Australian Financial Review 

News - 11.01.02 03:53 

Trevor Sykes

Christmas brought one very small glimmer of a possible present to those beleaguered Australians who were comprehensively shafted as "names" of Lloyd's in the 1980s.

The European Commission is to launch a legal action against the UK Government for allegedly failing to adequately regulate Lloyd's of London. The EC said last month there was prima facie evidence that the British Government breached European law governing the insurance industry, raising the prospect that as many as 20,000 names would be able to sue to recover the £8 billion they lost.

This is the last straw for the names to clutch. Their monster court case against Lloyd's came to judgement in November 2000 in what is called the Jaffray case. In that judgement, Justice Peter Creswell of the Queen's Bench came down with damning findings about the way Lloyd's had been run in the 1980s but found that its actions had not crossed the threshold of fraud and therefore the names could not recover damages.

Christopher Stockwell, chairman of the Lloyd's Names Association, who was bankrupted by the losses suffered in the insurance market, said he was delighted by the EC's decision. 

"We believe this will be the first step in enabling the names to seek compensation from the Government for the losses they have suffered."

Lloyd's names have lost a series of legal actions through the UK, US and European courts after incurring heavy losses in the 1980s. They allege they were wrongly persuaded to invest in risky syndicates.

Two years ago when the Jaffray case was at its height, a number of former names made complaints to the EC regarding the UK Government's prudential supervision of Lloyd's. 

Under article 226 of the European Community Treaty, the EC has power to pursue any failures by member States to follow EC directives. Such cases are taken before the European Court of Justice. Neither the EC nor the court can take any steps against Lloyd's, but they can against the UK Government.

What the names are hoping is that a successful action against the UK Government will clear the way for them to pursue damages claims against the Government. If the EC action does not succeed, then the names' hopes are dead. They already have no further recourse against Lloyd's and if the EC action fails, they will have no obvious further recourse against the UK Government. This is their last crack of light from a closing legal doorway.

The EC has issued a letter of formal notice accusing the Government of non-compliance with the EU's 1973 Non-Life Insurance Directive, which requires member States to ensure that insurance businesses have enough assets to cover their liabilities.

On Creswell's findings, Lloyd's did not meet that criterion in the 1980s, although the old insurance institution appears to have mended its ways today.

The Jaffray judgement (the case was taken in the name of William Jaffray) amounted to a condemnation of the way Lloyd's handled business and its names in the 1980s.

In that case, the names claimed fraudulent misrepresentation by Lloyd's. They said they were persuaded to invest or continue investing on the basis of accounts between 1981 and 1987 which hugely understated their liability to asbestos-related claims.

Creswell said: "The catalogue of failings and incompetence in the 1980s by underwriters, managing agents, members' agents and others ... is staggering and brought disgrace on one of the City's great markets.

"External names ... were the innocent victims of the failings and incompetence. Many names have suffered enormously in financial and personal terms."

The Jaffray case was complicated by the fact that losses in and after the relevant period were caused by other big insurance hits, including Hurricane Gilbert (1988), Hurricane Hugo (1989), the Exxon Valdez oil spill (1990) and the San Francisco earthquake (1989).

The names' case placed heavy emphasis on a letter written by the audit firm Neville Russell, written on behalf of themselves and five other firms that audited 80 per cent of the Lloyd's syndicates. 

The Neville Russell letter, dated February 24, 1982, was written to the manager of the Audit Department at Lloyd's. It said: "A substantial proportion of our syndicate clients have losses or potential losses arising from asbestosis and related diseases." 

However, it appeared that syndicates were unable to quantify their final liability with a reasonable degree of accuracy. To that date there had been 13,000 claimants, but total exposure to the problem appeared to be considerably in excess of that figure.

Most syndicates were not sure of their reinsurance recoveries and would also incur losses on their own writings of reinsurance business.

Lloyd's audit instructions required that if there were any factors that might affect the adequacy of reserves, the auditor should report to the committee and obtain instructions before issuing his syndicate solvency report, the letter said.

"We consider that the impossibility of determining the liability in respect of asbestosis falls into this category and we accordingly ask for your instructions in this respect," Neville Russell said.

The names have always claimed that proper and responsible regulation of the market would have required Lloyd's to bring the substance of that letter to the attention of all members' agents for communication to the names, and that was not done.

Lloyd's defended the case on the grounds that limited information was available about asbestosis in the early 1980s and that asbestosis cases developed in ways that were not predicted within the insurance market.

Lloyd's also denied dishonesty by underwriters or in recruitment of names.

Creswell noted that investigations into Lloyd's had uncovered scandals. One was the use of "baby syndicates" in which agency directors and associates were favoured either by receiving more profitable business than that directed to other syndicates under the control of the same underwriter, or by manipulation of funds between syndicates.

Another scandal was the placing of reinsurance premiums on behalf of syndicates with companies (mostly offshore) in which the agency or holding company director had a beneficial interest. Some of these were not reinsurance companies at all, but a conduit for diverting funds which legally belonged to names. Others offered genuine reinsurance but under secret terms which guaranteed them secret profits at the names' expense.

A former chairman of Lloyd's, David Rowland, testified that competence in areas of the Lloyd's market was seriously lacking in the 1980s. "The level of ability of Lloyd's was not at the level I would wish, looking backwards," he said.

In evidence to the Treasury and Civil Service Committee in 1995, Rowland was asked whether people with inadequate resources had been encouraged to become names during the 1980s. 

He replied: "Yes. They had to pass the relevant tests, they had to show the minimum necessary. But if you are asking me a general question, I think that many people came into membership either stretching themselves, being encouraged by their banks and other advisers to do so, and indeed by agents who brought them in - everybody has a responsibility in this - who never should have been members of the market."

Asked whether people had been brought in under false pretences, he replied: "No. I answered exactly as I believe. False pretences may have occurred but I am talking about an atmosphere which existed that many people were encouraged into membership who in hindsight should never have become members."

The casualties to the names were enormous. Lawyers for the names have claimed that losses averaged £263,400 for external names (that is, names who were not working members of Lloyd's). Many names had been forced to sell their homes or been evicted. Fifteen had committed suicide, although Lloyd's argued that it was not clear they had suicided as a result of their insurance losses.

Lloyd's greatly reduced the number of outstanding cases with names by what is known as the R&R settlement. Under this settlement, names agreed to pay set amounts to Lloyd's and drop all further claims. The average debt Lloyd's was allegedly due by names associated with the Jaffray case was £364,000 and under R&R they could have bought out for £66,000.

Having rebuffed the R&R offer, the remaining names fought the Jaffray case and lost. The hold-out names have now spent more on litigation than they would have spent on the R&R settlement. Their last hope is that the EC will clear the way for a case against the British Government.

So the EC didn't give the hold-out names a real Christmas present. Just a small promise that they might get one in future.