capital. Hence there would be
more assets to absorb the impending losses, and existing Names could leave
- a Ponzi scheme.
Lloyd's suppressed the Cromer report until well into the 1980's, and has
never issued it to Names.
1970: Lloyd's and American underwriters modified their liability
policies to exclude environmental claims unless the damage arises from a
'sudden and accidental' incident.
1972: Lloyd's opened its membership to Americans, and began to recruit
more members. Membership rose to 10,662 in 1977, to 23,436 in 1984, and
peaked at 32,433 in 1988.
1973: Ralph Rokeby-Johnson, a senior underwriter and later a member
of the Asbestos Working Party, advised his close friends that asbestosis
would bankrupt Lloyd's.
In the case Borel v. Fibreboard Paper Products, the judge stated
that 1 in 10 (21 million) Americans had been exposed to asbestos related
products at home or at work.
U.S. direct insurers inserted an asbestos exclusion clause in all general
Lloyd's suppressed information relating to the losses, and started to recruit
more members in the U.K. Australian, Canada, South Africa, and elsewhere.
1974: Ralph Rokeby-Johnson reinsured all pre-1969 liabilities from
his syndicate with Firemans Fund. This allowed the 1970 year of account
to be closed.
1978: In the case Keene Corp. v. INA the judge ruled that
claimants do not have to wait for asbestosis-related conditions to occur,
but only have to prove exposure to asbestos. This decision greatly increased
the rate of claims being filed against Lloyd's and other insurers.
Love Canal became the first major pollution liability to hit Lloyd's.
2: THE CRISIS DEEPENS
1979: The Fisher Study recommended that Lloyd's should be granted
the power of self-regulation, with immunity from prosecution unless fraud,
which is harder to prove in the U.K. is demonstrated.
Citibank N.A. warned Lloyd's that there were insufficient funds on reserve
in the Lloyd's American Trust Fund to cover the looming asbestosis and pollution
Asbestos-related claims started to pour into Lloyd's.
In the U.S., Lloyd's increased its recruiting campaign for new Names, while
failing to disclose the potential market losses from asbestos and pollution
1980: The U.S. Congress passed the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA). The Superfund trust was set up.
In August, Lloyd's set up the Asbestos Working Party (AWP). It estimated
that the amount per asbestos-related claim would be $75,000.
By December, the AWP realised that the amount per asbestos-related claim
would be $100,000-125,000, and the number of claims would increase. This
was not revealed to the market.
1981: In June, the Selikoff report, 'Disability Compensations for
Asbestos-Associated Disease in the United States' was published in the U.S.
The report gave an estimate for $170,000 per settlement, which was similar
to that in a commercial Union report, as well as an estimate of the total
number of potential claims.
In November, Syndicate auditors' raised concerns over the asbestos and other
1982: Some Underwriters, many of whom are on the AWP, and also Murray
Lawrence, then deputy-Chairman of Lloyd's, unloaded their liabilities by
purchasing run-off insurance from the few syndicates offering such policies,
while concealing what they knew. Syndicate 317, run by Richard Outhwaite,
underwrote almost 50 such policies in 1982. Much of the Lloyd's exposure
to asbestos-related claims was then concentrated in a few syndicates, contrary
to sound insurance practice.
In January, Lloyd's was advised
of, and concealed from the Market, the contents of the Selikoff Report.
In February, Auditors Neville
Russell, along with other Lloyd's auditors advised Lloyd's of the impossibility
of closing the 1979 year of account for many syndicates due to the unquantifiable
asbestos and pollution liabilities, and sought the guidance of the Lloyd's
Lloyd's had now reached the peak
of the crisis. Failure to close the 1979 year of account in 1982 would have
had the following consequences. Existing Names would have faced huge losses,
and would have been unlikely to be able to go on trading. It would have
been impossible to recruit new Names. Hence Lloyd's would have great difficulty
in continuing to trade. In addition, the opportunity for some insiders to
make fortunes, in some cases in excess of $50 million from the public flotation
of their agencies, would have been denied.
3: THE 'SOLUTION'
Lloyd's contrived a two-part solution. The losses would be passed from year
to year by increasing the minimum reserves that syndicates must set aside
for certain classes of business, when purchasing re-insurance to close (RITC).
