Did Lloyd's mislead the markets?
11 July 1995
21 November 2013
17 February 2014
13 December 2013
28 June 2013
6 September 2013
Did Lloyd's conceal the nature and scale of liabilities arising from asbestos claims, and thereby mislead the market?
Evidence culled from the reports of US law firms combined with insiders' information and Lloyd's own statistics suggest this may be the case, say some lawyers.
If this were proved the disastrous consequences for Lloyd's would be as unquantifiable as the continuing market losses arising from long-tail US asbestosis litigation. Lawyers say if grounds were found to suspect fraud, further cases for legal action by Names and reinsurers denying liabilities could be expected.
This week, Parliament's Treasury and Civil Service Select Committee is likely to turn up the heat when it publishes its latest report into financial services regulation by renewing the call for a "wide investigation" into Lloyd's events of 1970-1980. The committee's first call came last March. But, together with a demand for a fully-independent regulator to replace the Department of Trade and Industry (DTI), it was rejected by the Government.
The select committee's report will bring back into focus some of the issues alluded to by two protagonists: John Donner, the retired senior Lloyd's underwriter, and the Names Defence Association (NDA).
Donner's calls for an independent inquiry have been twice rejected by Lloyd's - in 1990 by a Lloyd's internal inquiry and in a report this year by Freshfields, acting for
Lloyd's, which said his 50-page report, made in March, brought no hard evidence to bear.
But Donner is refusing to go away, despite the fact that Lloyd's has twice concluded that he "has failed to produce any material to substantiate or support his allegations or theories".
Already a war of words is building up between Freshfields and London solicitors Memery Crystal, which delivered a strong rebuttal of Freshfields' report.
A study of Lloyd's statistics and US law firm reports by the NDA and Memery Crystal is claimed to show "possibly fraudulent" under-reserving of long-tail US liabilities and "stair-stepping of reserves" to allegedly conceal losses on syndicates with the effect of defrauding Names lumbered with growing risks.
Donner, in a report by his solicitors Memery Crystal to Lloyd's, alleges information was withheld about the scale of potential losses for asbestos claims. Such information was collated by the Asbestos Working Party (AWP) set up in 1980 by the then Committee of Lloyd's.
This information was contained in reports by US law firms such as LeBoeuf, Lamb, Greene & MacRae, Lloyd's US counsel, and Mendes & Mount Lord Bissell & Brook, which reported to Lloyd's and US insurance clients on the type, size and volume of asbestosis awards and predicted claims.
Donner's submission includes examples of information withheld - Lloyd's allegedly not telling the market of reports predicting "bankruptcy" for reinsurers or that average US settlements had risen from $75,000, a figure Lloyd's syndicates used to calculate reserves, to $170,000.
Lloyd's panel auditors anticipated asbestosis claims totalling $2 billion.
But the US government-sponsored Selikoff report, which predicted 200,000 deaths from asbestosis by the end of the century and total claims of around $170 billion, was also kept quiet by Lloyd's, says Donner.
He claims Leboeufs partner Charles Havens III sent copies of the Selikoff report to the AWP and the Lloyd's Underwriters Non-Marine Association in 1982. The report warned that Lloyd's insurers faced $544 billion potential liability from 3,200,000 possible claimants; Lloyd's underwriting capacity in 1982 was just $4,756 billion.
Meanwhile, accountants Neville Russell, a member of the Lloyd's panel of auditors, voiced its concern to the audit department of Lloyd's in February 1982 over the adequacy of syndicates' reserves for asbestos-related claims. It could not sign off reinsurance contracts and close syndicates' 1979 year of account because of an unknowable volume of claims coming through, which could bankrupt the market.
Donner also claims Lloyd's went on a massive drive to recruit Names to "dilute the impending costs" to the market. Names increased from 7,710 in 1975 to 18,506 in 1980, a more than four-fold increase unjustified by any growth in Lloyd's business. The withholding of information led to "thousands" of Names joining high-risk syndicates, some of which were also reinsuring other high-risk syndicates. He also claims some of this reinsuring was done by those who had access to information warning of potentially huge losses.
Donner's report is also critical of the DTI. He says it "was or should have been aware" that certain syndicates were "grossly under-reserving" but took no action and failed to consider the long-term US liability losses despite having "details that such claims would be massive, unquantifiable and inevitable". As such, claims Donner, the department was "reckless or negligent".
Lloyd's response to these and other alleged failings has been to reject the Donner report and on 6 September it said no independent inquiry would take place. Donner, it said, had "failed to produce any material to substantiate or support his allegations and theories" and had "misquoted or misconstrued...many of the documents".
Freshfields had interviewed the 1990 internal review committee of four "nominated members" and delivered a "comprehensive response" to each allegation.
Lloyd's also accepts that Freshfields "were not instructed to further review the work done by them, to second guess their conclusions, or to search for evidence not put forward".
Freshfields and Lloyd's are now scrutinising Memery Crystal's rebuttal of Freshfields' statement. In it, Memery Crystal criticised Freshfields' response to Donner as "selective and incomplete".
Memery Crystal also argues Freshfields does not answer Donner's underlying point, that the extent to which Lloyd's knew of asbestos losses and its alleged attempt to conceal this knowledge will only be revealed by an independent inquiry.
In its statement, Lloyds added that the submission by Donner referred to and relied on many sources as evidence of alleged wrongdoing.
"On analysis, however, none of these sources support the allegations which have been made and many of the documents have been either misconstrued or misquoted. Some documents simply do not support the assertions which are being made about them, while others are relied upon to support matters to which the document itself makes no reference whatsoever," it claimed.
It added that Freshfields had produced a "comprehensive response to each and every allegation in the submission".
And the statement added that press reports that the Council of Lloyds had decided that an inquiry into asbestosis was unnecessary were, in fact, incorrect.
Lloyds "remains willing to investigate fully any material which may be provided to it from any source. If the material warrants an inquiry or disciplinary action into alleged malpractice or improper conduct at Lloyd's, including matters relating to asbestosis, such action would follow," the statement said.