Update: Is Lloyd's of London Too Big to Sue? plus Lloyds Litigation Timeline

Back in May, we published an article in the Institutional Risk Analyst, "UK Country Risk: Is Lloyd's of London Too Big to Sue?," that described the efforts by investors to get a hearing regarding claims of fraud and other misdemenors against Lloyds of London.  A number of people have asked me to post the article on the web, which follows below.

In addition, I have included a rough time line of some of the more significant litigation and legislative developments in the UK, legal changes that have seemingly put Lloyds above the law both in the UK and elsewhere  There is a vast amount of litigation involving Lloyds that covers several waves going back three decades.  In every case, investors all over the world never get a hearing on the facts much less the merrits of their claims, either in the UK courts or the US.

But the more troubling issue for me is the clear appearance that investments in Lloyds represent a form of chattel bondage for investors that is a violation of the Constitution and laws of the United States.  How can Lloyds be allowed to enforce claims of chattel bondage in the US without even allowing American citizens the right to challenge these contracts in US courts? 

UK Country Risk: Is Lloyd's of London Too Big to Sue?
The Institutional Risk Analyst
May 12, 2011

"The years from 1929 to 1933 were, for America, a succession of breaking idols and abandoned faiths, some of them the notions of willful children, some deeply ingrained in the character of the nation ... Bank Statements: By agreement with the Government, banks placed an artificial value upon certain securities they held. Those who did not know of the agreement assumed that the values were actual."

Gilbert Vivian Seldes
The Years of the Locust: America 1929-1932
Little, Brown, and Company (1933)

Thanks to Josh Rosner for the above quotation. We had a lot of fun speaking with him and the other attendees at the REthink event hosted this week by Housing Wire. There was a lot of very interesting discussion we shall be summarizing in The IRA Advisory Service. But first we return to a favorite topic, namely the ongoing criminal enterprise known as the insurance industry. If you think American International Group was a fiasco for investors and US taxpayers, read on.

Last month an American investor named Richard Tropp filed a writ of certiorari with the US Supreme Court to review a decision by the Second Circuit in New York regarding an epic litigation against the Lloyd's of London insurance market. Of note, there are a number of amicus briefs accompanying the petition which seeks to overturn the Second Circuit finding in favor of Lloyd's.

To us, the case of Tropp v. the Corporation of Lloyd's is alarming not only because it implies that thousands of investors in the Lloyd's insurance market have no contractual rights enforceable at law in the courts of England and Wales, but also because of what it says more broadly about the state of the law in Britain. Some two decades after the Lloyd's Ponzi scheme scandal first exploded onto the scene, the situation for investors in the world's largest insurance market has arguably deteriorated.

In their 1995 book, Risky Business: An Insider's Account of the Disaster at Lloyd's of London, Elizabeth Luessenhop & Martin Mayer catalog the duplicity and incompetence of the managers within the Lloyd's insurance market up to that time and how this malfeasance affected thousands of American investors. The restructuring which occurred two decades ago as a result of the crisis, however, and the legal changes in the UK, including making Lloyd's a self regulatory agency, have arguably made Lloyd's too risky for passive investors regardless of domicile. Unless you are a member of the City club that controls the Lloyd's market, it seems, you as an investor effectively have no legal rights -- at least in terms of rights enforceable in UK courts.

The Tropp filing states:

    "In the face of litigation seeking to hold Lloyd's responsible for billions of dollars in insurance losses, incurred as a result of an alleged Ponzi-like scheme in which Lloyd's participated, Lloyd's was permitted by the U.K. courts to force a market restructuring under which: (a) it required market participants (known as "Names") to purchase reinsurance from an entity Lloyd's created and controlled; (b) Names were required to immediately pay a reinsurance premium as calculated by Lloyd's, without any opportunity to contest the existence or extent of their liability for the reinsured debt; and (c) although nominally afforded a post-deprivation hearing, the Names were allowed to challenge their alleged liability, or Lloyd's' calculation of its amount, only if they could show Lloyd's had engaged in fraud."

