|
You won’t find Equitas listed
under the insurance section of the Yellow Pages. Nor will you be able to find
anyone, world wide, who has ever purchased an insurance policy from Equitas.
Yet, uncounted thousands of American citizens, commercial enterprises and
insurance companies are unwittingly "insured" by Equitas as a result
of a scheme implemented by Lloyd’s of London in 1996 called Reconstruction
and Renewal ("R&R"). This scheme was designed to create the
appearance that the obligations of Lloyd’s underwriters under policies they
issued prior to 1993 were off-loaded onto a third party reinsurer.
The result of this high stakes
game of "hot potato" was the formation of Equitas, an enterprise
over which United States insurance regulators have virtually no authority
to effectively enforce their state solvency standards or fair business and
claims settlement practice statutes in regard to Lloyd’s policies issued in
the U.S. prior to 1993. The question is, how could this happen in an industry
that is one of the most highly regulated in America?
A Brief Look at
the History of Lloyd’s
To understand the genesis
of Equitas, we need to take a brief look at the history of Lloyd’s.
When asked what they know
about Lloyd’s, most American’s will tell you that Lloyd’s is an insurance
company. In fact, it is a complex market place that enables a constellation
of specialized insurance enterprises to operate as a collective group, using
a common brand name and licenses. To the insurance community, Lloyd’s is a
place where insurance brokers can conveniently procure a wide variety of standard
and exotic types of insurance protection on behalf of their clients.
Since its beginning over 300
years ago, and until 1993 when corporations were allowed to join Lloyd’s,
insurance policies purchased through Lloyd’s were backed by the personal wealth
of individuals known as Underwriting Members or Names. At its peak in 1988,
Lloyd’s had over 32,400 such members. Today it has less than 3,000 individual
members, with most of its financial backing now provided by limited liability
institutional investors.
Until recently, individual
membership in Lloyd’s was limited to individuals who were able to pass a financial
means test administered by Lloyd’s. Although for marketing and administrative
purposes the Names combined their resources into groups known as syndicates,
they severally, not jointly, provided the capital that collectively supported
the underwriting capacity of the Lloyd’s market. The individual Names exposed
their personal wealth to unlimited liability for the payment of claims incurred
through their underwriting activities.
To facilitate the orderly
disbursement of profits or settlement of losses to its investors, Lloyd’s
devised a special form of reinsurance that allowed them to close underwriting
accounts on an annual basis. If Names wanted, they could even withdraw from
membership at the end of any calendar year, provided the managers of their
syndicates could close out all outstanding policyholder obligations by purchasing
reinsurance to cover all outstanding claims.
Events leading to the creation
of Equitas revealed that prior to 1996 few Names really understood the implications
of the reinsurance to close (RITC) transaction. While Names understood their
syndicate managers could purchase an RITC contract to transfer the risks assumed
under policies written in a previous year, many who assumed the RITC liabilities
did so unwittingly. They did not realize until long after the fact that they
had pledged their wealth to pay claims asserted under policies issued many,
many years prior to the time they had become members.
After enjoying generations
of profitability, the tides began to turn in the late 1980s. By 1991, Lloyd’s
Names found themselves treading water, neck deep in an ocean of red ink,
buffeted by waves of natural disasters and other catastrophic losses. They
were being dragged under by mounting asbestos and pollution liability claims
asserted under policies issued as far back as the 1930s.
Drowning in losses and driven
by overwhelming evidence that they had been defrauded by Lloyd’s and its agents,
the Names formed approximately 65 offensive Action Groups, including the American
Names Association and the United Names Organization, to scrutinize Lloyd's
business practices. As a result of their findings, over 22,500 Names withdrew
from the market between 1992 and 1997.
The exodus of Names severely
diminished Lloyd’s underwriting capacity when it was most needed. While individual
members faced financial disaster, Lloyd’s itself fought to survive as the
world’s oldest insurance market place. It was in this climate that Lloyd’s
opened its doors to limited liability investment from corporations in 1993
and forever changed the capital structure of Lloyd’s.
Lloyd’s problems deepened
in 1994, when an audit of its 1993 business conducted by the New York Department
of Insurance revealed an $18.47 billion, and still-growing deficit in its
global trusteed surplus reserves. Lloyd’s was already gasping for air when
New York’s Superintendent of Insurance Ed Muhl demanded that Lloyd’s either
increase its deposits or lose the privilege of doing business in the U.S.
