The State of California is asking a court to freeze a $10bn (pounds 6.5bn) trust fund owned by Lloyd's as part of a lawsuit alleging that the insurance market deliberately defrauded up to 500 Americans.
In an action that could cripple Lloyd's US business, the state's Department of Corporations has applied to the Los Angeles Superior Court for an order preventing Lloyd's from trading in the state and from calling in $500m (pounds 320m) in debts from losing members.
"The department has taken this action to protect the interests of Californians who have been fraudulently induced into investing hundreds of millions of dollars by an operation well aware of the undisclosed and unlimited risks in such investments," said Gary Mendoza, the state's Corporations Commissioner.
Mr Mendoza is alleging that Lloyd's deliberately recruited new Californian members in order to use their assets to mitigate against vast losses expected from asbestos and industrial pollution claims.
Lloyd's said last night that it would issue a strong defence against the action and pointed to a number of apparently basic errors in the Californians' 88-page complaint.
Firstly, the complaint, to be heard next Wednesday, alleges that Lloyd's knew of huge future claims as early as 1970. However, a spokesman said that the test-case establishing insurers' responsibility in asbestos claims was not heard until 1974. The American legislation establishing "polluter pays" principles was not laid down until 1980.
Secondly, the action repeatedly refers to memberships of Lloyd's as "securities", which they are not, and to members as "investors", which, similarly, they are not. Members are actually sole traders underwriting on their own account.
Thirdly, the $10bn (pounds 6.5bn) Lloyd's American Trust Fund, which California is trying to have frozen and used to repay losses to 100 members, is administered by Citibank in New York and subject to the jurisdiction of the New York Insurance Department which would contest any attempt at freezing.
"That fund is solely for the purpose of making payments to claimants," said the Lloyd's spokesman. "It isn't there for the convenience of people in California."
The wording of California's complaint is damning, indicating it will be vigorously fought and it includes the names of 103 other defendants, including Lloyd's agents and representatives in the US, banks and institutions and 46 individuals, including David Rowland, Lloyd's chairman, and its chief executive Peter Middleton.
Michael Freeman, a solicitor representing a large number of losing members, said: "This could be extremely serious for Lloyd's. Half of Lloyd's US- dollar income is generated in California."Reuse content