For 20 years UK courts have deferred to Lloyd's management's singular private law as preempting reliance on all familiar English law by anyone who is defending or claiming against those insiders. Thousands of American, Irish, and European defendants are "precluded" in UK law from evidentiary hearing of their defenses to Lloyd's lawsuits against them, which impose a lifelong 80-year liability, a 1600s-style colonial-era vestigial debt indenture.

According to the vast case record in the Tropp litigation, first in the UK and now in the US, English courts treat Lloyd's merely private claims under its bylaws as carrying preemptive statutory authority which in Britain's jurisprudence overrides all other law. Moreover, UK courts have expanded the shield of Lloyd's legal immunity to preclude hearing of affirmative claims against them as well, and to preclude even hallowed English-law equitable remedies such as specific performance and an accounting. This applies to both UK investors in Lloyd's as well as foreign investors.

Having been denied even a hearing in the UK courts, Tropp and others are seeking to have their claims heard in the US. This is part of a second wave of litigation by Lloyd's Names that also raises troubling questions about the state of British political and legal institutions, as well as the financial and business practices of Lloyd's. In order for a plaintiff to litigate a foreign claim in the US, they must prove among other things that the country "does not provide impartial tribunals or procedures compatible with the requirements of due process of law." It very much appears that the situation in the UK fits that description.

Indeed, the record in this litigation suggests that the UK must now be grouped with the savage nations of the third world when it comes to the fairness of English courts. Whereas in the past US judges, who still tend to look up to English courts as paragons of jurisprudence, gave these venues full credibility, the Lloyd's litigation suggests that American courts need to question whether the judiciary in England and Wales is comprised of tribunals of competent jurisdiction. To us, it seems that an investor in Lloyd's would be better off seeking redress in a kangaroo court sitting in, say, Caracas or Mogadishu than in a UK courtroom. American judges and regulators need to start asking more questions as to whether the decision of UK courts should be given even partial credence when it comes to claims by Lloyd's.

For those familiar with the evolution of Rachel's Law, named after New York based author Rachel Ehrenfeld, the sad state of the UK courts is nothing new. Liable judgments against writers obtained -- or really purchased -- by wealthy foreign litigants operating freely in UK courts can no longer be enforced in the US. As we've noted in the past, every writer in the US owes Ehrenfeld a debt of thanks for her lonely legal battle against one of the wealthiest men in the world. We've been there too.

We wonder, for instance, ought not the SEC consider the fact that even private contractual disputes between Lloyd's and it's investors are precluded under UK law? It is interesting to note that in the past wave of litigation by US investors against Lloyd's, the SEC actually took an overt public position supporting the plaintiffs against Lloyd's. In thoses cases, the US courts gave credence to the UK courts and ruled in favor of Lloyd's claims, driving thousands of US citizens and others around the world into bankruptcy and financial ruin -- all without a hearing on their claims or allegations of fraud by Lloyd's.

Perhaps it is time for Congress to consider a blanket ban on the enforcement in the US of any judgment held by Lloyd's, at least until this ersatz insurance market is brought back under the rule of law. The fact that the residents of the UK and investors around the world must endure this monstrous situation only confirms the decision of America's Founders to break with England more than two centuries ago.

We believe it is time for Congress, the SEC and other US agencies to recognize that in the case of Lloyd's the UK's governmental, regulatory and legal systems have failed. The situation compares with the similar US failure in the case of AIG, but Lloyd's is far larger in systemic terms. This may, at the end of the day, explain why successive UK governments have allowed Lloyd's to effectively exempt themselves from all legal claims by investors and take on the nature of a sovereign state.

For investors and risk managers, the legal and sovereign risk illustrated by the Tropp v. the Corporation of Lloyd's litigation boggles the mind. If the Tropp petition is denied by the US Supreme Court, can any US individual, fund or fiduciary invest in Lloyd's with confidence? If you examine the history of Tropp and other investors, particularly the way in which existing contracts with investors were unilaterally revised by Lloyd's after the crisis two decades ago, it is hard to describe the situation as anything but arbitrary and fundamentally unfair. Is this how the people of Great Britain wish to be seen in the global marketplace?

