Brief
Fall, 2000

*22 LLOYD'S 101

Richard J. Astor [FNa1]

Copyright ©  2000 by American Bar Association; Richard J. Astor

  *23 The U.S. lawyer dealing with "Lloyd's" has two problems. The first is that third parties endemically misuse essential Lloyd's related terminology. The second is that he probably does not genuinely, truthfully understand the Lloyd's enterprise and how it really works. U.S. lawyers in this position sometimes win coverage cases, but sooner or later your client will fire you for not getting the basics right and for giving the opposition a good laugh at his expense. This article is principally intended to help the U.S. lawyer bringing a claim for an insured on a Lloyd's policy. Wouldn't you rather be a real expert?

Terminology

  Seldom has a business as procedurally peculiar, commercially important, and legally fecund as the Lloyd's enterprise been so poorly understood, so widely misunderstood, [FN1] and so incorrectly described--especially by U.S. claims-side lawyers. [FN2] Neither market practitioners at Lloyd's nor their lawyers can be trusted to correct your errors. Lloyd's-side deponents sometimes seem to take pleasure in entombing you in your own terminological mess while erring themselves in a similar manner. Be especially careful of your own expert witnesses. They may have spent their careers at Lloyd's and know market custom and practice, but they are particularly prone to terminological error, frequently calling a managing agency "the syndicate" or "the underwriter." Even a senior Lloyd's broker may erroneously believe that he deals with "syndicates"--which do not exist (as discussed later)--rather than managing agencies. Spotting these errors will help you understand and clarify your own case.

The single word "Lloyd's"

  The word "Lloyd's" by itself denotes solely the Lloyd's Act 1871, s.3 corporation of that name. Widely abused, the word is not apposite to refer to any component of the Lloyd's enterprise other than that particular corporation, whose correct name is Lloyd's--not "Corporation of Lloyd's," "Society of Lloyd's," "Society and Corporation of Lloyd's," or the faintly ridiculous, recent "Society incorporated by Lloyd's Act 1871 by the name of Lloyd's." Use any of these familiar sounding yet specious phrases in litigation, or the phrase "Lloyd's of London" (which is simply a trademark), and your mark your own card.

  While on the subject of what Lloyd's is not, it is not a primary regulator,  [FN3] an insurer, [FN4] a society, [FN5] an insurance market, or any other sort of market. The unincorporated, incorporeal insurance market at Lloyd's is not synonymous with Lloyd's. Lloyd's is best visualized--as its widely framed, formal statutory objects suggest [FN6]--as to some extent a hollow shell existing principally for the self-regulatory convenience of the Council of Lloyd's [FN7] (which does regulate [FN8] the Lloyd's enterprise) and the administrative and commercial convenience of members of Lloyd's.

The word "syndicate"

  After "Lloyd's," the word "syndicate" is probably the most abused and misunderstood word at the Lloyd's enterprise. That an insured at Lloyd's is insured by a syndicate; that the insured must notify a claim to a syndicate; that it is appropriate for an insured ever to sue a syndicate; and that members of Lloyd's sell insurance through, belong to, or join syndicates are worse than useless misconceptions. Here are some facts:

  . A syndicate does not have members and does not sell insurance. It is incorporeal; has no capacity to contract with anyone; has no legal existence, assets or liabilities; is not a trading or investment vehicle or agent of anyone; does not trade in any way; does not retain managing agencies; cannot be ordered to pay anything to anyone; and can never become insolvent. A syndicate is an idea in the mind of the managing agency. Never sue a syndicate.

  . The only way in which a syndicate can ever be said to exist is by individual members of Lloyd's deploying (if that is what they choose to do) "premium income limit"--akin to gambling chips--on one or more particular "years-of-account" of one or more particular syndicates. Despite its name, a year-of-account is not a time period. It is an accounting and collectivization device designed to get as many members of Lloyd's into a "syndicate" as possible. Like a syndicate, it does not really exist. It employs no one, sells nothing, and contracts with no one. A syndicate emits a new year-of-account at the beginning of every calendar year, giving the false impression that underwriting at Lloyd's is an annual venture. In reality, each year-of-account continues, potentially indefinitely, until it is able to jettison--by outward "reinsurance-to-close"--the accumulated undischarged liabilities of its participants. Never sue a syndicate-year-of-account.

  . All participants in a particular syndicate-year-of-account are required to personally, individually, and directly delegate authority to manage every aspect of their respective individual insurance businesses to their mutual managing agency. This is known as the passivity rule (discussed later). The managing agency typically does not bother to use any special number or code to identify the relevant year-of-account, preferring to talk fancifully of a "syndicate." In fact, if you didn't already know about years-of-account, you might never discover from the opposition that they existed.

