Freshfields has denied any potential conflict of interest in its unusual role advising both the Lloyd's Corporation and Equitas in negotiations for Equitas to take on the £570m reinsurance liability of Lioncover.
Lioncover was set up in 1987 to take on millions of pounds in liabilities from the Peter Cameron Webb (PCW) syndicates which were fraudulently mismanaged in the 1980s. Equitas, the company set up a year ago to reinsure and ring fence the liabilities up to 1992 of other Lloyd's syndicates that faced massive claims, has now taken on Lioncover's liabilities and received a premium of £104m from the Lloyd's Central Fund.
A Freshfields team led by corporate partner Graham Nicholson, who throughout 1996 had helped establish Equitas, represented Equitas in negotiating how much money it could get from Lloyd's and the details of the reinsurance contract. Lloyd's used its own in-house counsel, Julian Burling, and his assistant, John Ellison, while DJ Freeman insurance partner, Richard Spiller, and insurance litigator, David Kendall, were also at the table advising Lioncover.
Another Freshfields team got involved when Lloyd's asked for advice solving a corporate governance issue. Two of the four-strong Lioncover board refused to vote for the transfer of the company's liabilities to Equitas.
Lloyd's asked Freshfields partners Barry O'Brien and Guy Morton whether Lloyd's, as the Lioncover shareholder, could take the decision to reinsure the liabilities with Equitas. O'Brien, who has acted for Lloyd's since 1993 when he began advising it on the corporate capital part of its reconstruction and renewal project, gave his approval.
Freshfields' unusual position in advising the two parties to a transaction could have left it open to accusations of a conflict of interest, although a different team of corporate partners advised each side.
But Nicholson stressed that Lloyd's had asked O'Brien's team to consult it on a 'peripheral matter', not the contractual deal, for which Lloyd's had used its own in-house team. 'It would be wrong to say that we were at the same table together,' he said.
Counsel for Lloyd's, Julian Burling, said that he had no objection to Freshfields' role in the deal.
DJ Freeman's Spiller said the two Lioncover board members who had refused to vote for the deal had been concerned that, since Equitas already reinsured much the same US pollution and asbestosis risks as the PCW syndicates, their exposure would not be decreased.
'They were worried about putting all their eggs into one basket,' he said.
But Equitas says Lioncover's assets of £497m combined with the £104m premium will provide enough money to exceed Lioncover's liabilities by £70m.
Lloyd's names who had already been reinsured under Equitas had also been unhappy at seeing the Lioncover liabilities being taken on by Equitas. If Equitas failed, said Spiller, they would have to dip into their pockets again. But Spiller said he believed these fears had now been allayed.