INSURANCE—Name Dropper

0



American Investors in Lloyd’s Of London Sue Over Losses

Joseph Barth can still clearly remember the day nearly 20 years ago when he flew to England to the offices of Lloyd’s of London, the world-famous insurer perhaps best known for its willingness to insure just about any risk.

He had been tipped-off by his accountant to the possibility of becoming a “name,” the Lloyd’s term for investors in the insurer actually a collection of independent syndicates that underwrite its policies by giving unlimited pledges of their personal assets.

While subjecting oneself to unlimited personal liability is highly risky, Barth claims that risk was downplayed by the insurer, which historically had been highly profitable.

“My recollection is, they indicated the element of risk that you need to be prepared to lose the shirt off your back,” said the real estate broker, during a recent interview. “But they treat you very nicely. You have the general sense of investing in something very substantial. And even though (the risk) was mentioned, the emphasis was on spreading the risk and minimizing the risk to ‘names.'”

But, as Barth and thousands of other “names” were later to discover, the risk was very real when Lloyd’s began to absorb a series of casualties in the late ’80s and early ’90s, including an expanding number of American claims stemming from asbestosis, a lung disease caused by exposure to asbestos.

Barth, 67, said he was forced to declare bankruptcy in 1995, losing his various real estate holdings and his Beverly Hills-adjacent home worth $450,000. He now lives in a Culver City apartment with his wife and still works.

The billion-dollar losses suffered by people such as Barth prompted a flurry of lawsuits against Lloyd’s, filed by enraged “names.” It also led to government investigations in both the U.K. and U.S. over claims that insiders at Lloyd’s knew about the asbestosis problem but failed to warn potential investors.

The Lloyd’s insiders are accused of removing themselves from the risk by shifting it to unwitting syndicates, while starting a recruitment campaign to bring in new, unsuspecting investors like Barth.

Ultimately, the number of Lloyd’s “names grew from about 7,000 in the early 1970s to some 33,000 by the late 1980s, consisting of hundreds of syndicates who both competed for and cooperated in their underwriting, often reinsuring each other.

(Since the asbestosis debacle, that number of individual “names” has dropped to about 3,000, representing about 30 percent of its asset base, with the rest being corporations. This was a major change in Lloyd’s structure.)


Lloyd’s denial

Lloyd’s has long denied the accusations and, indeed, won a landmark, months-long fraud case last year in the U.K. brought by Sir William Jaffray, an outspoken British “name” and others, against the institution.

“You don’t need to listen to what Lloyd’s has to say. There was a six-month court case in the U.K.,” said Caroline Wagstaff, head of marketing and communications for Lloyd’s. “At the end, the judge said the information provided to these people (about the risk) was absolutely clear. There was no finding of misleading or fraud.”

Lloyd’s also contends that the “names” were attracted by the potentially high payoffs from an inherently risky investment, and then when their investments turned south, wanted to change the rules in mid game.

“These are smart, well-to-do people operating in the high-risk end of the market,” said Wagstaff.

Indeed, the “names” acknowledge that the upside could be enormous, because of the peculiar rules of investing in the market, which did not actually require the “names” to put up cash.

Under the system, investors underwrote varying amounts of insurance, but were able to collateralize it with letters of credit at only 30 cents on the dollar. That meant a 10 percent return would actually be a 33 percent return (a 10-cent return on every 30 cents of collateral).

Moreover, investors could then earn interest on their cash elsewhere.

“It’s a way of cashing in on your assets twice,” acknowledged Lomita engineer John Wiggins, who ultimately lost over $1 million and declared bankruptcy after becoming a “name” in 1987.

With the exception of losses it suffered from Hurricane Betsy in 1965, Lloyd’s was such a handsome investment that the local “names” say it was trusted friends, colleagues and other acquaintances who suggested they join.

“None other than my accountant told me about it,” stresses Barth.