  . The managing agency manages the businesses of participants on a particular syndicate-year-of-account collectively--the collectivization rule (discussed later)--and uniformly, giving the illusion of a homogenous single*24 entity. In reality, the managing agency makes contracts of insurance with insureds not on behalf of a syndicate or a syndicate-year-of-account, but on behalf of each syndicate-year-of-account participant individually: the separate contracts rule (discussed later). The year-of-account device enables its participants to enter into their own individual separate contracts, with each assured in a coordinated, collectivized fashion. Syndicate-year-of-account participation is a mere framework within which each underwriting Member of Lloyd's trades individually, personally, directly, and with several liability (discussed later).

  Beware of practitioners using--as they do extensively use--the word  "syndicate" to mean a syndicate-year-of-account, the separate years-of-account of a particular syndicate, syndicate-year-of-account participants collectively, syndicate-year-of-account participants generally, participants on a particular syndicate-year-of-account, a corporate member of Lloyd's, or a managing agency. The insurance practitioner should assume, unless obvious otherwise, that use of the word "syndicate" at Lloyd's is incorrect or misleading.

Some rules of syndicate-year-of-account participation

Managing agency

  As already mentioned, the managing agency is the compulsory instrumentality through which every syndicate-year-of-account participant conducts every aspect of his insurance business. It is the only operation authorized by self- regulators at Lloyd's to conduct that business. Traditionally, the managing agency does not execute the pre-arranged insurance business plans of one or more syndicate-year-of-account participants. Rather, it executes its own business plan: the agenda of the "syndicate." In this limited sense, participants in successive year-of-account of that syndicate support it financially, somewhat like investors. The managing agency is substantively and procedurally the sine qua non of insurance business at Lloyd's. The active underwriter and the claims manager at the syndicate box, though apparently to some extent independent personages, are the managing agency's mere approaches. Practical implication: Notice to an active underwriter or claims manager is arguably notice to the managing agency centrally. And notice to the managing agency centrally is arguably notice to each "syndicate." It will not do as a matter of agency law for the managing agency to compartmentalize itself by "syndicate."

Passivity rule

  It is obviously impracticable for the entrepreneurial managing agency to pay heed to the hunches, wishes, or instructions of a multitude of individual syndicate-year-of-account participants in the course of conducting their collectivized insurance businesses, especially because the insurance products and business ideas emanate (at least traditionally) from the managing agency itself. The managing agency does not want any syndicate-year-of-account participant's views on the merits of assuming a particular risk, of handling a specific claim, or of making a cash call on them. Nor does it ever relay to any syndicate-year-of-account participant a particular claims notification.

  All of these matters are enforced in the passivity rule, of some antiquity  [FN9] and one of the most important components of the standard managing agency agreement between each syndicate-year-of-account participant and his mutual managing agency. [FN10] The syndicate-year-of-account participant not only never knows about but is positively prohibited from having any control over the day-to-day conduct of his own insurance business. Even if the insured or his Lloyd's broker was permitted to deal directly with a syndicate-year-of- account participant (which he can't, as discussed later), the latter is prevented by the passivity rule from taking any part in the controversy. Practical implication: Each insurer at Lloyd's is in the hands of his managing agency.

Impenetrability rule

  Just as the passivity rule prevents the passive syndicate-year-of- account participant from interfering with the managing agency, the impenetrability rule prevents the insured or anyone on his behalf, including his Lloyd's broker, from accessing the syndicate-year-of-account participant. The impenetrability rule seems to be, to some extent, an unwritten custom. Given the managing agency and the Lloyd's broker, the insured usually will never need to access any syndicate-year-of-account participant directly. The Lloyd's broker will go to the managing agency to transact relevant insurance business and give notice of claims supposedly meant to be given to "underwriters." Because of the managing agency, the Lloyd's broker should never need to access any syndicate-year-of-account participant. Practical implication: Ignore the policy's requirement to notify "underwriters" because literal compliance is impossible.

Collectivization rule

  The syndicate-year-of-account is presently a regulatory device established to enable and ensure collectivization of the insurance affairs of its participants by their mutual managing agency. The collectivization rule says that the relevant affairs of every participant on the same particular syndicate-year-of- account must be dealt with by their mutual managing agency not only collectively but also impartially, without regard to their particular individual circumstances or wishes. The managing agency must not discriminate between them. In fact, the managing agency is not interested in syndicate- *25 year-of-account participants individually. Once on a syndicate-year-of- account, participants are treated by the managing agency as anonymous, indistinct parts bound together in a collective whole, without differentiation other than as to each participant's particular percentage participation. The rule applies to the creation and performance of every contractual transaction entered into by syndicate-year-of-account participants through the managing agency. A participant on a particular syndicate-year-of-account cannot choose to take part in some of those transactions and not others. Each participant on the syndicate-year-of-account gives identical authority to the managing agency, is treated substantially identically by the managing agency, and must submit to collective uniform treatment whether he likes it or not. [FN11]

  For example, the managing agency cannot impose the financial burden of a relevant judgment of only one participant on a particular syndicate-year-of- account without behaving identically toward the other participants on that year-of-account. Practical implication: It is often enough for an insured at Lloyd's to sue just one participant on a particular year-of-account.