On May 24, 1995 Lloyd’s then Chairman, David Rowland, signed a Stipulation
Agreement wherein, among other things, Lloyd’s agreed to place $500 million
in trust for the benefit of Americans whose policies had been underwritten
in 1992 and prior years (the "Old Years"). In 1996, Equitas was
launched as the rescue vessel to reinsure the Old Years policies.
At the time then-Chairman
David Rowland signed New York’s Stipulation Agreement, Lloyd’s leadership
was confidently saying that the operating results for underwriting years 1993,
1994 and 1995 were solidly in the black. Lloyd’s used these optimistic projections
to declare an "early release" of "profits" from these
three years to build confidence in their reorganization plan and to help fund
Equitas. By 1997, after actual results for syndicates from these three years
of account were reported, dozens of syndicates were found to have lost money
and were unable to secure RITC to finalize their operations. As a result,
these syndicates were put into run-off and Names were called upon to pay additional
money to replenish the reserves that were raided to deceive Names and regulators
into thinking that Lloyd’s fortunes had changed, and to help capitalize Equitas.
When the leaders’ plan for
Reconstruction and Renewal of Lloyd’s was implemented with the launching of
Equitas in September 1996, Equitas became the ultimate RITC underwriter. R&R
effectively prevented the erosion of the profits and reserves of investors
in the new Lloyd’s (both corporate capital providers and Names) by using Equitas
to dam the red ink flowing from Old Year claims. The Equitas RITC scheme was
initially structured to absorb an estimated $6 billion of Old Year claims
plus $2.85 billion in administrative costs. The amount required, however,
fluctuated between the first announcements in 1994 and Equitas’ September
1996 launch date.
Lloyd’s capitalized Equitas
by seizing court-awarded judgments in cases Names won against Lloyd’s Members
and Managing Agents, mutualizing the Old Year Names' syndicate reserves, and
placing these funds into interest bearing accounts on Equitas’ balance sheet.
Names with negative account balances were called upon to settle their
deficits in cash. Approximately 3,000 Names initially refused Lloyd’s "settlement"
offer, setting into motion a train of litigation that is, as of this
writing, far from concluding its journey through a maze of British and American
courts.
The Reinsurance
and Run-off Contract
The 131 page Equitas Reinsurance
and Run-off Contract is at best an imperfect document fraught with ambiguities.
Consider the following.
On September 3, 1996 the
Council of Lloyd's finalized the terms of a "Reinsurance and Run-off
Contract" that documented the powers vested in Equitas and its duties
to settle pre-1993 claims. Curiously, Lloyd’s created two "Equitas"
entities to handle the claims, Equitas Reinsurance Limited and Equitas
Limited.
Equitas Reinsurance Limited
(ERL) was organized to reinsure "all liabilities under contracts of insurance
underwritten at Lloyd’s and allocated to the 1992 year or account of any prior
year" other than life business. In simplified terms, ERL agreed to reinsure
the liabilities of Names under policies issued prior to 1993 in return for
ERL’s receipt of the assets held in Names underwriting accounts, and of the
Names’ obligations to pay the premiums levied as a part of the settlement
of their accounts (among other things).
Concurrent with the effective
date of the contract, ERL delegated its duties and retroceded its insurance
obligations to Equitas Limited (EL). As consideration for this retrocession,
ERL agreed to pay EL all of the assets and premiums it received from Names
under its reinsurance agreement with Underwriters, less £710,000,000
($1.136 billion). There is no plausible explanation as to how the Names benefited
from ERL’s retrocession to EL, or, given the laying off of liabilities, why
ERL needed to keep over $1.1 billion. There is no justification for
this arrangement in the original Equitas documentation nor in the cryptic
Annual Reports sent to the Names. Regulators should know if this money is
available to settle claims and if so, in what way. The financial statements
published by Equitas are of no help; no accounting of these held-back funds
has been provided.
Equitas’ Report
and Accounts
On September 4, 1996 Equitas
began its administration of the run off of Lloyd’s syndicates’ 1992 and prior
liabilities. According to its Report & Accounts for the period ended September
4, 1996, Equitas reinsured 740 syndicate years of account for more than 34,000
Names with gross claims reserves of £14.757 billion ($22.136 billion
@ $1.50). Anticipated recoveries from over 248,500 reinsurance policies issued
by approximately 2,900 reinsurers reduced the reserves to a net of £10.5
billion ($15.75 billion).
During the early stages of
R&R, Lloyd’s claimed that £5.9 billion ($8.85 billion) would be
required to fund Equitas. Based upon the Ridley Report dated November 1995,
however, between Spring and November of 1995, Lloyd’s statement of the total
amount needed increased to £11.4 billion ($17.1 billion).
