TIME EUROPE
FEBRUARY 21, 2000 VOL. 155 NO. 7
SPECIAL REPORT
The Decline and Fall of Lloyd's of London
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Did Lloyd's top brass endorse this rapid expansion with the legitimate aim of growing its business? Or was there, as the likes of Jaffray claim, a more sinister motive: the need to recruit suckers to help pay for asbestos claims which threatened to overwhelm the market? Was it mere coincidence that many new recruits ended up on the syndicates most exposed to the asbestosis risk? Was it also a coincidence that back in the early '80s, key insiders began laying off their asbestos exposure onto other syndicates?
Such questions will now be answered in an English court. But even if Lloyd's wins the upcoming trial its legal troubles are far from over. The European Commission in Brussels is questioning British compliance with E.U. insurance legislation. But more ominous for Lloyd's is what lies in wait in the U.S. Although most attempts down the years by ruined U.S. Names to sue Lloyd's for fraud haven't succeeded, largely for procedural and jurisdictional reasons, there are clear indications that the legal tide may be turning in America. The U.S. government itself may soon be getting into the act. The Department of Justice, in the person of the U.S. Attorney in New York City, is currently conducting an intensive, criminal investigation of Lloyd's. Senior federal investigators probing fraud, conspiracy and perjury allegations have interrogated witnesses recently in both the U.S. and Britain. The U. S. government is increasing the resources it has committed to the investigation.
Meanwhile, in California, a pivotal civil case is scheduled to go to trial early next year. The suit, brought by Lloyd's investor David West and his daughters, Deborah and Susan, charges that Lloyd's defrauded them in much the same way it allegedly defrauded the Jaffray Names. Lloyd's has more to fear from the West suit, however, because it is easier to prove fraud in the U.S. than in England, and the California state court, where the case will be heard, has been more sympathetic to Lloyd's Names than U. S. federal courts.
As these things so often do, the Lloyd's debacle began with an obscure person in an obscure place. In 1969, a dying insulation installer, Clarence Borel, began a lawsuit in federal District Court in Beaumont, Texas, against 11 asbestos-insulation manufacturers alleging that they had known of the dangers of working with asbestos but had failed to warn him. Four years later, a federal appeals court ruled that the companies were liable for damages. Other asbestos workers sued--in small numbers at first, then by the hundreds, then by the thousands. Eventually, damage awards would soar into the billions of dollars and threaten the financial viability of asbestos companies such as the Johns-Manville Corporation, which carried liability insurance (but not enough, it turned out) for such contingencies. The insurer of last resort--the most exposed to a tidal wave of claims--would be Lloyd's.
It was this revelation, grasped then by only a few people, that Ralph Rokeby-Johnson confided to Roger Bradley on the Walton Heath golf course in 1973.
Along with yachting, golf was an important entrée to the persnickety Lloyd's social culture. Membership of the club was by invitation only and it was on courses like Walton Heath, carved out of a jungle of heather and gorse in Surrey in 1904, that social and commercial bonds were forged. These bonds could--and did--lead to an incestuous insider culture which was lambasted as early as 1969 in a report produced by former Bank of England governor, Lord Cromer. The report had been commissioned by Lloyd's itself in the wake of 1965's Hurricane Betsy, which cost the average name $120,000 and caused Lloyd's membership to fall for the first time in a century. But it was speedily buried because it turned out to be too embarrassing. Cromer warned that Lloyd's was not only outmoded, but riddled with "conflict of interest." It was thus fitting that the huge insider trading scandal now alleged by angry Names should have been foreshadowed by two Lloyd's insiders sharing a round of golf.
"Well, Orator, has Green got all his reinsurance for asbestosis in place?" Rokeby-Johnson asked as their game progressed.
Bradley paused. "Peter seems relaxed," he replied.
Peter Green, a second-generation Lloyd's man, keen yachtsman, social mover, future knighted Lloyd's chairman and Bradley's boss in the Lloyd's trading room in London, was indeed laying plans to avoid the asbestos threat. But his plans were top-secret. Had Rokeby-Johnson got wind of them?
"Has he got enough reinsurance?" Rokeby-Johnson pressed. "Has he got it placed offshore?"
Bradley, addressing his lie on the narrow fairway, fell silent. The "reinsurance" to which Rokeby-Johnson referred was the universal practice of spreading risk. If Insurer A insured a risk, he then typically "reinsured" all or part of it with Insurer B, who then reinsured it again with Insurer C. The governing principle of reinsurance, established over centuries in law and custom, was the Latin maxim Uberrima fides. If Insurer A disclosed all the elements of the risk in laying it off on Insurer B, the contract was valid. However, if Insurer A intentionally concealed important facts, the contract could be voided.
Roger Bradley was chilled by the questions. Rokeby-Johnson sounded as if he knew more about the sensitive matter of asbestos than he was letting on. Bradley said nothing further until Rokeby-Johnson pressed him on the fourth tee as they looked out across a stretch of unforgiving heather that would swallow any ball hit less than 100 meters. It was when Bradley pressed back that he elicited the melodramatic declaration that he would remember vividly a quarter of a century later:
"Asbestosis is going to change the wealth of nations. It will bankrupt Lloyd's of London and there is nothing we can do to stop it." It was conceivable to Rokeby-Johnson that the Bank of England might have to intervene to prevent a meltdown at Lloyd's causing serious damage to the City of London's reputation as a business center.
Admonished by their partners to stop the shop-talk, Bradley and Rokeby-Johnson dropped the subject until after the game when they settled with drinks in a corner of the tweedy bar of the clubhouse.
"Were you serious about asbestosis destroying Lloyd's?" Bradley asked.
"Of course," Rokeby-Johnson replied. On the back of his scorecard, he then proceeded to calculate that Lloyd's could be swamped by claims far in excess of the market's ability to pay--perhaps as much as $120 billion by the year 2000.
"Do you mean 'million' or 'billion'?" the incredulous Bradley asked.
"Billion," Rokeby-Johnson stressed. "It's the time bombs that worry me."
"What are the time bombs?"
"The time bombs are the young victims [of asbestosis] who will gradually develop lung disease. When they die, the lawyers are going to have a field day. Pick a figure, but it won't be far off what I've told you. See whether I am right. I shall be gone long before you."
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