Admitting for the first time that it is facing a cash shortfall that threatens its existence, Lloyd's said yesterday it would apply to Michael Heseltine, President of the Board of Trade, for changes to the Premium Trust Deeds, which govern names' financial relationship with Lloyd's.
The proposal was contained in a document sent to names yesterday. It results from fears that many names will not use court awards to pay off their underwriting losses.
Two weeks ago 3,000 Lloyd's names on Gooda Walker syndicates won an estimated pounds 500m when a judge decided they had been the victims of negligent underwriting. The money will be paid directly to names and, as the deeds stand now, Lloyd's has no priority claim on it.
The proposed change means money would be paid to the trust, and used to meet the original underwriting liabilities of the names.
There are fears that without such drastic action, the market will not be able to pass the critical Department of Trade and Industry test of solvency next summer. Lloyd's only just scraped through this year's solvency test.
The Gooda Walker and Feltrim names, another group of litigators, still have debts of pounds 669m.
Lloyd's sources confirmed the move was prompted by the Department of Trade and Industry and the Bank of England. They are concerned that the Lloyd's Central Fund, designed to protect policy holders in the event of non- payment of claims by names, is running dangerously low.
Figures released by Lloyd's yesterday showed Central Fund liabilities of pounds 1.38bn at the end of August. At the time the Central Fund's assets were pounds 904m. Lloyd's is also allowed to use its other assets, mainly the market's buildings and the Lloyd's of London press, in the solvency equation. The buildings are valued at pounds 293m. This leaves a deficit of pounds 188m. By statute Lloyd's is required to show it has sufficient assets to meet the liabilities of defaulting names. If Lloyd's fails to show adequate assets the DTI can stop the market trading.
In the document sent to names Lloyd's warns: 'Payment by names of their underwriting liabilities out of their recoveries is vital . . . to ensure the future of Lloyd's'
It says it is taking this action 'in the interests of the society as a whole', and it wants to hear the opinions of names by 18 November.
The move is certain to be resisted by thousands of names and could spark fresh legal battles.
Michael Deeny, chairman of the Gooda Walker Action Group, said: 'This is the ill-considered act of a bad loser. Lloyd's allowed the underwriters to ruin us, they gave us no help in fighting our case, we had to do all the hard work ourselves, and now Lloyd's are trying to hijack it.'
Mr Deeny said his group would contest the move in the courts. He accused Lloyd's of trying to jump the queue of names' creditors in what amounted to unilateral change to a contract.
Christopher Stockwell, chairman of the Lloyd's Names Associations' Working Party, said: 'It is unlikely that names will agree to a retrospective amendment to the Premium Trust Deed, even if it can be done legally, just when the courts are acknowledging the legitimacy of their claims.'
About 10,500 names are behind with debts to the market.
View from City Road, page 33