Lloyd's rescue under threat

JOHN EISENHAMMER

Financial Editor

Auditors are threatening to scupper Lloyd's of London's hopes of ending all litigation against the insurance market as part of its pounds 6bn reconstruction and renewal programme.

Unless audit firms are brought under the protective umbrella of Lloyd's arrangements for global indemnity against litigation by disaffected names, the insurance society will not escape from its long-running legal nightmare, leading auditors warned yesterday.

"Lloyd's must realise that if they leave us out of the settlement loop, and people gun for us, we have the potential to keep the whole mess going,'' said the senior partner in a leading City audit firm. Lloyd's' recovery plan launched in May left out auditors from its proposed deal to buy an end to litigation, in return for names making a final payment to cap their liabilities for old policy losses.

Auditors are now saying that even if such an agreement were reached between names and Lloyd's, they would bring the insurance society back into any future court cases as a third party. "They simply won't be able to seal off the litigation," said another auditor source.

This is just the latest of a squall of difficulties assailing Lloyd's as it attempts to knit together the disparate elements of the hugely complex settlement package. At its meeting today, Lloyd's' ruling council is expected to abandon the intention to give names an indication at the end of this month of what they will have to pay into Lloyd's' new re-insurance vehicle, Equitas, to put a close on all liabilities for old policies.

But working out these sums for thousands of individual names is dependent on negotiations on several contentious fronts. As part of the overall restructuring package, Lloyd's is offering names an inducement to settle in the form of a pounds 2.8bn debt-forgiveness and credit package, which will go to reducing the amount names will pay into Equitas. Lloyd's is banking on being able to increase this to above pounds 3bn, but this depends on getting contributions out of insurance market brokers and auditors.

Lloyd's had indicated it hoped for some pounds 200m from the auditors. Most of the big auditing firms involved with Lloyd's appear now to have accepted in principle that some contribution will be paid, which will increase the overall inducement available to names. But in return they want full protection from any future litigation. "At present we are discussing the mechanism for ending litigation, what is our protection. There will always be disaffected names not willing to sign any settlement, and we need to have the same form of indemnity that Lloyd's will enjoy from Equitas, covering the costs of such potential cases," said a senior audit source.

The position of the auditors, and what they might contribute in return for an indemnity deal, is complicated by waiting for the court ruling in the key Merrett case. Turning on whether the Merrett syndicates and their auditors ought to have been more aware at the end of the 1970s and early '80s of the potential for enormous losses from asbestos claims in the US, the ruling will give an indication of auditors' liabilities.

The calculation of names' contributions to Equitas is also dependent on resolving the dispute with so-called personal stop-loss insurers, who are supposed to insure names against big losses. Many are still refusing to accept that names' contributions to Equitas should be counted as losses, and therefore covered by insurance.

An added complication is that most of the stop-loss insurance is written by Lloyd's syndicates, involving names in a merry-go-round of trying to reduce their contribution to Equitas at one another's expense.

Lloyd's is also facing a burst of inquiries by several state authorities in the US that it misled Names by recruiting them, despite widespread knowledge of the potential for losses through asbestos liabilities. Lloyd's said yesterday that these US allegations do not threaten the overall recovery plan, and that despite the current delays, it is still on course for completion by next spring.