No such thing as rest in peace for Lloyds Names
INSURANCE: A new chapter in the liability saga means policyholders might pursue payouts even from Names heirs, writes Isabel Berwick
Financial Times (London); Feb 25, 2006; p. 2
The saga of the near-collapse of the Lloyds of London insurance market in the 1990s, and of its regeneration, is a worthy successor to the Old Norse tales. Like those tales, its complex, and nowadays half-forgotten.
But, like all good stories, at its heart are people - in this case 34,000 Names who backed insurance syndicates at the Lloyds market with pledges of their own money. And in a suitably doomy scenario, the potential bills for many of these Names could reach beyond the grave.
The liability for all Lloyds non-life policies written before 1993 is now reinsured through a special company called Equitas.
Equitas was set up with Pounds 11.2bn of funds as a run off fund to meet all claims arising from those old policies, so its members did not have to pay out any more cash to claimants.
But a letter sent out by the Equitas Trust, which governs the company on behalf of the reinsured Names, has awakened fears that individual Names or their heirs could be pursued by policyholders seeking to make good their claims.
The creation of Equitas was meant to allow Lloyds to leave its troubled past behind and continue trading with a new structure and a more stable underwriting system.
But right from the start, the creation and running of Equitas has been controversial. Almost all the Names agreed to have their liability reinsured into Equitas, although an estimated 3,000 resisted - against Lloyds wishes. A few hundred chose bankruptcy as the only way to escape their ongoing liability.
There have always been mutterings about the safety (or otherwise) of the Equitas project. For example, the fund was established with a Pounds 11.2bn one-off reinsurance premium funded by members, Lloyds agents and brokers, trust funds and the Lloyds central fund.
The problem is that there is still an unknown number of hugely expensive US-based asbestos, pollution and other claims to come. The Equitas accounts have been qualified by the auditors from the start - because no one can predict whether the reserves will be enough to meet all the claims.
If the money runs out, there is no more. In theory, a policyholder - usually a company - left without its rightful cash would then have the right to track down individuals named as members of the syndicates that underwrote the original policy, and claim their assets.
Many angry former Names are convinced that Equitas doesnt have enough money to pay all the likely asbestos claims. John Pascoe is one of them: It is clear the Names are in the firing line as who else is there to pay? Lloyds itself maybe, but Lloyds only has current Names money, and most of them only have limited liability.
The government will find it hard to bail out rich Names and will only pay if there is no other source or if it were to be convicted in the European Court of Justice of failing to regulate properly.
The prospect of giant US corporations chasing old people in the English shires for thousands of dollars wouldnt exactly make for good PR. But even if the possibility is remote, some 30,000 Names cannot be sure their family wealth will always be safe from policyholders in search of a payout. This limbo also includes the children and grandchildren of the original Names, as the potential liability does not end with death. In theory, the claimants could then go after the beneficiaries of the dead Names estate.
These families of dead Names have already suffered in a peculiarly tangled legal nightmare. The executors of their estates were for many years unable to distribute assets to beneficiaries. The executors feared being hit by action from policyholders who might argue that they should have kept a reserve back for their claims.
Eventually, in 1996, in a move backed by Step (the Society of Trust and Estate Practitioners), a test case called Re Yorke led to a simple and inexpensive court procedure that allows executors to be protected from policyholders and go ahead and distribute the estate.
Owen Clutton, partner in the private client department at Macfarlanes, explains that executors of each estate have to go to court to get an order: Each re Yorke order may vary depending on the facts of the case. In a very simple case it will distribute assets, but in some cases a retention has to be made, for example an estate that was a member of Lloyds through a Scottish limited partnership.
In December 2005, things took a dramatic turn when the Equitas Trust (which governs the company on behalf of the reinsured Names) sent out a letter to members. Taking the form of frequently asked questions and answers, it was intended to outline the current position for Names estates.
Alarmingly, the letter said: Nothing in Re Yorke releases the estate; it just releases the executor. Should Equitas fail and policyholders pursue the individual name, it would be necessary to re-open the estate.
That sounds threatening but a leading legal expert on the case, Shan Warnock-Smith QC, says that reopening the estate is not an option: This is misleading.
The beneficiary is vulnerable to such a claim on ordinary legal tracing principles. So if he or she still has the property and hasnt spent it, he or she may be liable.
The emphasis is on may because there are various legal defences that might be deployed.
Equitas itself wont comment on its Trusts letter, saying: Our efforts are focused on running a successful run-off company; paying claims, collecting reinsurance and managing our cash and investments. The letter issued by the Equitas trustees is an attempt to answer commonly asked questions on estate issues.
Step says it is preparing to issue a statement to clarify its own legal interpretation of the Equitas situation and to calm worried Names and their families.
The immediate position of Equitas seems stable. From launch to the end of March 2005, it had paid Pounds 16bn in claims - the original fund being boosted by returns on investments. At the end of March 2005 it had Pounds 3.9bn in reserves for net claims outstanding.
Theres a lot of uncertainty about the future, and the most recent pronouncement from Equitas Trust isnt going to clear that up. Sir Adam Ridley, chairman, wrote: Until these (asbestos claims) and other matters are successfully resolved, the group is clearly not out of the woods; and there can be no certainty of meeting our twin objectives of finality, and some return of premium to Reinsured Names. Great progress is being made in many spheres, nevertheless.
Equitas is a very English sort of institution, but the future prosperity of its 30,000-odd members and their heirs rests on how successful it can be in lobbying to reduce the risks from claims, and in arranging policy buyouts and commutations in the US.
CREPULAX COMMENT: This ongoing issue is a good reason to avoid probate in the United Kingdom. A Missouri (or other US) asset protection trust is an attractive alternative. Those Lloyd's investors who have been discharged in bankruptcy ought to be outside the scope of these claims, but they too might look to the USA as an asset haven. Statutes of limitation for claims against estates are short in the USA: a year or two in most states, and Lloyd's is unlikely to argue its claims in a state probate proceeding.