WHAT EVERY INSURANCE COMMISSIONER
NEEDS TO KNOW ABOUT LLOYDS
A White Paper presented by
The American Names Association
EQUITASState insurance regulators are encouraged to take a close look at how Equitas is handling claims asserted under policies and reinsurance agreements issued by Lloyd's Underwriters to US policyholders and reinsureds prior to 1993. A disturbing trend is developing that, if allowed to go unchecked, will continue to impose significant hardship upon insureds, reinsureds, and their claimants, and materially compound the significant financial damage they have already suffered.
A common thread runs through 20 separate cases in state and federal courts that involved Equitas' assertion that policyholders and reinsureds must first perfect their claims against Lloyd's Names before looking to Equitas for payment. In principle, Names 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. They may reside in one or more of 50 different countries. Many are dead and their estates closed.
Taken together, these cases form a clear pattern. Equitas is deliberately attempting to avoid its liabilities and/or minimize its settlements by placing the insurmountable barrier of finding the Names between it and Lloyd's policyholders and reinsureds. Any US company that unjustifiably forces a policyholder to sue to collect benefits or engages in other unethical claims handling practices can be severely disciplined. If regulators do not find a way to intervene, there is presently little they can do under existing statutes and regulations governing fair claims practices of non-admitted insurers and reinsurers, to protect their constituents.
Over four years ago, Britain's Minister for Trade, Anthony Nelson, authorized the Council of Lloyds to form Equitas Reinsurance Ltd and Equitas Ltd (Equitas) for the purpose of reinsuring the liabilities of Lloyd's underwriting members incurred prior to 1993. In his March 29, 1996 decision, Nelson described Equitas as a "pure reinsurer" and reasoned that by transferring prior losses to Equitas, Lloyd's "policyholders will benefit from substantial additional funds which would not otherwise be likely to be forthcoming" and that "the assets of Equitas will be fully mutualized and all available to support all of Equitas' liabilities to policyholders." He also justified his authorization by stating, "the creation of Equitas offers a strong prospect of lower claims handling costs and higher investment yields than would otherwise be the case, the benefits of which will accrue to policyholders in the first instance."
Lloyd's Names were drowning in red ink caused mostly by mounting pollution and asbestosis claims asserted under third-party liability policies issued or reinsured by Names' syndicates as far back as the 1940's. The Council realized that Lloyd's ability to retain existing capacity and attract new Names would be impaired if the bleeding could not be stopped. Equitas was the keystone to Lloyd's solution. The Council convinced Nelson that by assuming the Name's pre-1993 liabilities, Equitas would "very significantly improve the security of 1993 and subsequent policyholders at Lloyd's by substantially removing the risk that further deterioration in the 1992 and prior liabilities would affect them." Without Equitas, Lloyd's acknowledged it might have to cease as an ongoing concern.
Under Lloyd's Reconstruction and Renewal plan, Equitas was to be capitalized with the assets of the pre-1993 underwriting syndicates. Because the liabilities exceeded the assets, the Names were expected to pay premiums based upon their proportionate share of the estimated shortfall. Many Names refused to pay Lloyd's assessments asserting that Lloyd's had fraudulently failed to disclose its known liabilities for pollution and asbestosis claims and had induced them to become Members of Lloyd's to relieve the burden of losses carried by existing Members. The allegations of fraud and how Lloyd's escaped insolvency was the subject of a Special Report authored by David McClintick and published in the European edition of Time magazine on February 21, 2000. McClintick describes the steps initiated in 1982 by Lloyd's to dupe individuals "into becoming Names by fraudulently misrepresenting its profitability and concealing the ruinous asbestosis losses that were in the pipeline."
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 companies to handle the claims. 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 oversimplified terms, ERL's consideration was the transfer of the Names' assets held by their syndicates plus the Names' payment of premiums based upon their participation in their respective syndicates.
Curiously, ERL then entered into a Retrocession Agreement with Equitas Limited (EL) wherein EL accepted the liabilities of ERL under the Reinsurance Contracts and any other contract of reinsurance underwritten by ERL and the delegation of the run-off of such business. In abbreviated terms, as consideration for the 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 indication in the documents explaining why this amount was retained by ERL or how it is to be used. Nor has it been explained in the cryptic Annual Reports sent to the Names. Regulators need to know if this money is available to settle claims and if so, in what way?