According to Lloyd's "Reconstruction
and Renewal Towards the Settlement" report dated May 1996, Lloyd’s "markedly"
lowered the amount required from the Names to capitalize Equitas. The "additional
premium" due from Names was reduced from Lloyd’s original estimate of £1.9
billion ($2.85 billion) to £1 billion ($1.5 billion). Lloyd’s professed
that the reduction resulted from its discovery that claims for some lines
of business had been over reserved and that reinsurance protection was more
substantial than expected. The reduction was looked upon by dissenting Names
as a ploy to entice them to accept R&R.
By November 1996, soon after
R&R had been adopted, the total premium was £11.2 billion ($16.8
billion). During the fiscal year ended March 31, 1998 it increased to £11.812
billion ($17.718 billion). As of December 31, 1996 approximately 5% of the
premium, or £56 million ($84 million), had not been collected. The uncollected
balance stood at £30 million ($45 million) on March 31, 2000.
The American Names Association
obtained a copy of an analysis of the Report & Accounts statements published
by Equitas that was prepared by the editors of equiTalk Publishing, to determine
whether the statements provided information in a format comprehensible to
Names, insurance regulators, insurance executives and attorneys. The editors’
efforts to measure Equitas’ operating efficiency, quantify its operating expenses
and track its claims were frustrated by the lack of pertinent details. The
following tables provide a summary of Equitas’ cumulative operating results,
extrapolated from the data presented in its initial Report & Accounts
of September 4, 1996 and each subsequent fiscal year end report through March
31, 2000.
INCOME
|
£m |
$m |
Gross Written & Earned Premium |
11,812 |
17,718 |
Less Outward Reinsurance Premium |
_____4 |
_____6 |
Net Written & Earned Premium |
11,808 |
17,712 |
Investment Income |
2,080 |
3,120 |
Other Income |
__122 |
__183 |
Total Income |
14,010 |
21,015 |
CHARGES (1)
|
- |
- |
Non-technical Account |
100 |
150 |
Taxes |
100 |
150 |
Total Charges |
200 |
300 |
|
|
|
NET INCOME BEFORE CLAIMS |
13,810 |
20,715 |
NET CLAIMS INCURRED |
13,026 |
19,839 |
RETAINED SURPLUS |
784
|
876
|
(1)
Although Equitas has not provided an accounting of
its expenses on a line item basis, a bar chart presented in the March 31,
2000 statement, indicates that Equitas’ operating expenses totaled approximately
£765 million ($1,148 million). It is assumed the difference between
the total operating expenses and the non-technical account charges of £100
million ($150 million) reported in the statements, or £665 million ($998
million), is attributed to the settlement of claims.
Employee salaries and perquisites
totaling £137 million ($206 million) accounted for approximately 18%
of total operating expenses. Over £8.76 million ($13.14 million) has
been paid to Equitas’ 11 executive and non-executive directors in the form
of salaries, bonuses, pension contributions and fees. The non-executive directors
do not have service agreements or pension arrangements and their salaries
have not increased over the past three years. However, the compensation paid
to executive directors increased more than 20% between 1999 and 2000. They
were scheduled to receive additional awards of £464,548 in 2000 with
an additional £632,100 to be paid during 2001, for a total of $1,644,972.
Equitas’ method of reporting
claims development leaves much to be desired. Clearly, the reporting format
falls far short of meeting the convention statement requirements of the NAIC
and would likely be rejected by state regulators. It only presents a juxtaposition
of current year and prior year claims data, instead of using the traditional
Schedule P triangle format that provides a capsulized perspective of the year-by-year
development of claims by number and amounts paid and unpaid.
GROSS CLAIMS |
£m |
$m |
Opening Reserves -- Gross |
14,757 |
22,136 |
Less Paid Claims -- Gross
|
9,162 |
13,743 |
Gross Reserve Balance |
5,595 |
8,393 |
Plus Claims Development
|
7,617 |
11,426 |
Closing Reserves – Gross |
13,212 |
19,818 |
|
|
|
REINSURANCE RECOVERY
|
£m
|
$m
|
Opening Reserves |
4,285 |
6,428 |
Less Recoveries
|
3,344 |
5,016 |
Reinsurance Reserve Balance |
941 |
1,412 |
Plus Development
|
1,969 |
2,954 |
Closing Reserves |
2,910 |
4,366 |
|
|
|
NET CLAIMS
|
|
|
Net Opening Reserves |
10,472 |
15,708 |
Less Net Claims Paid |
5,818 |
8,727 |
Plus Net Claims Development |
5,648 |
8,472 |
Closing Net Reserves |
10,302 |
15,453 |
As of September 4, 1996, Equitas reported
that its Retained Surplus stood at £588 million ($882 million) after
reserving for gross claims totaling £14,757 million ($22,136 million)
reduced by £4,285 million ($6,428 million) in reinsurance recoveries
to a net of £10,472 million ($15,708 million). Significantly, the reserves
were not discounted for present value.