As one investor told The IRA, the US Supreme Court "must face the implausible, distasteful, and counter-intuitive reality" that the UK legal system did not meet even minimal US standards of due process when it comes to protecting the rights of investors in Lloyd's. Indeed, we see the true risk to Lloyd's as winning this US litigation. Then every American investor and fiduciary will be on notice that they may have no effective legal protection for any investment made in the Corporation of Lloyd's.

Questions? Comments? info@institutionalriskanalytics.com
Lloyds Litigation Timeline [draft]

1979-81 US: Congress enacts CERCLA (Superfund, environmental toxics contamination clean-up liability), US EPA drafts regs implementing it. Separately, US courts expand asbestos Incurred But Not [yet] Reported (“IBNR”) liability to become “long-tail”, unlimited in time as to how far in the future a reinsurer is liable for claims which originated in the underwriting year it had insured, based on an “occurrence” test (had an IBNR liability originated in that year) irrespective of how far in the future a liability might “manifest” as a notified claim.

1979-81 UK: Lloyd’s itself is named co-defendant in multiple fraud suits by members of Lloyd’s syndicates against their syndicate’s managing agent, notably Sasse, on a theory of liability by Lloyd’s itself for negligent failure to supervise and regulate agents in Lloyd’s’ market.  On reported advice of counsel that it could be held to have such a duty, Lloyd’s settles and pays.  UK Government (“UKG”) appoints Fisher Working Party to examine why the market is egregiously infected with conflicts of interest and repeated insider self-dealing by agents against their principals the members of the Society of Lloyd’s.  Fisher report 1980 finds that Lloyd’s’ contractual regulatory authority is inadequate to enforce fair dealing in the market, recommends that Parliament give Lloyd’s strengthened statutory authority as a self-regulator 

Dec. 1981-spring 1982: Lloyd’s’ Panel of Auditors warns its Council (board) that based on notifications in 1981 by US insurers who had reinsured with Lloyd’s underwriting year 1979 syndicates of long-tail IBNR asbestos liability to policy-holders originating from underwriting 1979, the future timing of when that IBNR would “manifest” as notified claims and the amount of those claims could not reasonably be projected.  The auditors warned that consequently those syndicates which had written comprehensive general liability (“CGL”) seemed massively underreserved on a solvency level (against the regulatory requirement to “reserve to ultimate”) as opposed to on an annual liquidity basis (only that amount required to pay losses from 1979 which manifested next year as notified claims), and that the auditors could see no way to calculate a fair-value premium for the “reinsurance to close” (RITC) which would be required to close the accounts of those syndicates for their 1979 underwriting year at the end of its standard Lloyd’s 3-year claims period at 12/31/81. 

Note:  It seemed to the auditors that those syndicates therefore had to remain “open” and go into “run-off”, insolvency workout.  This information remains closely held for years among members of the Council committee.

1981-82: Parliament enacts Lloyd’s Act of 1982, which gives Lloyd’s strengthened statutory (as vs. only contractual) authority to supervise and regulate agents in the Lloyd’s market.  Act required divestiture by brokers (representing the buyer side in an insurance transaction) and underwriters (seller side) of one another, to end flagrant structural conflict of interest: brokers and underwriters owned one another or had common controlling principals, so in effect were on both sides of deals in the Lloyd’s market.  This had facilitated collusive self-dealing by both sides acting together, though nominally at arms’ length from one another, against their insured policy-holder customers (buyers) or their nominal principals the members of their managed syndicates (sellers).

Act sec. 14 provides an immunity shield for Lloyd’s and its individual officers, staff, and agents against liability in damages for negligence or other tort, except on showing of bad faith.  Intent of the immunity, the subject of protracted Parliamentary hearings and heated opposition by other UK self-regulatory organizations (“SROs”) such as the Stock Exchange, was to facilitate the exercise of strengthened statutory self-regulatory “public functions” given to Lloyd’s by the Act to regulate its agents and the market.