Given that in many cases it was impossible to quantify the losses, these
RITC transactions were fraudulent. Further Names would be recruited to dilute
the losses. These new Names were recruited, and not told of the losses which
were being 'reserved for.' This fraud was not just misrepresentation, bu
also comes from the fact that a syndicate trades as an annual venture, and
should not be allowed to build up 'reserves.'
Lloyd's indemnified the syndicate
auditors in order to get their approval of the syndicate accounts for the
1979 year of account.
In March, Murray Lawrence composed
a letter to all members and managing agents warning of the asbestos and
pollution liabilities. It was never sent to most agents, nor U.S. policy
In November, after pressure from
Lloyd's, the British Parliament passed the 1982 Lloyd's Act, granting Lloyd's
the power of self-regulation, and its officers protection from lawsuits.
Some 50 Conservative Members of Parliament were Names, with an obvious conflict
Lloyd's London Market Excess
of Loss (LMX) syndicates started the practice of reinsuring other LMX syndicates,
and then declaring large profits. This reduced the funds available to pay
losses, in some cases by up to 70%, while the brokers made fortunes from
commissions on each transaction. Lloyd's, which should have prevented this
spiral, took no action. This activity gave the illusion of there being an
increase in Lloyd's overall business, which used up market capacity from
new Names, and allowed Lloyd's to recruit even more Names.
1983: The EPA ordered Shell to pay the clean up of Rocky Mountain
Arsenal. Lloyd's denied liability.
Hurricane Alicia hit the United States, exposing the potential losses on
1985: Outhwaite Syndicate 317 was left open for the 1982 year of
account after the auditors expressed concerns over asbestos and pollution
liability losses. Despite this, Richard Outhwaite, the Underwriter, continued
to assure the Names that the account would prove to be profitable.
1986: Lloyd's required all Names to sign a new 'General Undertaking'
agreement, which included 'forum selection' and 'choice of law' clauses,
saying that all cases must be heard in U.K. courts applying U.K. law. This
contravened existing American Securities law whereby American citizens cannot
sign away legal rights to a foreign country if similar legal protection
is not provided. The new 'General Undertaking,' along with the 1982 Lloyd's
Act, shielded Lloyd's from all litigation.
Names on Outhwaite Syndicate 317 had to pay $30 million to cover asbestos
1988: For the first time, Lloyd's publicly, but briefly, stated that
there was an asbestos problem.
Richard Outhwaite warned of the dangers to the LMX market from the LMX spiral.
The Piper Alpha oil platform exploded.
A jury ruled that Shell Oil was liable for the clean-up costs at Rocky Mountain
1989: This was a year of major disasters: Exxon Valdez, San
Francisco earthquake, Phillips Petroleum Plant explosion. These, along with
Piper Alpha, triggered massive losses for the 14 LMX syndicates, where most
of the losses were concentrated. These syndicates contained a disproportionate
number of U.S. Names, some of whom lost $2 million each.
PART 4: THE EFFECTS OF THE FRAUD ARE EXPOSED
1991: Lloyd's declared a loss of more than £1 billion for 1988
year of account. The asbestos-related losses surfaced, and were devastating
to U.S. investors, and external Names in general. Their losses were more
than double those of the 'working' Names, i.e. brokers, members' and managing
agents who control Lloyd's.
Names formed action groups and
successfully sued Lloyd's agents, but later found that the Errors and Omissions
(E&O) coverage was insufficient to cover all the claims.
The Roby case, where U.S. Names filed racketeering charges against
Lloyd's, was the first of many cases to be thrown out on the 'forum selection'
clause. The court assumed that Lloyd's had SEC approval as a security, which
in fact it did not have.
The SEC suddenly ceased its investigation
into Lloyd's for possible violations of securities laws.
Federal Judge Joseph Sadofski
ruled, in a pollution-related case that "public interest overrides contractual
language." This ruling invalidated environmental damage exclusion clauses
in insurance policies.
1992: Lloyd's declared larger losses for the 1989 year of account.
Names continued to leave Lloyd's as they did not have the money to continue
1993: Lloyd's declared even larger losses for the 1990 year of account.
The exodus of Names continued. In 1993 only 19,537 Names traded.
1994: Lloyd's made its first offer to Names, of $900 million. No
cap, i.e. protection, against further claims was included in the offer.