Equitas cannot by any standards
be considered a going concern. It must rely heavily on the income earned on
its investment of loss reserves to pay its wind-down expenses. Its investment
income dropped drastically – by 75%! – from £714 million
($1,071 million) during fiscal 1998-1999 to £178 million ($267 million)
in fiscal year 1999-2000. That income can also be expected to decrease further
as invested loss reserves are reduced by settlements.
Loss Reserve Discounting
Some analysts question the
motive behind the decision to discount reserves. The reason seems obvious.
If the reserves were not discounted, Equitas’ balance sheet would show a deficit
of £2,534 million ($3,801 million) instead of a Retained Surplus of
£784 million ($1,776 million)!
As of March 31, 2000 Equitas
discounted its gross reserves of £13,212 million ($19,818 million) by
£4,182 million ($6,273 million) and reported £9,030 million ($13,545
million) in liabilities for outstanding claims on its balance sheet. It also
discounted £2,910 million ($4,365 million) of reinsurance receivables
by £864 million ($1,296 million) thereby reducing its reserves for reinsurance
recoveries by £2,046 million ($3,069 million). For some unexplained
reason, this number does not track with the £1,663 million ($2,495 million)
carried as a receivable on Equitas’ balance sheet. The following table puts
the effect of the discounts into perspective.
|
£m
|
$m
|
Gross Claims |
13,212
|
19,818
|
Less Discount
|
4,182
|
6,273
|
Adjusted Gross |
9,030
|
13,545
|
|
|
|
Gross Reinsurance
|
2,910
|
4,365
|
Less Discount
|
_864
|
1,296
|
Adjusted Reinsurance
|
2,046
|
3,069
|
|
|
|
Adjusted Net Claims
|
6,984
|
10,476
|
Had
Equitas maintained the accounting methodology used in its inaugural Accounts
& Reports statement, and not applied the discounts, here’s how the Retained
Surplus account would look.
|
£m
|
$m
|
Retained Surplus @ 9-4-96 |
588
|
882
|
|
|
|
Retained Surplus @ 3-31-00
|
784
|
1,176
|
Less Net Discounts
|
(3,318)
|
(4,977)
|
Adjusted Retained Surplus
|
(2,534)
|
(3,801)
|
Needless to say, relatively
small upward adjustments in gross loss reserves or downward adjustments in
discounts will have a profound affect upon Equitas’ ability to pay policyholder
claims and the Names’ exposure to future calls for funds.
Reserve Warning
During Equitas’ annual meeting
of reinsured Names held in early September 2000, its chairman Hugh Stevenson
issued a warning that external factors beyond the control of the company –
such as increasing asbestos claims, legal developments, judicial decisions
and social trends, especially in the US – could have a profound impact on
Equitas’ reserves. As seen above, Equitas’ annual report shows that during
its fiscal year ended March 31, 2000 it increased its loss reserves by £711
million ($1.0665 billion @ $1.50) to over £9 billion ($13.5 billion).
On November 30, 2000 Stevenson
sent a report of financial information for the six month period ended September
30, 2000 to reinsured Names, in which he stated: "During the first half
of this year, the rate of new asbestos filings has again increased, substantially
exceeding our revised expectations." He warned "It is therefore
probable that we will further strengthen asbestos reserves at the end of this
year following the comprehensive actuarial review." Stevenson said Equitas
cannot provide a complete financial summary because it only undertakes a comprehensive
actuarial review of its loss reserves and reinsurance recoveries once a year.
It is anticipated that Equitas’ 2001 Report and Accounts will be published
in early July. Regulators are encouraged to obtain a copy.
No Finality for
Old Year Names
Equitas does not provide finality
for Names’ Old Year underwriting obligations. The New York Department of Insurance
made it clear it did not want to let the Names off the hook when it included
a provision in the 1995 Stipulation Agreement that states "...in the
event Equitas is ultimately unable to satisfy all claims, such claims shall
continue to be enforceable against the underwriting members who subscribed
the original Old Years policies issued to American Policyholders..."