The controversy has recently picked up steam in the United States, including an effort on Capitol Hill by the American Names Association, who fought for a special provision in the new federal bankruptcy bill.

The provision would have shielded the 250 or so “names” from British court judgments obtained by Lloyd’s, provided they could prove in a U.S. court that fraudulent misrepresentations or omissions had been made by individual Lloyd executives or agents a lower standard.

However, the Senate stripped the provision from the bankruptcy bill last week, and now the “names” must consider whether they want to seek to have the provision attached to another bill, said Jeff Peterson, the association’s executive director.

The investors contend they need the provision to counter a 1986 contract they signed with Lloyd’s that requires any legal actions against the insurer to be heard in British courts, which the “names” claim favor Lloyd’s because of an act of Parliament partially shielding it from lawsuits.

At issue are millions of dollars in payments that Lloyd’s claims the investors owe to a reinsurer called Equitas, set up by the insurer to right itself financially by clearing its books of all insurance claims prior to 1992.

Lloyd’s says about 95 percent of the 33,000 “names” at its height have signed settlement agreements and paid into the fund. But “names” like Dale Cox, a Palos Verdes Estates resident, don’t want to pay another dime to the insurer.


Working at 80

Cox, who invested in Lloyd’s in 1974, says he has been forced to continue actively running his El Segundo electronics company at 80 years old because of some $2 million in losses he suffered in London.

“I had no idea that asbestos was on the table until it happened. Nobody told me anything about it,” said Cox, who estimates that his underwriting had roughly tripled to more than $300,000 by the 1980s, thus increasing his risk exposure when the losses starting hitting.

“I was in one of the major asbestos syndicates, and now they say I (still) owe them quite a bit of money,” said Cox, who is unsure exactly how much he owes and is a plaintiff in five American lawsuits being brought against the U.S. attorneys representing Lloyd’s and other Lloyd’s affiliates in the states.

Meanwhile, there is still an investigation into Lloyd’s by the U.S. Justice Department that reportedly has been expanded to look into news reports that former California Insurance Commissioner Chuck Quackenbush covered up $400,000 in payments he received from Lloyd’s in 1999.

The payments came after Quackenbush intervened for Lloyd’s against California’s own Department of Corporations, which had sued the insurer in 1996, accusing it of fraud and siding with the American “names,” which at the time numbered about 530 in the state.

The state agency ended up joining in a settlement that same year with other states that also had taken legal action against Lloyd’s. It created a settlement pool of up to $62 million for qualifying “names” who maintain the end result could have been better without Quackenbush’s interference.

Lloyd’s has defended its payments as unrelated to the lawsuit, saying they were reimbursements for expenses incurred by the insurance commissioner for educational briefings related to changes at Lloyd’s. But the development has further enraged California investors.

Thomas Malone, 62, owner of Malone & McCullie Insurance Brokers Inc. in Torrance, invested in Lloyd’s in 1985, and was able to recoup his $20,000 in initial fees and other costs by making small profits for a few years. But then the losses started mounting in the early ’90s.

“I liquidated mutual funds I had. I sold an interest in an apartment building. I sold a condominium I had planned to use for retirement. My house would have been paid off in three years, and I ended up having to refinance it for $300,000, so now I am never going to be able to pay the damn thing off,” he said.

Malone calculates his total losses at $1,084,571. He said despite being forced to pay into Equitas when Lloyd’s was able to draw down a letter of credit, he said he still gets statements from the insurance market that he owes a few thousand more dollars.

Malone said he is particularly irked because, by the time he had invested, he had heard rumors of the asbestos-related claims, prompting him to question Lloyd’s professional underwriters during his own London visit.

“The Lloyd’s underwriters would typically say, ‘We are adequately reinsured for any eventuality,'” recalls Malone, who also is now a plaintiff in several of the U.S. civil lawsuits. “I took them at their word, and of course, I found out later this was false.”

No posts to display