Spiralling towards disaster?

Catrin Griffiths reports on a multibillion dollar threat to London's insurance market and a personal accident crisis. Catrin Griffiths is a director of New City Media, publisher of The Insider's Guide to Insurance and Reinsurance. c.griffiths@ncm.uk.com

In January next year, the last piece of the jigsaw in the Names litigation is due to be heard. The Jaffray case, where some 150 non-accepting Names are suing Lloyd's, may represent the death throes of the Lloyd's litigation, but the London insurance market is about to see some dramatic court action.

"It's been a quieter period for reinsurance litigation in the last few years," says Jonathan Sacher of Paisner & Co. "But in recent months people are beginning to look more carefully at their exposures."

More particularly, the great defining problem at Lloyd's, the London Markets Exchange spiral, a pass-the-parcel where everyone reinsured everyone else, looks set to be repeated.

There are two problems looming: workers compensation business and the personal accident (PA) spiral - both products, say critics, of false markets fuelled by cheap reinsurance.

"They're amazing examples of the lengths that brokers and underwriters will go to produce a package when they're under the pressures of a tight market," says a leading reinsurance lawyer. Those packages are now rebounding rather badly.

The workers' compensation problem first hit the headlines in March with the news that Cologne Re (owned by Warren Buffet's Berkshire Hathaway) was about to post massive losses from US workers' compensation business, organised by underwriting manager Unicover.

Although primarily a US problem, the London market could be seriously affected, and many major insurance firms are active.

"This is big money," warns Clyde & Co partner Nigel Brook. "The total losses at the primary level could run into billions of dollars, not millions."

Clyde & Co's client Odyssey Re - which has since changed its name back to Sphere Drake - has launched an assertive action under the RICO (Racketeer Influenced and Corrupt Organisations) Act against Lloyd's broker Stirling Cooke Brown, among others.

Lawyers involved include John Hall of CMS Cameron McKenna for Lincoln; Terry O'Neill of Clifford Chance for Sun Life, and Allen & Overy for General Re, Warren Buffet's company. This last instruction was something of a coup for Allen & Overy. Despite having a strong general litigation team, it has virtually no track record on reinsurance litigation.

Although revolving around a different class of business, the PA spiral has much in common with Unicover and the workers' compensation problems, not least because it involves a common defendant in Cooke Brown, represented by Richards Butler.

The PA spiral has much the same insurers involved, although there have been various attempts at settlement.

Once again, there are some familiar names involved on the legal side. Ince & Co is acting for Crown Life; Clifford Chance for Manulife; CMS Cameron McKenna for Lincoln; and Transamerica is using Elborne Mitchell. Wilde Sapte and Clyde & Co are acting for other participants.

The PA spiral could have even worse consequences for the London insurance market, not least because of the potential exposure sustained by professional indemnity underwriters, who will themselves insure the managing agents and brokers who placed the PA business.

But Unicover and the PA spiral are still only on the horizon. In the meantime, the insurance market is still talking about Kingscroft v Nissan Fire & Marine, one of the most significant cases of the last few years.

Freshfields, led by Roger Enock, acted for Kingscroft, part of the KWELM group of companies which are now in liquidation and went into battle against Nissan's lawyers Holman Fenwick & Willan, led by Ian McKenna.

The case - which involved complex questions of contract interpretation - revolved around the attempt by Nissan, the reinsurer, not to have to pay Kingscroft's claim.

The commercial ramifications were huge. If Kingscroft, the reinsured, had lost, it would have rewritten the way an entire industry has regarded reinsurance collection for years.

Although most of the market hailed the result as the right commercial solution, some reinsurance lawyers clearly feel uneasy.

"They had to do injury to language to get the right result," says one.

"There is a tension between the temptation to produce a commercially sensitive result and strict adherence to the text," adds David Mildon of Essex Court Chambers.

In any event, it isn't over; the case is being appealed. Holman Fenwick's Ian McKenna agrees: "Recent decisions highlight the difficulty in predicting the outcome in a situation where the court is weighing up the commercial purpose of the contract against the ordinary meaning of the words used."

With such uncertainty lawyers will have to be creative. And reinsurers and reinsureds alike will have to look to their wordings.