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 Reinsurance and Run-off Contract speaks differently. The Contract specifically states that the terms of the Agreement "will constitute reinsurance to close." Reinsurance to close was the device used by Names to close out their liabilities for a given underwriting year by transferring them to other Underwriters. This mechanism made it possible for "old" Names to transfer their pollution and asbestosis and other claims to the "new" Names. In principle and in practice, the reinsurance to close contracts placed the new Names in the shoes of the old Names. 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. Summarized, Equitas has all of the "power to adjust, handle, agree, settle, pay, compromise or repudiate any Claim..." previously vested in the Names. 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. Logic and the principles of equity dictate that, despite its assertion that it is a reinsurer, Equitas assumed all of the obligations of a primary insurer and should not be allowed to circumvent its responsibilities as such.
Although the Stipulated Agreement entered into on May 24, 1995 by Edward J. Muhl, then Superintendent of Insurance of the State of New York and J. David Rowland, then Chairman of Lloyd's 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. Despite the Agreement provision 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 Reinsurance and Run-off Contract includes provisions for Proportionate Cover Plans that appear to contradict the requirement. This is troubling because there is no assurance that Equitas has the resources to assure full payment of all claims that may be asserted. Referring to solvency of the Equitas Trust Fund, the Special Master for the Circuit Court of Cole County, Missouri in the Transit Casualty Company Receivership 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.
The question is: "what can state regulators do to protect their constituents from Equitas' questionable claims handling practices and potential insolvency?"
There are no easy answers. Equitas is not licensed as an insurer or reinsurer in any state. Because it is not actively engaged in the transaction of insurance, it is able to avoid the minimum capital and surplus requirements imposed upon non-admitted carriers "White Listed" by regulators. At present, regulators have little to no authority to regulate the conduct of Equitas or penalize it for its misconduct.
The National Association of Insurance Commissioners is encouraged to draft a model set of regulations that, if adopted by the individual states, will allow them to assert some control over Equitas' claims handling practices. Because any threat of a cease and desist order would be hollow, regulators will only be able to force Equitas to comply with prevailing fair claims handling practices by implementing a violation-based system for assessing and collecting penalties.
Attention should be given to the recent example set by the California Department of Insurance in the Superior National insolvency. Kemper agreed to "reinsure" Superior's liability and provide a "cut-through" endorsement allowing policyholders and claimants direct access to Kemper. Based upon the premise that Equitas has stepped into the shoes of Lloyd's pre-1993 Names, regulators can stop Equitas from continuing its vexatious behavior by adopting regulations that place Equitas into a special category of run-off non-admitted insurers. Categorizing Equitas as a primary insurer standing in the shoes of the Names will defuse its argument that it is a reinsurer.
Insurance adjusters and third-party claims administrators appointed by Equitas to investigate and adjust claims should be required to be specially licensed by each state in which they operate. As a condition of licensing they ought to be required to satisfy well-defined criteria setting forth minimum experience and educational requirements and post a bond. Just as surplus lines brokers are required to file reports with their state governing bodies, the adjusters and administrators should be required to file statistical data relating to the Equitas claims they handle, without disclosing any information that would violate confidentiality. A detailed description of the causes of action asserted in litigated claims should also be mandated. The regulator would use the data to monitor Equitas' claims activity and settlement practices and take appropriate action when indicated. The surety bond would guarantee the payment of fines imposed upon the licensee for violations of the regulations.
There are obviously many other alternatives that deserve consideration. The American Names Association is willing to assist the NAIC and any state regulator in drafting and implementing a regulatory scheme to govern the conduct of Equitas. Copies of the legal rulings and decisions of cases involving policyholders that have been frustrated in their attempt to resolve their claims involving Equitas expeditiously and fairly will be provided upon request. Reprints of David McClintick's Special Report are also available.
The American Names Association is a non-profit corporation organized under the laws of the State of California for the benefit of American Names. For additional information contact Jeffrey Peterson, Executive Director, American Names Association, PO Box 9940, Rancho Santa Fe, CA 92067, 858-759-2288. www.truthaboutlloyds.com
Neither the ANA nor its members desire to interfere with the claims functions of Equitas. The ANA's position is that Equitas should treat policyholders in an ethical and fair manner, consistent with insurance industry standards.