This stipulation is in effect reiterated in paragraph J of the opening recitals
of the Equitas Contract that states, "This Agreement is to take effect
as a contract of reinsurance and shall have no effect on the liability of
any Name or Closed Year Name under any original contract of insurance entered
into by such Name or Closed Year Name. The liability of the relevant Names
or Closed Year Names under all contracts of insurance underwritten by them
shall remain several and not joint."
Lloyd’s fully anticipated
that Equitas might not be able to pay all Old Year policy claims in full.
The Contract includes a Proportionate Cover provision that sets forth a formula
for the partial payment of liabilities in the event Equitas runs out of money.
Should this happen, it follows that the Names will be called upon to make
up the shortfall.
According to reliable sources,
the New York Department of Insurance went a step further in order to protect
U.S. policyholders who purchased policies from Lloyd’s syndicates prior to
1993. It reportedly has a letter agreement in its files signed by David Rowland
that obligates the new Lloyd’s to pay any shortfall from its U.S. Joint Asset
Trust Fund. If this letter exists, it serves as an umbilical cord through
which Equitas can draw financial nutrition from the "new" Lloyd’s.
Given Lloyd’s present underwriting results, however, it is questionable
if any funds would be available.
According to recent industry
and news reports, Lloyd’s is wallowing in over $5 billion of losses accumulated
over the last four underwriting years. With over 70% of its underwriting capacity
provided by corporations with only limited liability, it follows that Lloyd’s
capacity will be reduced if very many of them withdraw due to concerns over
their individual underwriting losses. One must also wonder if Lloyd’s institutional
investors are aware that they may be called upon to make up any shortfall
in Equitas’ reserves. If individual Names refused to fund Equitas, it doesn’t
take much of an imagination to see that corporate backers of the new Lloyd’s
will fold their tents and walk away without contributing to the pot.
Lloyd’s Trust Fund
Requirements
The accumulation of Lloyd’s
underwriting losses in recent years ($5 billion in the post-R&R era) raises
another concern. Under the 1995 Stipulation Agreement, the New York Department
of Insurance required Lloyd’s to immediately deposit $500 million, to be held
unconditionally for the benefit of U.S. policyholders, and to maintain not
less than $100 million of joint assets in separate surplus lines and reinsurance
trust accounts to cover all existing and future liabilities. In addition,
as a condition of doing business on an ongoing basis as an accredited alien
insurer in the U.S., the Stipulation requires each of Lloyd’s Sponsoring Syndicates
to maintain 100% of their gross liabilities in separate U.S. situs reinsurance
and surplus lines trust accounts. Historically, the trust accounts have been
administered by CitiBank, NY.
For more than four years,
Lloyd’s has been lobbying regulators to reduce the gross liability requirement
significantly. Lloyd’s wants state regulators to lower the amount it agreed
that sponsoring surplus lines syndicates would maintain in their U.S. trust
accounts. Instead of depositing 100% of their liabilities as was required
since the 1995 agreement between Muhl and Rowland, surplus lines syndicates
only want to deposit $5.4 million or 30% of their gross surplus lines liabilities.
Assuming outstanding liabilities exceed $4 billion, Lloyd’s would only have
to post $1.2 billion. The reason for the request is transparent. The "new",
current Lloyd’s investors would otherwise have to divert cash from their surplus,
because liabilities exceed collected premiums. One proposed solution is to
allow the Sponsoring Syndicates to obtain letters of credit from CitiBank
for the 70% difference.
A similar scenario is playing
out in the reinsurance regulatory arena. Lloyd’s is seeking drastic reductions
in its reserving levels and the composition of funds held in its trust accounts
that secure its reinsurance obligations for U.S. insureds on post-1993 policies.
Regulators are encouraged
to examine the trust fund documents entered into by Lloyd’s and CitiBank before
making any decisions about amending the composition of Lloyd’s trust funds.
The use of letters of credit issued by CitiBank raises serious conflict of
interest questions. Regardless of the amount ultimately required, the Trust
documents do not require CitiBank to perform the customary duties of a trustee
or to maintain control over disbursements. As written, the trust agreements
make CitiBank little more than a repository of the funds that can be
drawn upon by Lloyd’s at Lloyd’s discretion. Furthermore, the trust accounts
have not been audited since they were established almost five years ago. No
one knows with any degree of certainty whether the amounts deposited by Sponsoring
Syndicates are adequate. Based upon Lloyd’s past performance, it is doubtful.