Separate contracts rule

  The result of the managing agency contracting on behalf of each syndicate- year-of-account participant individually is a multiplicity of virtually identical contracts--as many as the particular year-of-account has participants. Each syndicate-year-of-account participant, being a sole trader, has his own personal, individual, direct, separate contract with each person with whom the managing agency contracts on his behalf, including each of those to whom he sells insurance, each of those who sell him reinsurance, and (as a general rule) each of the accountants, auditors, actuaries, lawyers, loss adjusters, and others apparently providing services to the "syndicate."

  The separate contracts rule, in effect prohibiting participants on the same syndicate-year-of-account from co-contracting, means that syndicate-year- of-account participants never share anything contractually. It is a misconception that each syndicate-year-of-account participant must be sued separately for his share of the syndicate's or syndicate-year-of-account's supposed liability. Practical implication: Don't permit Lloyd's side lawyers to snowstorm you with the notion of a multitude of different insurance contracts. In practice, they are all identical except for the syndicate-year-of-account participant's particular individual exposure to liability.

Several liability rule

  The several liability rule--largely statutory [FN12]--is of fundamental importance in understanding how syndicate-year-of-account participants sell insurance. The insured is on notice of the rule from the well-known "each for his own part and not one for another" Lloyd's policy boilerplate. The same rule, incidentally, applies to the syndicate-year-of-account participant in his capacity as a member of Lloyd's. Here, various internal rules of the Lloyd's enterprise require the member to contribute to a central fund, to be disbursed at the Council of Lloyd's discretion for a wide variety of purposes. This is apt to be confused with joint liability but is merely several liability, because the member is liable to contribute to the central fund only his own particular due and not that of any other member. Practical implication: Regardless of contrary provisions in local law, don't even think about suing one participant for the insurance liabilities of another, even if they are on the same syndicate-year-of-account.

Bottom line

  The depth and breadth of terminological error at Lloyd's is astonishing. Use the right terms correctly, and you may be more than halfway to winning your case. Correct terms will liberate you to devise creative arguments about how business is and should be done at Lloyd's, perhaps raising novel points of agency law. For example, because the impenetrability rule makes it impossible for either the insured or his Lloyd's broker to comply literally with the policy requirement to give notice to "underwriters," and because the passivity rule apparently makes it impossible for a syndicate-year-of-account participant to do anything with the notice if he ever did receive it, is the Lloyd's broker the managing agency's agent for purposes of the insured notifying a claim? Does the insured comply with a policy notification requirement in all cases, and however many syndicate-years-of-account (and their participants'*26 managing agencies) on the slip, simply by giving notice to the Lloyd's broker? The field is presently wide open for U.S. lawyers to win their coverage claims, and change the balance of advantage in their dealings with the opposition, through genuine expertise in the law and lore of the Lloyd's enterprise--rather than luck.

[FNa1]. Richard J. Astor is a barrister and Associate of the Chartered Institute of Arbitrators, based in London. He practices and consults extensively on Lloyd's-related matters, has acted as an expert witness in Lloyd's-related litigation in the United States, and is the author of the two- volume Astor's Law and Practice of Lloyd's, 2d ed. (a major professional treatise on Lloyd's, due out October 2000). He can be reached at (44 20) 8455 5081 (phone) or (44 20) 8455 5050 (fax).

[FN1]. For a typical example chosen randomly from hundreds of similar cases, see State ex rel. Barclays Bank PLC v. Hamilton Cty. Court of Common Pleas, 660 N.E.2d 458, 459 (Ohio 1996). 
    Lloyd's is ... an insurance market-place. ... The Corporation of Lloyd's  (the Corporation) ... regulates Lloyd's insurance market. Through the Council of Lloyd's (Council), the Corporation promulgates standard form agreements which govern the relationships among the entities involved with the market. The Council acts as trustee of a fund maintained to ensure payment of policyholder losses. 
Lloyd's is not a marketplace. The Corporation does not primarily regulate anything. The Corporation does not promulgate rules through the Council. The Council does not act as a trustee of anything.

[FN2]. The author recently examined every U.S. federal and state case since 1949 materially involving the Lloyd's enterprise. Well over 95 percent of them contained material terminological or conceptual error.

