In deciding to use strong-arm tactics against names who refuse to pay up, Lloyd's has raised the stakes to dangerously high levels. If we don't take draconian measures, our very future is at stake, Lloyd's has said publicly for the first time.
The idea is to change the deeds that govern the market's financial relationship with members in a way that allows it to get its hands on court compensation awards to members. The implication is that without such action the market will become insolvent, which would prevent it trading. The changes must first be approved by the President of the Board of Trade.
At present, there is nothing to stop names using the compensation to pay off other creditors, or for that matter to take a long holiday somewhere far away. David Rowland, the Lloyd's chairman, has made it clear the market intends to jump the queue of creditors.
The change in the deeds would be carried out not under the Lloyd's Act, governing the regulation of the market, but under 1982 insurance legislation, which is designed to protect the policyholders who rely on Lloyd's names to pay up.
Since the Act's emphasis is on the welfare of the customer - rather than the providers of the capital - it will be hard for Mr Heseltine to refuse the request.
Either way, Mr Heseltine cannot win. Refuse and he risks being blamed for driving the market out of business; accept and a horde of angry names will blame him for taking the side of the market that robbed them.
The compensation awarded to Gooda Walker names was for losses they suffered as a result of negligent underwriting inside Lloyd's, so logically it should be used to pay off their debts to the market. If the names do keep the money, then other market members will have to pay policyholders' claims instead.
However, this ignores the fact that many names have obligations to other creditors, including the banks that guaranteed their exposure to the market.
The money was awarded to them, not the market. Lloyd's is now trying to rewrite the rules of the game after the event.
It hardly matters who you think is right. The result will be another flood of litigation by names who have pledged not to pay up until every avenue is exhausted. Neither does it matter that 40 per cent of the Gooda Walker names have already settled their debts. There are plenty more determined not to.
The bottom line is that this is no kind of solution. Lloyd's must grasp the nettle and devise a settlement with all aggrieved names. That will almost certainly involve a levy on members. If it does not, passing next year's solvency test looks destined to become a highly serious issue. And if that occurs, it will not just be names leaving the market. Policyholders will begin to wonder, too.Reuse content