Equitas Trust Fund
Although the 1995 Stipulated Agreement also
required the creation of a special trust fund for Equitas, existing state
insurance statutes and regulations give regulators little to no power over
the operations of Equitas or its solvency. A provision in the Agreement states
that "in the event Equitas is ultimately unable to satisfy all claims,
such claims shall continue to be enforceable against the underwriting members
who subscribed to original Old Years policies issued to American Policyholders..."
The Proportionate Cover Plans provision of the Reinsurance and Run-off Contract,
however, appears to contradict that requirement. This is troubling because
there is growing evidence that Equitas does not have the resources required
to assure full payment of all claims that may be asserted. The Special Master
for the Circuit Court of Cole County, Missouri in the Transit Casualty Company
Receivership, referring to the likelihood of Transit recovering anything from
its Lloyd’s reinsurance agreements, observed that the only credible evidence
presented to him showed that the trust could, if Proportionate Cover were
invoked, cause the trust to become "inadequate" by its own terms.
Policyholders’ Right to
Sue Equitas
Since at least the 1940's Lloyd’s policies
have included a "service of suit" clause, providing that Lloyd’s
syndicate underwriters will submit to the jurisdiction of any court of competent
jurisdiction in the United States chosen by the insured or the reinsured,
and be bound by the law and practice of such court. The "service of suit"
clause has been an extremely important marketing tool for Lloyd’s over many
decades, because it gave U.S. insureds and reinsureds the comfort of knowing
that if a dispute over coverage developed, the insured or reinsured could
seek a remedy in court without having to go to England to sue. All of that
changed, however, with the creation of Equitas. Now Equitas, when defending
claims on these same policies, insists it is not subject to the jurisdiction
of U.S. courts.
Under the Equitas Reinsurance and Runoff Contract,
Equitas assumed responsibility for both reinsuring and handling all claims
against Lloyd’s non-life policies issued prior to 1993. Moreover, the funds
on hand at all relevant syndicates were delivered to Equitas, all rights to
reinsurance were assigned to Equitas, and all responsibility for claims handling
was transferred to Equitas. Thus, after Reconstruction and Renewal Equitas
had all the money, and all the decision-making power, for all Lloyd’s non-life
policies issued prior to 1993.
Since the inception of Equitas, the first
question the courts faced in disputes between policyholders and Equitas was
whether the policyholders could sue Equitas at all, or were limited to suing
"Underwriter’s at Lloyd’s" as they had done in the past.(1)
Equitas argues that a contract of reinsurance
gives a policyholder no right of action against the reinsurer, citing a clause
in the contract which reads "[t]his Agreement is not intended to and
does not create any obligations to, or confer any rights upon, Insurance Creditors
or any other persons not parties to the Agreement." Some courts have
accepted this language as controlling the question.(2)
In addition, Equitas has argued that it does no business in the United States
and therefore it would be a violation of due process to compel it to submit
to jurisdiction here and that in any event, the reinsurance it provides is
not so different from ordinary reinsurance that different rules should apply
to it.(3)
Policyholders have advanced three main lines
of argument in favor of requiring Equitas to submit to the jurisdiction of
courts in the United States. These are:
- Although it is well-settled that policyholders
cannot sue reinsurers directly without a "cut-through" clause,
the nature of the Equitas reinsurance is so different from the nature
of classic reinsurance, that it is in fact an assumption by Equitas of
all the responsibilities and obligations of the underwriters who subscribed
to the original policies.(4)
- That all Insurance Codes in the United
States prohibit unfair or deceptive claims-settlement practices, and that
since Equitas is acting as an adjuster for the Lloyd’s policies in question,
it must accept jurisdiction of courts in the United States on claims that
it engages in such practices.(5)
- Because of the extraordinary powers which
Equitas has assumed under the Reinsurance and Runoff Contract, to-wit,
all power to adjust, handle, settle, compromise, accept or repudiate claims,
all power to commence, conduct prosecute, settle, appeal or compromise
legal proceedings, and all power to negotiate with insureds and to instruct
lawyers and other consultants, without input or direction from the original
insurers (i.e., the Underwriters at Lloyd’s), Equitas is, in effect "running
the case," and therefore ought to submit to the jurisdiction of courts
in the United States.(6)
At present, the score is even. Four and one-half
years after Equitas came into being, six reported cases have held that Equitas
is not subject to jurisdiction in courts in the United States,(7)
while six have ruled that it is.(8) The better-reasoned
opinions appear to be those which hold that Equitas is amenable to jurisdiction
in the United States, based on the activities it actually undertakes. The
opposite line of court decisions rely heavily on the wording of the Equitas
Reinsurance and Runoff Contract, and appear to elevate form over substance
to the severe detriment of policyholders, who find they are deprived of the
benefit of their insurance policy terms. Having purchased a contract which
included a service of suit clause, U.S. policyholders find that the only party
they can sue is an empty shell; all of the money and decision-making power
having been transferred to a different party, who claims to be beyond the
jurisdiction of the United States courts.