Various Names' Action Groups
won all court cases brought against members and managing agents at Lloyd's,
but only recovered £1.5 billion of the £9.3 billion in asbestos
and pollution claims.
However, Lloyd's unilaterally
amended the Premium Trust Deeds, which govern a Name's obligation to pay
Lloyd's for losses allegedly owed by Lloyd's syndicates, so that the £1.5
billion in awards went to Lloyd's.
1995: The New York State Insurance Department investigated the Lloyd's
American Trust Fund which is administered by Citibank in New York City.
Its public report concluded that there was a deficit in the fund of $18
billion. It further revealed that individual accounts had not been maintained
for each Name, as required by trust law.
The Treasury Select Committee
of the British Parliament continued its investigation into financial self-regulation,
including Lloyd's. It heard evidence that fraud had been committed at Lloyd's.
In its report, the Committee called for a major enquiry into Lloyd's. The
British Government deferred any enquiry until the middle of 1997, i.e. after
the next general election.
Lloyd's made a second, £2.8
billion offer to Names in response to Names court actions. This offer provided
cover for existing claims and an allowance for future claims. However, it
did not preclude policy holders from pursuing Names for payment of the reserves
were insufficient to meet long tail claims.
Lloyd's CEO Peter Middleton resigned,
after admitting that there had been fraud at Lloyd's.
1996: Lloyd's made its third offer, called 'Reconstruction &
Renewal' (R&R), of £3.1 billion. However, Names were required to
pay £1.4 billion in alleged losses, and give up £1.5 billion in
litigation awards. In addition, Names were required to give up all past,
present and future claims against Lloyd's. It would give the ongoing Lloyd's
market almost complete protection against pre-1993 liabilities. Lloyd's
consistently denied Names requests for details as to how their liabilities
had been calculated.
Securities Regulators in 13 states issued Cease and Desist orders against
Lloyd's. These were based upon claims that Lloyd's broke state laws by selling
unregistered securities through unregistered agents, and misrepresenting
the investments through material non-disclosure and fraud.
Lloyd's set a deadline of 28
August 1996 for acceptance of the offer, with threats to aggressively pursue
Names for their alleged losses if they did not accept. Lloyd's, managing
agents, and members agents continued to deny Names access to information,
to which they were entitled by law, regarding their underwriting activities.
The North American Securities
Administrators Association sent a task force to London to reach a resolution
to securities fraud cases, either filed or pending, in some 40 states. In
secret negotiations, the task force agreed to an additional £40 million
discount on the payments to be made by American Names, but only for Names
who accepted R&R. Lloyd's had already taken more than £700 million
from American Names.
In Allen v. Lloyd's, Judge
Robert Payne ordered, in a 141-page decision, that Lloyd's provide detailed
and independently audited accounting of the losses for each Name. He further
enjoined Lloyd's from imposing its August 28 deadline for the acceptance
Lloyd's filed an emergency appeal,
claiming that if the deadline for acceptance was not met, the international
insurance industry would collapse. This view was supported by some state
Insurance Commissioners. The appeals court overturned Judge Payne's decision,
after two hours of oral evidence and without reading Names affidavits. Two
hours after the judgment, Lloyd's extended the deadline for acceptance of
R&R by two weeks to 12 September 1996. Names later appealed the case
to the U.S. Supreme Court.
PART 5: THE PAY OFF
In September, Lloyd's reported that, of 34,000 Names, 82% accepted unconditionally,
13% accepted conditionally, and 5% rejected the offer. 700 rejecters live
in the United States.
In October, Lloyd's wrote to
all Names who had conditionally accepted, saying that unless they removed
the conditions, Lloyd's would not accept them as part of the settlement
offer. This was after Lloyd's had implied that it had accepted these offers.
Lloyd's failed to make payments
to Names who were due to receive payments back to them as part of the settlement.
Lloyd's was rumored to be short of money, as other parties to the settlement
offer, including agents and brokers had not paid up.
In December, Lloyd's failed to obtain summary judgments in the British Courts
against Names who did not accept R&R. The cases went to full trial,
and are expected to go the European Court.
1997: The number of Names fell to 9,972, with corporate capital backing
44% of the market capacity.
Lloyd's announced that it was
considering some form of external regulation, as part of its overhaul of