[FN3]. For judicial error, see, for example, Napier and Ettrick v. R. F. Kershaw Ltd., 1 W.L.R. 756, 759 (1999) ("The function of Lloyd's is to manage and regulate the Lloyd's insurance market"); Lloyd's v. Leighs, C.L.C. 1398, 1399 (1997) ("The society has ... purported to procure ..."); Ashmore v. Lloyd's, (No. 1), 1 W.L.R. 446, 449 (1992) ("Lloyd's is a society authorized by its constitution to exercise supervisory, regulatory and disciplinary power over its members"); Ashmore v. Lloyd's, (No. 2), 2 Lloyd's Rep. 620, 632 (1992) ("Lloyd's is authorized by its constitution to exercise supervisory, regulatory and disciplinary powers over its members. ... It is a most important function of the Corporation to regulate the Lloyd's insurance market"); Shell v. R. W. Sturge Ltd., 850 F. Supp. 620, 626 (S.D. Ohio 1993) ("The Corporation of Lloyd's was created by an Act of Parliament to regulate Lloyd's insurance market"); Haynsworth and Leslie v. Lloyd's, 121 F.3d 956, 958 (5th Cir. 1997) ("[T]he Corporation of Lloyd's [is] the entity that governs that market"). All these dicta are erroneous.

[FN4]. See Rozanes v. Bowen, 32 Lloyd's Rep. 98, 101 (1928) ("[I]t cannot be too clearly understood by those who do not know anything about it that Lloyd's does not insure; Lloyd's as such never insures; the corporation never insures. ... Lloyd's insures nobody and takes no liability"). See also Industrial Guarantee Corp. v. Lloyd's, 19 Lloyd's Rep. 78, 83 (1924), commenting on a promotional pamphlet put out by Lloyd's ("There is a statement that the premium income of Lloyd's is now £ 30,000,000 a year. As a matter of fact, Lloyd's have no premium income at all. They have not £ 30,000,000 or thirty pence of premium income"). See similarly Napier and Ettrick v. R. F. Kershaw Ltd., 1 W.L.R. 756, 759; Scott v. Tuff-Kote (Australia) Pty. Ltd., 2 Lloyd's Rep. 103, 108 (1976) ("When someone makes a claim that his business procedures are insured by Lloyd's, the falsity of that claim does not affect any business of the corporation, but it does affect the business of the underwriters who constitute the underwriting members of the corporation"). And see Cassidy v. Forum Ins. Co., 561 N.E.2d 1167, 1168 (Ill. App. 1990) ("The Lloyd's corporation does not operate in the same manner as a United States corporation. Lloyd's provides a physical site for its members to conduct the buying and selling of insurance risks. None of these risks falls upon the corporation but upon its individual members").

[FN5]. For English judicial error, see, for example, Ashmore 1 W.L.R. at 449 (1992) ("Lloyd's is a society of individual underwriters incorporated by statute and authorized by its constitution to exercise supervisory, regulatory and disciplinary power over its members." It is neither).

[FN6]. See Lloyd's Act 1911, ß  4: 
    The objects of the Society shall be: The carrying on by Members of the Society of the business of insurance of every description including guarantee business; The advancement and protection of the interests of Members of the Society in connection with the business carried on by them as Members of the Society and in respect of shipping and cargoes and freight and other insurable property or insurable interests or otherwise; The collection, publication and diffusion of intelligence and information; The doing of all things incidental or conducive to the fulfilment of the objects of the Society. 
Note the misconceived use of the word "Society" throughout Lloyd's Act 1871- 1982.

[FN7]. See generally Lloyd's Act 1982, ss.3-5.

[FN8]. See generally Lloyd's Act 1982, ß  6.

[FN9]. See, e.g., Hambro v. Burnand, 2 K.B. 10, 18 (1904).

[FN10]. A typical expression of which is s.7.3 of the managing agency agreement at Lloyd's Byelaw 8 of 1988, Sch. 3 (and see various subsequent amendments): 
    The Name acknowledges that he has delegated to the Agent sole management and control of the Underwriting and that the Agent is not bound to comply with any instructions or requests of the Name relating to the conduct of the Underwriting and undertakes that he will not in any way interfere with the exercise of such management or control. 
And see the (somewhat narrower) statutory requirement at Lloyds Act 1982, ß  8(2): ("An underwriting member (not being himself an underwriting agent) shall underwrite contracts of insurance at Lloyd's only through an underwriting agent").

[FN11]. See, e.g., Daly v. Lime Street Underwriting Agencies Ltd., F.T.L.R.  (1987).

[FN12]. Lloyd's Act 1982, ß  8(1): 
    An underwriting member shall be a party to a contract of insurance underwritten at Lloyd's only if it is underwritten with several liability, each underwriting member for his own part and not one for another, and if the liability of each underwriting member is accepted solely for his own account. 
In reality, only the risk, not the contract, is underwritten. The risk is not underwritten with several liability; the syndicate-year-of-account participant assumes several liability. Also, the provision is redundant: Several liability imports both "each for his own, not one for another" and "solely for his own account."

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