1983: Lloyd’s’ very first bylaw after the Act, “Interpretation Byelaw (No. 1 of 1983), assumes statutory authority for all Lloyd’s bylaws including those issued in its private commercial capacity, not only (as Parliament intended) those issued in the performance of its statutory self-regulatory “public functions” under the Act.  The byelaw requires that “...every Lloyd’s byelaw… shall be deemed to be ‘subordinate legislation’ [under] that Act”.  UK courts uphold this self-assumption of statutory authority in considering particular Lloyd’s bylaws issued in its clearly merely private capacity (e.g. Arbuthnott v Fagan 1994).

The effect is that UK courts defer to all Lloyd’s’ bylaws as carrying Parliamentary authority from their statute, deeming them “statutory instruments” with authority exactly as if they were regulations of UKG agencies.  (P&B (Run-Off) Ltd. v Woolley 2004, Court of Appeal [“EWCA”], para 31 [Lord Phillips, Master of the Rolls, then-Chief Judge of the EWCA]).

Note: Britain’s jurisprudence of “Parliamentary supremacy and sovereignty” is the anti-Marbury v Madison; Marbury was crafted by the early US Supreme Court to be, precisely, its antithesis.  Under that jurisprudence, any UK legal instrument invested with statutory authority preempts, in the formal sense in which that expression is used in US constitutional law, all other English law.  Thus, the UK courts, in deferring to Lloyd’s’ bylaws as “subordinate legislation” which bears Parliamentary authority, gave Lloyd’s the authority to override all other English law, such as the hallowed old English law of contract and of insurance, by formally precluding defenses against Lloyd’s claims when those claims relied on the legal authority of a bylaw -- whether issued in Lloyd’s’ regulatory “public functions” or in its merely commercial private capacity, and whether in the interest of the whole Lloyd’s market or only in that of insider management as against the market and its members.

1982-87: Lloyd’s recruits tens of thousands of new members, reportedly more middle-class rather than its traditional wealthy, including for the first time thousands of non-Britons.  Lloyd’s had previously not allowed members’ letters of credit (“L/Cs”) supporting their underwriting to be secured by their home, but relaxes that rule, and recruits many elderly “house-poor” into liquefying their home’s capital value for investment purposes by securing an irrevocable evergreen L/C with it, at risk that it could be seized if Lloyd’s cash-called on the L/C to cover losses.  Old-wealth Names from before 1982 are quietly moved off syndicates which reinsure what Lloyd’s insiders called the pre-1982 “old years” long-tail risk.  1990s analysis finds that new recruits, Americans and perhaps Irish especially, were disproportionately stacked onto those syndicates.

Before 1982, RITC by a syndicate to close its accounts for a particular underwriting year at the end of that year’s 3-year claims period had been with a non-Lloyd’s market reinsurer such as a Munich Re or Swiss Re, another syndicate run at arms’ length by an unrelated managing agency, or the successor year of account (“YoA”) of the same syndicate.  Beginning 1982 for the long-tail syndicates, RITC increasingly is done only with the same syndicate’s successor YoA: the same managing agent is on both the buyer and the seller side of the RITC transaction, with no independent arms’ length scrutiny of whether the RITC premium paid by the prior-year buyer syndicate to its reinsuring future-year successor would meet regulatory accounting capital-adequacy solvency standards as being enough to bear all the IBNR liability being passed into the future by the RITC.

1987: Beginning reportedly with underwriting year 1987, Lloyd’s changes the General Undertaking that all members have to sign so as to require that new members commit to UK “choice of law” and “forum selection” in the event of dispute between Lloyd’s and members.  For Americans, this contractual provision is construed by US courts in the 1990s to have been a voluntary waiver of all protections in US securities laws, overriding the anti-waiver provision of those laws.

1990-91: In response to cash calls against members to cover losses they had not been led to anticipate, a wave of UK and US plaintiff class lawsuits begins against the highest-loss long-tail and “LMX” Lloyd’s agents and Lloyd’s itself, pleading “fraud on the inducement” to the original contract and seeking rescission.  The US lawsuits rely on US securities law rights and remedies.  The UK groups win reportedly every such suit against agents, losing every one against Lloyd’s itself.

