High Court Decides For Lloyd’s in Jaffray Case, No Fraud Found

It looks like the Lutine Bell will continue to ring at Lloyd’s for a while longer, as it no doubt did on Nov. 3, when Justice Peter Cresswell of London’s High Court announced his long-awaited decision in the Jaffray case. Although he severely criticized its managers and agents for numerous failings and instances of incompetence, Creswell nevertheless ruled that Lloyd’s itself had not made fraudulent misrepresentations nor failed to disclose material facts. He specifically rejected the “Jaffray Names'” contentions that they were the victims of a massive fraud.

The much publicized case was the first to examine in a full trial the Names’ allegations of fraud, which they have raised as a defense against claims on their personal wealth brought by Lloyd’s. A Lloyd’s Name puts up only a certain amount of capital, but pledges all his assets to cover losses. Cresswell’s decision is a major step in drawing the acrimonious series of litigation to a close.

The case covered the years 1978-88,
during which Lloyd’s recruited more than 34,000 Names as investors in its syndicates. Subsequently, Lloyd’s huge losses—$11.7 billion between 1988 and 1992—caused by a series of natural disasters, asbestos and environmental claims, brought financial ruin to a number of Names, and Lloyd’s itself barely survived.

As a result, the Lloyd’s market was reformed. In 1996, as part of its Reconstruction & Renewal (R&R) Plan, pre-1993 losses, including all asbestos claims, were transferred to Equitas, a special purpose reinsurer that is now responsible for handling them. It is funded by Lloyd’s and by premiums paid by the Names as part of a settlement offer to limit their liabilities. According to Lloyd’s, 95 percent chose to participate, but a small minority refused.

Among those who rejected the settlement were Sir William Jaffray and some 200 others. When Lloyd’s began proceedings to collect their premiums (which it paid when they refused), they filed counter-claims for damages alleging fraud. They contended that Lloyd’s personnel, some in the highest management positions, knew of the impending losses, particularly asbestos, when they were recruited and deliberately withheld the information from them.

The Names began presenting their evidence in the London High Court on Feb. 28. Lloyd’s presented a vigorous defense, which pointed out that all the information allegedly concealed was in fact easily obtainable and had been disseminated to Lloyd’s members and the Names’ designated agents. The hearing concluded on July 14.

Cresswell’s 600-page decision absolves Lloyd’s of any fraudulent conduct, but also finds numerous instances of mismanagement and woefully deficient business practices. “Despite all the reforms etc., the catalogue of failings and incompetence in the 1980s by underwriters, managing agents, members’ agents, and others…is staggering and brought disgrace on one of the City’s great markets,” Cresswell wrote.

He made it clear that, while Lloyd’s could not be held legally responsible, many managing and general agents were at least guilty of gross negligence. “External Names (whether they accepted R&R or not) were the innocent victims of the failings and incompetence. Many Names have suffered enormously in financial and personal terms,” Cresswell concluded.

Commenting on the verdict, Sir William Jaffray reportedly observed: “How many findings of gross negligence are needed before that becomes fraud?”

Cresswell presented a solution, writing: “I suggest that there should be an independent review by an independent panel set up by Lloyd’s.” He also urged both sides to begin bargaining in good faith to try and reach a settlement. Had the Jaffray Names accepted the Equitas deal when it was offered, their liabilities would have been capped at an average $92,000, rather than the $379,000 many of them are now faced with.

The evident ill will on both sides, however, makes a settlement difficult. Lloyd’s CEO Nick Prettejohn said he felt it was up to the Names to come to the bargaining table, and indicated that if they chose to appeal the decision, Lloyd’s would be very reluctant to set up an independent panel or to bargain further. Although he didn’t mention it, the fact that Lloyd’s may have already spent close to $29 million in legal fees on Names’ cases may well be a factor in any decision.

After 15 long years, Lloyd’s may finally see the light at the end of the tunnel. “It is, however, high time that the Lloyd’s litigation and related litigation here and overseas came to an end,” Cresswell observed. The West case in California was in fact settled on undisclosed terms the day before the judgment was announced, and the other actions pending, notably in Canada and Australia, may now reach similar outcomes.

Lloyd’s has not emerged unscathed. The mismanagement and incompetence that the losses in the ’80s and ’90s exposed also revealed a fundamental weakness of the classic Lloyd’s market and forced it to change. Individuals, no matter how well off they are, cannot provide the flexible capital a large insurer can. With the adoption of the R&R Plan, new rules came into force and the traditional Lloyd’s market disappeared forever. It has become a more rigorously structured and regulated market, run by seasoned professionals from the big insurance companies and brokers who now control most of the syndicates.

Individual Names now contribute less than 17 percent of Lloyd’s capital. The groups who increasingly dominate the global insurance market provide the rest. AIG, Berkshire Hathaway, ACE, Chubb, MarshMac and others are the main players at Lloyd’s these days. Once corporations were admitted as Names in 1994, their takeover has proceeded apace.

Despite the changes, or maybe because of them, Lloyd’s retains its importance. Standard & Poor’s reaffirmed Lloyd’s “A+” insurer financial strength rating the same day the judgment was announced. “Lloyd’s rating is based on the market’s very strong business position and strong, but volatile, earnings over the course of insurance cycles; together with its very strong capital base, strong financial flexibility, and robust regulatory management,” S&P stated. No rating agency would have said that five years ago.

The Lutine Bell continues to ring, but its song has changed forever.

Topics Fraud Agencies Excess Surplus Lloyd's