US fraud actions hit Lloyd's

Insurance market's shaky survival plan under threat as states line up to file suits

THE troubled Lloyd's of London insurance market is facing a series of fraud actions by US law enforcers that threaten to tear a pounds 1bn hole in its struggling survival plans.

Three states, Arizona, Illinois and Ohio, have filed court actions to stop Lloyd's seizing assets of US names - as market investors are known - and up to 30 in all, including New York, are set to follow suit, US state securities officials say.

The moves follow court success by Colorado in December and may scupper Lloyd's pounds 5.9bn Equitas reconstruction plan.

More than pounds 8bn of losses, on disaster, pollution and asbestosis claims, have already bankrupted thousands of names. And if around 2,600 US names owing pounds 700m-pounds 1bn walk away, stricken UK names are likely to balk at paying an average pounds 30,000-plus extra each to fill the gap.

"Many action-group chairmen are extremely concerned how the US action affects the viability of Equitas," said Ian Chalk, chairman of the Rose Thomson Young group, one of many suing UK Lloyd's agents.

RTY, whose member names include President of the Board of Trade Ian Lang, finished its case in the High Court last week, alleging negligence over pounds 428m of losses, including the Piper Alpha oil platform disaster. A ruling is expected by the end of February.

The survival plan, announced last May, aims to shunt old liabilities into Equitas, in return for an intended one-off payment by names. Guidance on the size of payments is due by the end of February, with final demands by the end of May; but many experts doubt it will ever fly.

The Department of Trade and Industry has to sanction Equitas, and if it subsequently fails the UK taxpayer may foot the bill as writs fly. Lloyd's has tried to play down the significance of the US actions and has caused fury by suggesting US names are ready to negotiate a settlement. "There is no settlement. There never was," said a source at the American Names Association.

The Colorado decision stops Lloyd's seizing money through all-important letters of credit - bank guarantees given by US names. Lloyd's is appealing, but Colorado Assistant Attorney General Richard Djokic says the state is now considering contempt of court action over demands since sent to names.

Lloyd's also faces problems in California over $750m (pounds 497m) of sureties demanded for pollution claims. An attempt to overturn legal rights to sureties is now stalled in the state senate after objections from firms including Lockheed, General Electric, Hughes Aircraft and Raytheon, according to the office of state senator Pat Johnston.

Arizona, meanwhile, is likely to be next to hear allegations of fraud and securities violation. "The complaints stem from the fact that names were not told they were going to be underwriting asbestosis claims whenthey were put into those syndicates," said Karen Silva of state regulator the Arizona Corporation Commission.

A Lloyd's spokesman denied this, but the cases have led to fears that it might call on credit letters in other states when guidance comes in February.

The US is just one of the rocks on which Equitas may founder. The market's futuristic London headquarters is up for sale for pounds 200m to plug gaps in the plan, which is bogged down as agents, brokers and auditors squabble about their contribution.

The deal also includes a pounds 2.8bn settlement to halt litigation, but action groups say nearer pounds 4bn is needed. Last week, the Feltrim group alone was awarded an initial pounds 175m to compensate for pounds 525m of losses.

Most of that will fall on agents' "errors and omissions" (E&0) insurance. In a new move, though, E&O underwriters have voided managing agents' policy cover on Lloyd's Merrett syndicate.

Merrett Names, who include Sir Rocco Forte, won a landmark case last October, finding negligence against auditors Ernst & Young and deliberate concealment of facts by Stephen Merrett, a former deputy chairman of Lloyd's.

"There's plenty more in-fighting to come," one partner at a leading insurance law firm said.