The US groups lose every lawsuit one against both Lloyds defendants on the basis that the “choice” clauses in their entering agreement committed them to dispute resolution under English law in UK courts, and since they hadn’t tried, they had made no showing (under the controlling case Bremen v Zapata establishing the standards in the Federal common law of forum selection) that UK remedies were “unavailable” or were “inadequate” to vindicate their rights in US securities law under comparable UK law.

Sept. 1991: In Bonny v Lloyd’s in the Chicago U.S. District Court, then-Magistrate (now District) Judge Joan B. Gottschall presciently determines that such UK remedies would be held unavailable by UK courts because of preclusion by Lloyd’s’ sec. 14 immunity, as a matter of UK public policy.  Lloyd’s stipulates to a one-time waiver of reliance on its immunity if the court overrules her, denies US hearing to the Bonnys and leaves them only a UK option to litigate.  The court does so, in reliance on the “stip” without reaching the question of whether, without it, the immunity would have left the Bonny parties without available UK remedy. The 7th Circuit upholds denial of US hearing.

Lloyd’s re-submits its Bonny UK barristers’ affidavits in Roby v Lloyd’s in the Manhattan US District Court (“SDNY”), assuring that court and the 2nd Cir of availability of UK remedies in contract, misrepresentation, fraud, public law, and all equitable remedies.  The 2nd Cir. relies on those affidavits as evidence confirming Lloyd’s’ pleadings, and denies hearing to the Roby group in reliance on the availability of especially remedies in misrepresentation and fraud against Lloyd’s itself, rights against Lloyd’s’ agents (as issuers of Lloyd’s investment securities, financial participations in their syndicates), and equitable remedies including rescission equivalent to those in US securities law.

Subsequent 1993-98 denials of hearing to plaintiffs by other US courts in other circuits rely on Bonny and Roby case findings of availability of adequate UK remedy, focusing on, in particular, those UK remedies which would substantively vindicate plaintiffs’ rights in US securities law.
Meanwhile, in the UK, as this line of US cases was unfolding in reliance on Lloyd’s’ representations to American judges, Lloyd’s was aggressively litigating to develop law that would shield it from all the English-law remedies of whose availability it was at the time assuring US courts.  Ashmore v Corp. of Lloyd’s (No. 2) (July 1992), before the 7th Cir.’s decision in Bonny and before both the District Court’s and 2nd Cir.’s decisions in Roby, established that Lloyd’s owed no statutory duty to its members, no common law duty of care, and no implied contractual duty for breach of any of which Lloyd’s could be liable to them, expressly including no duty to supervise its agents and no “duty to speak” to disclose wrongdoing by its agents to those agents’ members.  Ashmore also held that “despite the absence of express reference to contract” in the sec. 14 immunity, which on its face is limited to shielding Lloyd’s from liability only for “negligence or other tort”, the immunity shields Lloyd’s from all claims in contract as well.  This stripped all rights and protections in the hallowed English law of contract from Lloyd’s members, as a matter of UK law.

“Rule 11” duty notwithstanding, nobody on the Lloyd's side of these lawsuits so informed the US courts at the time.

Lloyd’s v Clementson (EWCA Nov. 1994) confirmed that Lloyd’s owes no implied contractual, or any other, duty to supervise and regulate its insider agents to protect Lloyd’s members from any breach of duty by their agents, and could not, therefore, be liable for any such omission.

A dozen years later, in Tropp’s UK case, Lloyd’s in its pleadings and the Commercial Court and EWCA in their denials of hearing were to rely on Ashmore and Clementson as the lead authorities which had established it as then-settled law that Lloyd’s’ sec. 14 immunity shut Tropp out of all hearing on his claims, precluded reliance by him on rights in all other English law on whose availability US courts had relied in the ‘90s line of cases which had denied plaintiffs US hearing, and precluded the UK courts from considering (much less granting) all the post-deprivation contractual and equitable English-law remedies for which he pleaded.