Equitas Claims Settlement
Practices
Because of its growing financial
problems, State insurance regulators are encouraged to take a close look at
how Equitas is handling claims asserted under the policies and reinsurance
agreements it has assumed. As mentioned above, a disturbing trend is developing
that, if allowed to go unchecked, will continue to impose significant hardship
upon U.S. insureds, reinsureds and their claimants, and materially compound
the significant financial damage they have already suffered.
A common thread runs through
the more than one dozen separate cases in state and federal courts that involve
Equitas: the assertion that policyholders and reinsureds must first perfect
their claims against Lloyd’s Names before looking to Equitas for payment.
This places an unfair and overwhelming burden on claimants. It also runs counter
to Lloyd’s centuries old practice of forbidding Names to have any involvement
in the defense, adjustment and payment of claims. Simply put, there is no
precedent, mechanism or money with which Names could consider and satisfy
policyholder claims.
In principle, Names are passive
investors who are severally, and not jointly liable for the settlement of
claims asserted under policies and reinsurance agreements they underwrote.
The number of Names sharing the liability assumed under a single policy can
run into the hundreds, or even thousands. They may reside in one or more of
50 different countries. Many are dead and their estates closed.
Taken together, these cases
send a clear message: Equitas is deliberately attempting to avoid its liabilities
and/or minimize its settlements by misrepresenting its responsibilities to
those who purchased Lloyd’s policies in the U.S. prior to 1993. The deception
has been advanced by arguing that policyholders and reinsureds must first
find and pursue collection from the Names who backed the old-Year Lloyd’s
policies before the "reinsurance" that those Names purportedly bought
from Equitas will kick in. There is also evidence that Equitas is employing
other methods designed to avoid or delay payment of legitimate claims.
All of the delay and deception
tactics mentioned above are prohibited by fair claims practice statutes. Any
US company that unjustifiably forces a policyholder to sue to collect benefits
or engages in similar unethical claims handling practices can be severely
disciplined. Equitas, however, falls into a regulatory crack, and there
is presently little insurance regulators can do to protect their constituents
under existing statutes and regulations governing fair claims practices of
non-admitted insurers and reinsurers.
No Privacy of Contract
Equitas has attempted
to justify its position that Lloyd’s policyholders must perfect their claims
against the Names by arguing that it is a "reinsurer" and therefore
no privity of contract exists between Equitas and the policyholders. The tone
of the Reinsurance and Run-off Contract speaks differently. The Contract
specifically states that the terms of the Agreement "will constitute
reinsurance to close." In principle and in practice, the age-old reinsurance
to close contracts used to close Lloyd’s syndicate years of account placed
the new Names (successor syndicate) in the shoes of the old Names (predecessor
syndicate). This is exactly how Lloyd’s Names who were recruited to invest
in Lloyd’s in the 1970’s and ‘80s were given their asbestos liabilities! The
language of the Agreement places Equitas in an identical position. Equitas
became the primary insurer.
The Contract extends 20
specifically described powers to Equitas, giving it the right to control all
aspects of claims defense and adjustment. Further, it has the right to delegate
its powers to others. Neither the Names nor their representatives have any
right to intervene in the settlement of any claim asserted under policies
assumed by Equitas. Despite its assertion that it is a reinsurer, logic and
the principles of equity dictate that Equitas assumed all of the obligations
of a primary insurer and should not be allowed to circumvent its responsibilities
as such.
Looking to the Future
A disturbing sequence of events raises serious
doubts that Lloyd’s can survive as a viable and reliable market. Lloyd’s has
reported, and independent ratings agencies such as Standard & Poors and
Moody’s Investors Services have confirmed, that loss deterioration on Lloyd’s
market syndicate years of accounts for 1997, ’98, ’99 stand at approximately
$5 billion as of March 2001. Its market share is in steep decline. Because
its existing capacity is not being utilized, Lloyd’s recently abandoned its
long standing policy of only accepting risk submissions from a clique of "approved"
Lloyd’s brokers and opened its doors to virtually all qualified insurance
brokers. It is no longer an exclusive money pot from which a limited number
of brokers can draw wealth with little outside competitive interference.
