BALTIMORE - The U.S. Court of Appeals here removed the last legal barrier to Lloyd's of London's $22 billion reconstruction plan scheduled to go into effect today.
A three-judge panel reversed a decision by a lower-court judge, upholding the Lloyd's position that some 2,700 U.S. members of its insurance syndicates fall under British law and are not entitled to further financial disclosures required by U.S. securities laws.
On Friday, Judge Robert E. Payne of Federal District Court in Richmond, Va., issued an injunction requiring Lloyds's to postpone for 30 days its deadline for U.S. members to vote on the reconstruction plan, and it ordered Lloyd's to give American members more information about Equitas Group, the new reinsurance company that will take over some of Lloyd's most risky claims.
Yesterday, after a 2 1/2-hour hearing, the judges lifted the injunction and sent hte case back to Richmond, ordering Judge Payne to revers his finding that U.S. law applied and to dismiss the case.
Speaking for the Baltimore pannel, Judge Paul V. Niemeyer said Judge Payne had erred in his interpretation of a "forum selection clause" by whcih members of Lloyd's agreed to settle all legal disputes in British courts.
Judge Payne had asserted that the Lloyd's members -- "names" in insurance jargon -- were passive investors protected by U.S. securities laws. Under U.S. laws some rights, such as the right to ful disclosure about investment opportunities, can't be waived. The judges here, however, appeared to agree with Lloyd's that the names were professional insurers and not investors in securities.
Officials of Lloyd's had predicted that the huge insurance market could go bankrupt if the injunction wasn't lifted. Yesterday afternoon, they were jubilant. "What's important for the moment is that we've gotten all the legal obstacles out of the way," said Peter Lane, Lloyd's director of North American operations.
Yesterday's decision left Lloyd's close to the end of a long and difficult period of legal maneuvering and lobbying to win support for what Lloyd's called its "reconstruction and renewal" plan. The effort included some 40 states and battles in eight separate U.S. courts and at the U.S. Securities and Exchange Commission.
All 34,000 world-wide members of Lloyd's syndicates must decide by noon today London time (7 a.m. EST) whether they agree to join the new plan voluntarily or be conscripted into it. Under Lloyd's terms, those who agree to join the new plan must give up their rights to sue Lloyd's, its officials or agents of its syndicates. In return, Lloyd's will reduce its claims against them by letting them participate in a special $4.2 billion settlement fund that it has amassed by selling its flashy headquarters in downtown London and by prying contributions out of Lloyd's agents, brokers and underwriters who faced a battery of lawsuits for fraud and negligence.
According to Mr. Lane, 82% of Lloyd's members had signed up by yesterday and more are expected following the appeals court decision. Lloyd's members who don't agree to join the plan will be forced into it anyway, but won't receive a discount on their debts because they haven't given up their rights to sue.
Mr. Lane said that faxes from American members wanting to join the reconstruction plan began to surge into Lloyd's headquarters shortly aafter the Baltimore decision was announced. Until them, only 53% of its U.S. members had responded, he said. Given the confusing circumstances, Mr. Lane said, Lloyd's will agree to relax today's deadline for the Americans. "We have no reason not to accept people who don't manage to get their papers in on time."
Lawyers for the American names said they were uncertain what their next move will be. Regulators in several states, including Colorado and New York, are considering the possibility of brining consumer-fraud cases against Lloyd's agents who, according to U.S. members, put the Americans into the most risky syndicates without telling them.
Lloyd's main financial problem stems from losses exceeding $12 billon that its syndicates sustained between 1988 and 1992. Many of the claims resulted from asbestosis and pollution claims against U.S. companies insured by Lloyd's.
The claims were so severe that a number of Lloyd's syndicats went bankrupt along with many of Lloyd's members who participated in them. Under Lloyd's terms, members of its syndicats are subject to unlimited liability. That means they agree by contract to subject all of their property and wealth to insurance claims.
Three years ago, after a rash of lawsuits and a spate of suicides by names, Lloyd's and the British government began a plan to rescue the 308-year-old insurnace market, which began in a London coffeehouse with shipping claims and later grew to include insuring actress Jamie Lee Curtis's legs for $1 million.
Although Lloyd's agents have been recruiting U.S. members for its syndicates since 1969, the SEC has been silent about whether their offers of investment opportunities amounted to securities under U.S. law.
Recently, SEC lawyers have issued amicus curiae briefs in two federal-court cases indicating that Lloyd's might have to obey its regulations requiring full disclosure, an opinion the judges rejected yesterday. In July, Lloyd's won approval from state securities regulators in some 30 states to give up any claims against Lloyd's in return for a 20% reduction in Lloyd's claims against members in their states.
Throughout Lloyd's history, only Lloyd's insiders have had full knowledge of the insurance business that was being underwritten. Lloyd's names placed their trust in the insiders and for many years this trust was honored. This trust broke down in the 1980s. The high risk asbestos and pollution liabilities that were underwritten by about one third of Lloyd's syndicates had a high up-front profit that was pocketed by the agents and underwriters. The investors in the syndicates were left with all their assets at risk, without knowing what the risks were.
The Appeals Court may have ruled the way it did to avert a world wide financial disaster. But their ruling makes no legal sense. Lloyd's investors were not independent insurance underwriters. They were passive investors. Few of them would have invested in the syndicates they got involved in if they understood the nature of the insurance policies the syndicates underwrote.
American investors agreed to be bound by British law in their dealings with Lloyd's. This was upheld by the Appeals Court. However, this is a license to use a foreign venue to defraud American investors. What is to stop someone from setting up a company in, say, Grand Cayman, and enlisting naive Americans as "business partners" who agree to settle all disputes under Cayman law. Hopefully this ill considered decision will be overturned by the U.S. Supreme Court.