The "new Lloyd’s"
is facing the same type of problems that caused "old Lloyd’s" to
form Equitas. Underwriters are losing gigantic sums of money. The significant
difference is that today’s Lloyd’s lacks incentives to prevent the limited
liability corporate members that currently provide the capital that underpins
Lloyd’s syndicate underwriting from leaving the market. This current group
of capital providers could withdraw their capacity with almost no recourse.
If they walk away, current market conditions make it highly unlikely that
Lloyd’s would be able to find new underwriters willing to fill the capacity
void.
The world is getting smaller
and the stakes higher in an increasingly competitive global marketplace. It
is questionable whether the archaic Lloyd’s market can remain viable in today’s
world of e-commerce and consolidated, well-capitalized insurance and reinsurance
companies. Given the abundance of sophisticated underwriters and unused capacity
in the world insurance market, is there really a need for the Lloyd’s market
place?
Unless regulators can find
a way to regulate Lloyd’s operations and control the business practices of
those operating under the Lloyd’s moniker, policyholders will find their visions
of security and financial peace of mind shattered by the reality of unkept
promises. The most tragic chapter in Lloyd’s history may well repeat
itself. The only difference will be that no one will be willing to participate
in the charade of another Equitas.
#####
1. The earliest reported case in which
this question was faced was Employers Ins. of Wausau v. Certain London Market
Companies, 1997 WL 1134980, 97-C-0409-C (W.D. Wis. Oct. 27, 1997).
2. Union Pacific Railroad Co. v. Equitas,
Ltd., No. 98 CA 1240 (Col Ct. App., Sep. 16, 1999); Millennium Petrochemicals,
Inc. v. C. G. Jago, Inc., No. 3: 98CV-433-J (W.D. Ky. Apr. 13, 1999).
3. This view is advanced in an article
published in reply to the Sylvester & Goldman article: "Equitas: Setting the
Record Straight," Haarlow, John B. and Baach, Martin R., Mealey's Litigation
Reports: Insurance, March 25, 1999.
4. This argument was successfully advanced
in Central Vermont Public Service Corp. v. Adriatic Insurance Co., No. 1:96
CV-252 (D. Vt. Feb. 11, 1998), and was later elaborated upon by the attorneys
who advance the argument in an article entitled "Suing Equitas on a Lloyd's
Policy: Lifting the London Fog," Sylvester, John M. and Goldman, Stephen M.,
Mealey's Litigation Reports: Insurance, Oct. 13, 1998. It was rejected in
two other cases: First State Ins. Co v. Minnesota Mining and Mfg. Co. No.
C3-94-12780 (D. Minn. May 1, 1997) and USX Corporation v. Adriatic Ins. Co.,
95-866 (W.D. Pa. Sep. 30, 1998).
5. This argument was accepted by the court
in Equitas Reinsurance Ltd. v. Browning-Ferris Industries, Inc., No. 14-99-01084-CV
(Ct. App. Tex., Apr. 26, 2001).
6. This argument was also accepted by
the court in Equitas Reinsurance Ltd., v. Browning-Ferris Industries, supra,
n. 3.
7. Employers Ins. of Wausau, supra, n.
1; Unisys Corp v. Ins. Co. of N. Am., No. L-1434-94S (N.J. Super. Dec. 7,
1999); Employers Mt. Cas. Co. v. Owens Ins., Ltd. No. MRS-C-51-96 (N.J. Super.
Dec. 7, 1999) Central Maine Power Co v. Moore, No CV-93-489 (Me. Super. Kennebec
Co. Jan. 11, 2000); Central Vermont Public Service Corp, supra n. 2; and Equitas
Reinsurance Ltd. v. Browning-Ferris Industries, supra n.3.
8. Archdiocese of Milwaukee v. Certain
Underwriters at Lloyd's, No. 96 (Cir. Ct. Milwaukee, Wis. July 13, 1999);
Boeing Corp v. Certain Underwriters at Lloyd's, No. 99-2-03873 (Sup. Ct. King
City, Wash. Nov. 23, 1999); B.F. Goodrich v. Commercial Union Ins. Co., No.
CV 9902 0410 (Ct. Comm. Pleas, Summit City, Ohio Oct. 14, 1999); Union Pacific
Railroad Co., supra n. 5; Malone v. Equitas Reinsurance, Ltd. 101 Cal. Rptr.2d
524 (Cal. Ct. App. 2000); and Millennium Petrochemicals v. C.G. Jago, supra,
n.5.
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